Trade spat turns to ‘war’ in growth threat

Tit-for-tat tariffs loom and central bankers warn of the risk to economic growth

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The US and China returned to the trade battlefield last week with governments from Europe and India joining in as rounds of tit-for-tat tariffs loom and central bankers warn of the risk to economic growth.

Here’s our weekly wrap of what’s going on in the world economy.

China-US Spat

Seemingly not satisfied with threatening duties on US$50 billion (RM200 billion) of Chinese imports, US President Donald Trump said he’s now eyeing a further US$200 billion and renewed charges that China is imperilling American security. China repeatedly pledged to reciprocate blowfor-blow although fewer goods enter the US than go the other way so it may need to be creative.

The escalation drew warnings from businesses including Daimler AG, but Goldman Sachs Group Inc sounded less concerned. Bloomberg Economics charted the potential casualties. China faces a sizeable hit even if its central bank does deploy its tools “comprehensively” to stabilise markets.

While the US economy also could lose its shine, a Trump aide says the country can absorb the hit. Just hours after the European Union’s retaliatory tariffs on US products came into force last Friday, Trump threatened to impose a 20% levy on all cars imported from the bloc.

Global Central Bankers

Members of the global central banking family gathered in Sintra, Portugal to air grievances on trade policy and to compare notes as the policy tightening cycle carries on. The US Federal Reserve (Fed) and Bank of Japan (BoJ) are actually dealing with similar job-market issues, though the Fed chief sees a strong case for gradual interest-rate hikes while BoJ governor Haruhiko Kuroda is pushing for bigger wage gains and a former Japanese central bank official says he should face up to failure.

European Central Bank (ECB) president Mario Draghi reassured that the ECB will be patient in timing its first interest-rate hike of the cycle, while he and colleagues are studying what to do with maturing bonds next year. Australia’s Philip Lowe isn’t all that worried about low inflation, given the alternative. We’re also reminded that the easy money era isn’t really over. And Larry Summers told us the global economy is “brittle”.

In other central bank announcements last week, the Bank of England kept rates unchanged although its chief economist shocked markets by unexpectedly voting for a hike — and investors now increasingly believe that such a move will happen in August. The Norges Bank confirmed plans to tighten in September, while the Swiss National Bank indicated no rush to do so and policymakers in Hungary for the first time mentioned an eventual end of loose policy.

The Philippines raised its key rate for a second month to stem the peso rout, and Bank Indonesia signalled it’ll probably hike at this week’s meeting. Thailand bucked the regional trend with a hold, while Taiwan maintained policy. Brazil held its main rate amid domestic turmoil but signalled it might consider lift-off from a record low and Mexico increased borrowing costs for the second time this year. Mozambique cut.

EM Currencies

Trade tiffs, policy tightening, and oil prices all remain on the minds of emerging-market (EM) officials as they try to get a handle on their currencies. Indonesian Finance Minister Sri Mulyani Indrawati told Bloomberg TV earlier last week that the EMs just can’t adjust fast enough to all the stresses.

Argentina’s US$50 billion credit line from the International Monetary Fund (IMF) — the biggest in the IMF’s history — was officially approved. Electoral risk is keeping voters on edge in Thailand even as the numbers look good, and regional neighbour Vietnam has a similar anxiety even amid enviable growth.

Malaysia scored a new central bank governor this week, and she’s a former investigator of embattled state fund 1Malaysia Development Bhd. Savings are being treated as a luxury in Russia, where a middle-class boom is dying out.

Things are at least looking up on the oil front, with OPEC and allies including Russia agreeing to boost oil production starting next month. — Bloomberg