The trade war between the US and China has intensified, with the US implementing 10% tariffs on $200 billion of Chinese imports. The US is planning to increase the tariffs to 25% in 2019. China has retaliated by imposing new trade tariffs on $60 billion of US goods, which included liquefied natural gas, produced in Trump voting states. However, China hinted that it was considering broad based tariff cuts on its other imports. Donald Trump has said that he has plans for further tariffs on $267 billion worth of Chinese goods. At the same time, Apple has warned that the trade war will make its products more expensive for American consumers. There appears to be no end in sight to these trade tensions and it remains one of the key risks to the global economy, although the markets believe that after the US mid-term elections the trade tensions will fade away.
There was a surprising drop in the US Services Purchasing Managers’ Index (PMI) from 54.8 to 52.9 and this is perhaps the first sign of stress from the trade war threat, however, most other indicators, such as Housing Starts, Philadelphia Fed Survey and weekly jobless claims, point to a strengthening economy. The US economy has added 201,000 jobs in August, with the unemployment rate remaining steady at 3.9%. This marks an unbroken 95 month streak of uninterrupted jobs growth, the longest on record.
Apart from the threat of a trade war, US inflation remains a key indicator for the global economy in that the US remains the world’s largest economy and US interest rates underpin the cost of capital for global financial markets. Very simply, rising inflation tends to be a sign of “overheating” in the economy, and the theory is that excess demand for goods and services pushes up their prices, with the first symptom often being higher wages. Wage growth in the US is running at 2.9%, which is the highest increase since June 2009.
Despite strong growth and rising wages, inflation remains dormant, with core Consumer Price Index (CPI) declining from 2.4% to 2.2% in August 2018. Despite the inflation figures, the Federal Reserve (Fed) will continue the policy of normalising monetary policy. At the annual meeting of central bankers, the Fed Chairman, Jay Powell, said he does not see the risks of the US economy overheating and defended the central bank’s gradual approach to rising interest rates. The Fed have raised interest rates a third time in 2018 and expect to raise interest rates one more time before the end of the year.
The UK economy grew faster than expected in July. This was due to consumer spending being boosted by the hot summer and the World Cup. Gross Domestic Product (GDP) rose 0.3% for the month and 0.6% for the quarter. The construction sector also bounced back following a weak start to the year.
Wages for British workers have increased at their strongest rate for three years, whilst unemployment dropped to its lowest levels since the mid 1970s. Average weekly earnings (excluding bonuses) rose 2.9% in the 3 months to the end of July, up from 2.7% in the quarter to the end of June.
UK inflation, as measured by CPI, rose to 2.7% in August, which is its highest level in six months. The big uncertainty for the UK economy remains the outcome of the Brexit negotiations. The Brexit negotiations may delay the Bank of England making further rises in interest rates.
The Italian government budget
The new Italian government’s first draft budget must be submitted to the European Commission on 15th October and this could increase the political and economic tensions within the Eurozone.
Japan’s economic policy
The Bank of Japan has maintained interest rates at current levels and remains upbeat on its economic outlook. However, the big news from Japan is that Prime Minister Shinzo Abe has been re-elected leader of the ruling party; therefore, there should be no changes to the existing economic policies.
China’s economy is showing new signs of weakness. China’s fixed asset investments in the first eight months of the year grew 5.3% from the same period of 2017, which was below analysts’ forecasts of 5.5% and slower than the 5.5% growth recorded for the first seven months.
Chinese exports in August were also slower, whilst imports beat expectations. This is possibly due to inventory shifts related to potential tariffs. The annual trade surplus with the US rose to record levels and no doubt, Donald Trump will not like this news. However, China runs a deficit with the rest of the world.
Iran and the oil price
The price of Brent oil has hit a 4-year high, with the price rising above $82 per barrel. Saudi Arabia and Russia have appeared to reject calls from the US to increase production amid looming US sanctions against Iran. A higher oil price should give a boost to inflation, which could lead to interest rates rising at a faster pace in many developed economies.
Argentina and Turkey
The rout in emerging market assets has deepened amid concerns over Argentina and Turkey. Both countries are battling rising inflation and weakening currencies, with global investors fearing contagion. Turkey’s central bank has increased interest rates to 24% in an effort to control soaring inflation and stem the country’s currency crisis. Tayyip Erdogan, Turkey’s President, had called for restraint from the central bank, but there has been mounting pressure from international investors.
The global economy, led by the US, is continuing to move in a positive direction, however, there are a number of political and economic risks that could derail the economy and markets. The main political risk is the threat of a full-scale trade war between the US and China and/or the European Union, whilst the second political risk is in the Eurozone, with the new Italian government submitting its draft budget to the European Commission. The main economic risks are the Fed increasing US interest rates at too fast a pace and the rising oil price, both of which could lead to a recession.