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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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Economic cost of a warmer planet

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Earlier this year California-based utility Pacific Gas and Electric (PG&E) became one of the clearest cases of how climate change can wipe out a company that has not done enough to prepare for a warming planet.

After costs related to wildfires ballooned, PG&E filed for bankruptcy protection. The company faced approximately $30bn in liabilities as a result of its role in the 2017 and 2018 fires.

State investigators linked 100 deaths to the fires. Federal judge William Alsup blamed the cause of some of the fires on the utility’s negligence and said the utility had paid $4.5bn to shareholders in dividends over the past five years while failing to take adequate safety precautions.

And now Germany‘s car industry is facing the threat of losing its position as a leading centre for production. A series of missteps – from diesel-cheating scandals to a lack of preparedness for the end of the combustion engine – has left the road open to Uber, Tesla and Chinese electric brands. An industry that employs more than 800,000 people is facing a make-or-break moment.

So, are businesses doing enough to prepare for climate change or do executives have their heads in the sand?

According to a Global Commission on Adaptation report, businesses need to plan more for a warming planet. Companies that do not adapt may not survive.

The report claims investing $1.8 trillion to climate-proof business and the broader economy by 2030 could generate up to $7.1 trillion in net benefits. Half of the world’s biggest companies believe climate adaptation could result in $236bn in increased revenue.

One of the authors of the report is Feike Sijbesma, chief executive of Dutch life sciences company Royal DSM. Economics editor Abid Ali talks to him about climate change adaptation and why it is important for businesses around the world.

Sijbesma points out that no country in the world can escape from climate change.

“Addressing climate change mitigation and addressing climate change adaptation is in the interest of all countries and in the interest of all companies,” Sijbesma says.

“Of course, as companies we are not philanthropic organisations, we need to make money, but there are more interests than only making money and there are more interests than only the short term.”

Source: Al Jazeera News

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Peru economic growth jumps due to healthy domestic demand

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SANTIAGO — Peru’s economy grew 3.28% in July from the same month a year earlier, the second highest rate this year, due principally to healthy domestic demand and a slight rally in the mining sector, the government said on Sunday.

The rate was in line with analysts’ estimates in a Reuters poll. The Peruvian economy grew 2.74% in the last 12 months to July, the state statistics agency Inei said.

Peru is the world’s No. 2 producer of copper, zinc and silver. (Reporting by Marco Aquino, Writing by Aislinn Laing Editing by Paul Simao)

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Slower U.S. job growth expected

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By Lucia Mutikani

WASHINGTON (Reuters) – U.S. job growth likely slowed further in August, but the pace of gains probably remains sufficient to keep the economy expanding moderately amid rising threats from trade tensions and weakness overseas that have left financial markets fearing a recession.

The Labor Department’s closely watched monthly employment report on Friday will come in the wake of a survey on Tuesday that showed manufacturing contracting for the first time in three years in August. The economy’s waning fortunes, underscored by an inversion of the U.S. Treasury yield curve, have been largely blamed on the White House’s year-long trade war with China.

Washington and Beijing slapped fresh tariffs on each other on Sunday. While the two economic giants on Thursday agreed to hold high-level talks in early October in Washington, the uncertainty, which has eroded business confidence, lingers.

The economy is also facing headwinds from Britain’s potentially disorderly exit from the European Union, and softening growth in China and the rest of the world.

The Federal Reserve is expected to cut interest rates again this month to keep the longest economic expansion in history, now in its 11th year, on track. The U.S. central bank lowered borrowing costs in July for the first time since 2008.

“The general message from the labor market is that businesses are cutting back on hiring, but they are not laying off workers and that is important,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “Consumers are what’s keeping the economy moving at this point.”

Nonfarm payrolls probably increased by 158,000 jobs last month after advancing 164,000 in July, according to a Reuters survey of economists. The anticipated job gains would be below the monthly average of 165,000 over the last seven months, but still above the roughly 100,000 per month needed to keep up with growth in the working age population.

The unemployment rate is forecast unchanged at 3.7% for a third straight month.

August job growth could, however, fall short of expectations because of a seasonal quirk related to students leaving their summer jobs and returning to school. Over the past several years, the initial August job count has tended to exhibit a weak bias, with revisions subsequently showing strength.

Other factors favoring slower job growth include declines in both the Institute for Supply Management’s manufacturing and services industries employment measures in August. In addition, global outplacement firm Challenger, Gray & Christmas reported a 37.7% jump in planned job cuts by U.S-based employers in August.

BULLISH CONSUMERS

But first-time applications for unemployment benefits, a more timely indicator of labor market health, have been hovering near historically low levels. Consumers were very bullish about the labor market in August and the government likely started recruiting for the 2020 Census last month.

Though the trade impasse does not appear to be spilling over to the labor market, job growth has been slowing since mid-2018.

The government last month estimated that the economy created 501,000 fewer jobs in the 12 months through March 2019 than previously reported, the biggest downward revision in the level of employment in a decade. That suggests job growth over that period averaged around 170,000 per month instead of 210,000. The revised payrolls data will be published next February.

The government has also trimmed economic growth for the second quarter. The employment report is expected to show average hourly earnings gaining 0.3% last month, matching July’s rise. But the annual increase in wages is seen dipping to 3.1% from 3.2% in July as last year’s surge falls out of the calculation.

“Recent downward revisions to estimates of economic growth, corporate profits, and employment growth all suggest that the economy is displaying classic late-cycle symptoms,” said Michael Feroli, an economist at JPMorgan in New York. “Moreover, these symptoms are unlikely to go away entirely even if a truce is reached in the current trade tensions.”

The length of the workweek will also be watched for clues on how soon companies might start laying off workers. The average workweek fell to its lowest level in nearly two years in July as manufacturers and other industries cut hours for workers. It is forecast rising to 34.4 hours in August from 34.3 hours in July.

“While one month does not make a trend, hours worked is a leading indicator worth noting,” said Beth Ann Bovino, U.S. chief economist at S&P Global Ratings in New York. “A prolonged drop in hours worked signals that businesses may reduce hiring, with layoffs and cutbacks in private spending to likely follow.”

Manufacturing employment is expected to have risen by 8,000 jobs last month after increasing 16,000 in July. But factory payrolls could surprise on the downside after the ISM reported on Tuesday that its gauge of factory employment dropped in August to its lowest level since March 2016.

Manufacturing has ironically borne the brunt of the Trump administration’s trade war, which the White House has argued is intended to boost the sector. Factories cut overtime for workers in July.

Government employment could get a lift from hiring for the 2020 decennial census, which could create roughly 40,000 temporary jobs.

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