U.S.-China Trade war puts world economy on the brink - Canadanewsmedia
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U.S.-China Trade war puts world economy on the brink

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To most people, Aug. 9, 2007, was an ordinary enough summer day. The stock market fell about 3 per cent, enough to lead the major newspapers, but hardly anything that would generate panic in the streets.

Yet to many people who work in economic policy or financial markets, that day was the beginning of what would eventually be called the global financial crisis. It was the day that lending froze up among banks within Europe, trigged by the breakdown in the market for bonds backed by American home mortgages, and central banks first intervened to try to keep money flowing.

Monday felt eerily similar, and not just because it was another August day in which the stock market fell by nearly identical amounts: The drop in the S&P 500 was 2.96 per cent in 2007 and 2.98 per cent Monday.

For months, people who study economic diplomacy between the United States and China have warned that the world’s two biggest economies are on a collision course, that the trade war between the two will have no easy resolution, and that this tension could spill into other areas of policy and create dangerous ripple effects for the world economy.

In the past several days, that pessimistic story has become more real.

On Thursday, President Donald Trump said he would place 10 per cent tariffs on US$300 billion in Chinese goods, ending a period in which there seemed to be some easing of tensions between the two nations. On Monday, the Chinese government allowed its currency to fall below a symbolically important seven-to-the-dollar level, an apparent retaliatory move that amounts to trade tensions spreading into another arena. The United States returned fire by formally naming China a currency manipulator.

The swings in financial markets Monday are hard to justify in narrow terms. A slightly cheaper Chinese currency should not have huge consequences for the global economy. Rather, investors are coming to grips with the reality that the trade war is escalating and spreading into the global currency market.

While the drop in the stock market gets the attention — the S&P is down 5.8 per cent in the past — it is global bond markets that are flashing the most worrying signs about the outlook for growth in the United States and much of the world. Ten-year Treasury bonds yielded 1.72 per cent at Monday’s close, down from 2.06 per cent a week earlier — a sign that investors now believe that weaker growth and additional interest rate cuts by the Federal Reserve are on the way.

“The Chinese have sent a strong signal that they are ready to rumble,” said Paul Blustein, a senior fellow at the Centre for International Governance Innovation and the author of “Schism,” a book due out next month about the fraying relationship between the United States and China. “To depreciate the currency at such a fraught time sends a signal that they are prepared to endure a heck of a lot of pain, and it doesn’t surprise me that markets would finally come around and say, ‘This could be really bad.’ ”

As we’ve seen many times through this trade war, escalation and deescalation can come at seemingly any time. Trump could back away from his latest tariff threat and calm things down, or move the opposite direction by increasing the tariff to be charged on those US$300 billion in imports from China. But one recurring theme of the past two years is that trade conflicts in the Trump era never seem to become fully resolved, but rather go through more-intense versus less-intense phases.

Whatever happens next — and whether this turns out to be the beginning of a major turning point for the global economy or just one rough day on the markets — it is clear that the trade war is no longer confined to trade.

While Trump has often accused China of seizing advantage in global trade by manipulating the value of its currency to keep it lower, the latest developments reflect pretty much the opposite. In fact, a slowing Chinese economy is creating downward pressure on the yuan, also known as the renminbi — a pressure that China’s government has resisted, through intervention by its central bank and capital controls, to try to keep Chinese citizens from moving money out of the country.

On Monday, the Chinese essentially reduced the scale of that intervention and let the value of the yuan fall closer to the level it would reach in an open market.

The risk is that Trump and eventually leaders of other nations will conclude that currencies are now fair game — that they are a good and appropriate weapon to use in trade disputes. For weeks Trump has pilloried the Federal Reserve for not cutting interest rates more, arguing that this has made the value of the dollar excessively high, hence weakening American exporters.

Trade disputes and currency disputes have historically gone hand in hand. Most notoriously, during the Great Depression, nations competed to devalue their currencies in “beggar-thy-neighbour” policies that ultimately made everyone poorer. It’s less clear what a 21st-century currency war would look like.

Major nations have mostly agreed not to take action to artificially depress their currencies at the expense of their trading partners. But setting monetary and fiscal policies aimed at helping your domestic economy is considered OK, even if doing so has implications for currencies.

The thing is, it can be debatable which bucket a given policy fits into. For example, countries including Germany, China and Brazil accused the United States of manipulating its currency when the Fed engaged in “quantitative easing” policies in 2010 that depressed the value of the dollar.

If Trump directs his administration to try to drive the value of the dollar lower using Treasury Department authorities to intervene in markets, or prevails upon the Fed to more aggressively lower interest rates in order to depress the value of the dollar, that could embolden not just China but other economic powers, like Japan, South Korea and Europe to do the same.

The entire structure of international institutions meant to prevent Depression-era policies would be under threat. In that situation, no nation would be able to achieve lasting economic advantage, but a set of financial institutions that have served the world well could be undermined.

“If you don’t change the economic fundamentals, intervening in currency markets won’t be effective,” said David Dollar, a senior fellow at the Brookings Institution and a former Treasury Department representative in China. Citing organizations like the World Trade Organization, he said, “The question for me is, does this end up damaging the core economic institutions?”

Nothing about the world economy during the past few years has been linear or predictable. There is no reason that the events of Aug. 5, 2019, need to be the first chapter of future books about the Global Recession of 2020. But to avoid that result, it matters that world leaders understand just what is at stake — and the pervasive pessimism in markets Monday was a good indication.

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German economy grows slightly in 3Q

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BERLIN — Germany’s gross domestic product returned to modest growth in the third quarter, the Federal Statistical Office reported Thursday, staving off a widely-feared recession in Europe’s largest economy.

The Wiesbaden-based agency said the economy grew 0.1% in the July-September period over the previous quarter, largely driven by public and private consumption. Exports rose as well, while imports remained roughly at the second quarter level, the agency reported.

It said, however, that the second quarter contraction was greater than preliminary figures had shown, with the economy shrinking in the April-June period by 0.2% compared to the 0.1% originally reported.

Two straight quarters of declining output is considered a technical recession, which many economists had predicted that Germany had entered in the third quarter.

A week ago, the German government’s independent panel of economic advisers reported that a 0.1% third-quarter contraction was likely.

Though they said there were no signs of a “broad, deep recession,” the panel also said there was no sign of a “strong revival” in the fourth quarter. The five-member panel cut its economic forecast to growth of 0.5% this year and 0.9% in 2020, compared with its forecast in March of 0.8% this year and 1.7% next year.

And even though the recession has been averted, the numbers show Germany is in a de facto stagnation, and its export-driven economy still faces headwinds due to international uncertainty.

Services companies and the jobs market have held up well in Germany, but the industrial sector, led by automobiles and factory machinery, has seen declines amid trade tensions.

Among other things, the dispute between U.S. President Donald Trump and the Chinese leadership over China’s trade surplus with the U.S. has dampened trade and industrial output by raising uncertainty about whether and where more tariffs might be imposed. Another negative is uncertainty about the date and terms of Britain’s departure from the European Union.

In their report, the government economists cautioned that a no-deal Brexit could yet chop 0.3 percentage points off next year’s German growth, reducing it to 0.6%.

Britain is currently scheduled to leave the European Union by the end of January, but whether, how and when it leaves will depend on the outcome of an election next month.

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China economy grinds lower as October indicators miss forecasts

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By Gabriel Crossley and Huizhong Wu

BEIJING (Reuters) – China’s industrial output grew significantly slower than expected in October, as weakness in global and domestic demand and the drawn-out Sino-U.S. trade war weighed on activity in the world‘s second-largest economy.

Industrial production rose 4.7% year-on-year in October, data from the National Bureau of Statistics released on Thursday showed, below the median forecast of 5.4% growth in a Reuters poll.

Indicators showed other sectors also slowing significantly and missing forecasts with retail sales growth back near a 16-year trough and fixed asset investment growth the weakest on record.

The disappointing economic data adds to the case for Beijing to roll out fresh support for the economy after China’s economic growth slowed to its weakest pace in almost three decades in the third quarter as the bruising U.S. trade war hit factory production.

Broad activity in China’s manufacturing sector remains weak with data on the weekend showing factory gate prices falling at their fastest pace in more than three years in October.

China’s official Purchasing Managers’ Index (PMI) also showed activity in the factory sector remained in contraction for a sixth straight month in the month.

“Admittedly, optimism surrounding a phase-one U.S.-China trade deal could provide a boost to corporate investment in the near term,” Capital Economics China Economist Martin Lynge Rasmussen said.

“But even if a minor deal is agreed upon in the coming months, this would merely allow the focus to shift to the more intractable issues that we think will eventually lead the trade talks to break down. The case for further monetary easing remains intact.”

Other data on Thursday showed China’s property investment growth in the first 10 months of the 2019 slowing year-on-year.

The tariff war between China and the United States has hit global demand, disrupted supply chains and upended financial markets.

While some signs of recent progress in trade negotiations between the superpowers have cheered investors, officials from both sides have so far avoided any firm commitments to end their dispute.

That uncertainty has continued to weigh on manufacturers and their order books.

Thursday’s data also showed fixed asset investment, a key driver of economic growth, grew 5.2% from January-October, against expected growth of 5.4%. The January-October growth was the lowest since Reuters record began in 1996.

Private sector fixed-asset investment, which accounts for 60% of the country’s total investment, grew 4.4% in January-October.

On Wednesday, China’s State Council said Beijing would lower the minimum capital ratio requirement for some infrastructure investment projects.

Retail sales rose 7.2% year-on-year in October, missing expected growth of 7.9% and matching the more than 16 year low hit in April.

Consumers have been hit with higher food prices over the past few months, as pork and other meat prices soared.

At the same time, consumers have been reluctant to make big purchases with auto sales falling for the 16th straight month in October, data showed on Monday.

(Writing by Stella Qiu; Editing by Sam Holmes)

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Why Corporate America Is Bullish on the Economy – Investopedia

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Corporate executives are surprisingly bullish about the U.S. economic outlook for 2020, judging from an extensive analysis of management commentary in Q3 2019 earnings conference calls, as conducted by Goldman Sachs. Among the companies making particularly optimistic comments are Marriott International Inc. (MAR), Procter & Gamble Co. (PG), Republic Services Inc. (RSG), Harley-Davidson Inc. (HOG), and Allegion PLC (ALLE).

“Despite high levels of uncertainty, executives remained upbeat on the 2020 economic outlook. Corporate managers were optimistic about recent economic data, particularly consumer data,” Goldman writes in the current edition of their quarterly S&P Beige Book publication, released on Friday. “However, uncertainty remains high and executives expect to be dealing with US-China trade tensions for the foreseeable future. Consequently, inventories have declined and dealer demand has dropped,” they add.

Key Takeaways

  • U.S. corporate executives are upbeat about the economy in 2020.
  • This is based on analysis of Q3 2019 earnings calls.
  • However, other surveys of CEOs and CFOs indicate growing gloom.
  • The OECD, IMF, and Conference Board see lower U.S. growth in 2020.

Significance For Investors

Hotel operator Marriott calls the U.S. economy “robust” overall, and notes that its industry has low unemployment and high occupancy. Consumer products company Procter & Gamble sees “no signs of weakness.” Waste hauling company Republic says “the underlying economy is pretty strong…our view now and our view for 2020 is the economy is in pretty good shape.” Motorcycle manufacturer Harley-Davidson does not see any more uncertainty than 6 months ago, and noted that its own industry enjoyed a Q3 “pick up,” calling this “an encouraging sign.”

Security products and services company Allegion says “we are solid, positive, upbeat on the economy.” They find that the key indicators for their business are encouraging, including consumer confidence, low unemployment, high tax revenues for state and local governments, low interest rates, and a tight housing market. In conclusion, they “don’t know how you could not be positive about the view going forward.”

However, the bullish views observed by Goldman in Q3 conference calls conflict with recent surveys that show declining confidence among senior executives. CEOs are more gloomy about the future than at any previous time since the global financial crisis of 2008, according to a survey conducted by the Conference Board that was cited in a previous Goldman report. Meanwhile, “More than half (53%) of US CFOs believe that the US will be in recession by the 3rd quarter of 2020 and 67% believe that a recession will have begun by the end of 2020,” per the latest Duke University CFO Global Business Outlook survey.

Other key trends discussed in Goldman’s Beige Book relate to spending plans and the upcoming 2020 U.S. national elections. “S&P 500 cash spending plummeted in 2Q driven by a ten-year low in CEO confidence, but has stabilized in 3Q. Many executives highlighted deferring capital expenditures as they approached investments with increased caution,” the report noted. “Firms also outlined plans to divert cash from capital projects and [stock] buybacks in favor of strengthening the balance sheet,” the authors added.

Regarding the 2020 elections, many companies indicated that they are planning for multiple outcomes. Others preferred to discuss their long-term plans, while avoiding comments on politics. Some noted that there often is a big difference between what politicians advocate as candidates, and what they they actually do once elected.

Looking Ahead

In contrast to the bullish notes on the economy that Goldman finds in earnings commentary, Q3 2019 profits for the S&P 500 are on track to be down on a year-over-year (YOY) basis for the third consecutive quarter. However, while aggregate S&P 500 Q3 earnings are down by about 1% YOY so far, the median S&P 500 stock actually has a 5% increase, per Goldman’s current US Weekly Kickstart report.

Real GDP growth in the U.S. will slow from average rates of 2.9% in 2018 and 2.3% in 2019 to its long-term trend of 2.0% in 2020, per The Conference Board. However, this will represent a slight increase from annualized rates of 1.9% in Q3 and Q4 2019. The OECD calls for 2.28% U.S. real GDP growth in 2020, while the IMF projects U.S. economic growth to be 2.1% in 2020, down from their estimate of 2.4% for 2019.

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