Why economic data will show that there is no room for complacency
Dr. Rebecca Harding, CEO
It seems the world has dodged the first bullets in a full-blown trade war. However predictable this was, the news that the US and China were agreeing Memoranda of Understanding on a range of trade issues has been greeted with an increase in the trade-weighted value of the US dollar and a sigh of relief around the collective board rooms of corporates and financial institutions alike. Alongside this, there appears to be a softening of the resistance to Theresa May’s Brexit deal so the week ahead looks like it might be quite quiet from a trade negotiations perspective.
It is important to be clear on one thing, however. A global trade war was always going to be the economic equivalent of pressing the nuclear button and was therefore unlikely. In reality, US tariffs on iron and steel and the reciprocal imposition of tariffs on a total of $363bn of trade between China and the US are the only tangible effects of the rhetoric over the past 18 months. What seems to be happening is a recalibration of the world trade, and indeed foreign policy, order on bi-lateral grounds defined by the US rather than by the multilateralism that we have relied on for our economic and political security since the second world war.
Don’t expect this rhetoric to disappear either. The Trump Administration’s trade report to Congress last week was a comprehensive statement that it will not. However, it also laid out its own priorities to its negotiating partners: no currency manipulation to favour other countries, promotion of US agriculture in trade negotiations with Japan, the EU and the UK as well as with China, and clear red lines on intellectual property, investment and government procurement. While we wait for a Summit between Presidents Trump and Xi, we should watch for less militarised but equally strident language by the US administration in relation to trade with its strategic allies.
Meanwhile, the economic data to be published this coming week is likely to show that the rhetoric has had an impact both on confidence and on hard economic data. China, the US and the EU Member States all publish trade data this week and we can expect China’s trade to have slowed (it always does around the Chinese New Year), the US trade deficit to increase, and the eurozone’s trade to have slowed. Watch closely for imports as these are the indicator of what is happening to demand in the future – they are likely to have slowed and with them GDP growth. Confidence surveys, including the PMIs, published for services this week are also likely to continue to soften.
There is little doubt that the populist rhetoric of trade wars has had an impact on global growth and will continue to do so for some time. The shift by the US administration to focus on currency manipulation as well raises the spectre of currency wars as well as President Trump focuses on one of his other bug-bears: the strength of the US dollar. By highlighting the role of currency in trade policy, he is directly targeting Central Bank policy across the world as well.
Where does this leave the UK? There is probably an equally large sigh of relief at the fact that there are no parliamentary votes this week and we can all take a bit of a break. However, there is still a huge amount to be decided. We are likely to see weaker retail sales and inflation in the data this week, as well as weaker services and construction PMIs, adding to the growing evidence that uncertainty is beginning to impact economic growth.
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