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China’s sagging economy looms over quarterly results around the world



July 20 (Reuters) – China’s frail growth could weigh on companies with exposure to the world’s second-largest economy, including Apple (AAPL.O), big chipmakers and luxury retailers as they report quarterly results in the next few weeks.

Wall Street is bracing for a steep drop in second-quarter U.S. earnings, with profit margins expected to be hurt by U.S. inflation and weaker spending. Both U.S. and European companies with exposure to China could be hit by that economy’s sluggish growth as its post-COVID momentum has faltered rapidly.

China’s weak economic figures have weighed on its stock market, limiting the Shanghai Composite Index’s (.SSEC) gain in 2023 to 2.6%, compared to the S&P 500’s (.SPX) 18% increase.

“The post-zero COVID reopening has been disappointing by basically all measures in China, and the country’s hesitance to do broad-based consumer-facing stimulus is weighing on sentiment,” said Ross Mayfield, investment strategy analyst at Baird. “That’s going to have a spillover effect on the European and U.S. companies that are levered to the country.”

Early reports suggest that spillover is real. Swiss engineering group ABB (ABBN.S) said Thursday that its orders in China fell 9% in the second quarter, while Cartier-owner Richemont (CFR.S) this week posted quarterly sales in Asia that were slightly lower than expected.

Richemont’s outlook for the year was “somewhat tempered” due to uncertainties in the Chinese macroeconomy that could affect both high-end and aspirational consumers, according to analysts at Bernstein who took part in a call with executives.

With China’s youth unemployment hitting a record 21% in June, young consumers may favor moderately-priced products and services and forgo big ticket purchases.

Tesla sold a record 247,217 China-made vehicles in the second quarter, but on Wednesday reported lower gross margins due to the company’s price war with rivals, including Chinese competitors NIO (9866.HK) and Xpeng (9868.HK).

Upcoming reports from NXP Semiconductors NV (NXPI.O) on July 24 and Texas Instruments (TXN.O) on July 25 will serve as barometers for chip demand. China accounted for 36% of NXP’s revenue last year and half of Texas Instruments’ revenue.

Analysts estimate NXP reporting a 3.2% drop in quarterly revenue, with Texas Instruments’ revenue tumbling 16%, which would be its steepest drop since 2009, according to Refinitiv.

Credit Suisse Chief U.S. Equity Strategist Jonathan Golub said in a report this week that weakness in China that hampers U.S. growth might limit stock-market gains.

Corning Inc (GLW.N), whose Gorilla glass is used in smartphones made by Apple and Samsung Electronics (005930.KS), is expected on July 25 to report a 21% drop in adjusted net income, according to Refinitiv.

The specialty glass maker blamed “anticipated recession-level demand” for weak results in its previous quarterly report last April. China accounted for 30% of Corning’s net sales last year.

Apple, the world’s most valuable company, saw its sales in China dip 2.9% in its March quarter, worse than the 2.5% drop in overall revenue. Analysts on average see the iPhone maker’s revenue falling 1.7% to $81.6 billion for the June quarter, which would be the lowest in two years, according to Refinitiv.

Coffee maker Starbucks (SBUX.O) in May reported quarterly results that beat estimates, powered by recovering demand in China.

U.S. companies that operate in China are also facing uncertainty related to trade disputes between Washington and Beijing, particularly in semiconductors. Chipmakers are currently grappling with Washington’s sweeping set of rules imposed in October to hobble China’s chip industry.

“Many companies’ manufacturing base is heavily Chinese-based, so are companies planning to diversify their manufacturing base or even ‘re-shore’ back to the US? If so, that’s presumably higher-cost and would weigh on gross margins,” said David Klink, senior analyst with Huntington Private Bank.

Reuters Graphics

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Reporting by Noel Randewich in Oakland, California; additional reporting by Chavi Mehta in Bangalore, Caroline Valetkovitch in New York and Mimosa Spencer in Paris; editing by David Gaffen and Nick Zieminski

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Here is Trump economy: Slower growth, higher prices and a bigger national debt



If Donald Trump is re-elected president of the United States in November, Americans can expect higher inflation, slower economic growth and a larger national debt, according to economists.

Trump’s economic agenda for a second term in office includes raising tariffs on imports, cutting taxes and deporting millions of undocumented migrants.

“Inflation will be the main impact” of a second Trump presidency, Bernard Yaros, lead US economist at Oxford Economics, told Al Jazeera.

“That’s ultimately the biggest risk. If Trump is president, tariffs are going up for sure. The question is how high do they go and how widespread are they,” Yaros said.

Trump has proposed imposing a 10 percent across-the-board tariff on all imported goods and levies of 60 percent or higher on Chinese imports.

During Trump’s first term in office from 2017 to 2021, his administration introduced tariff increases that at their peak affected about 10 percent of imports, mostly goods from China, Moody’s Analytics said in a report released in June.

Those levies nonetheless inflicted “measurable economic damage”, particularly to the agriculture, manufacturing and transportation sectors, according to the report.

“A tariff increase covering nearly all goods imports, as Trump recently proposed, goes far beyond any previous action,” Moody’s Analytics said in its report.

Businesses typically pass higher tariffs on to their customers, raising prices for consumers. They could also affect businesses’ decisions about how and where to invest.

“There are three main tenets of Trump’s campaign, and they all point in the same inflationary direction,” Matt Colyar, assistant director at Moody’s Analytics, told Al Jazeera.

“We didn’t even think of including retaliatory tariffs in our modelling because who knows how widespread and what form the tit-for-tat model could involve,” Colyar added.

‘Recession becomes a serious threat’

When the US opened its borders after the COVID-19 pandemic, the inflow of immigrants helped to ease labour shortages in a range of industries such as construction, manufacturing, leisure and hospitality.

The recovery of the labour market in turn helped to bring down inflation from its mid-2022 peak of 9.1 percent.

Trump has not only proposed the mass deportation of 15 million to 20 million undocumented migrants but also restricting the inflow of visa-holding migrant workers too.

That, along with a wave of retiring Baby Boomers – an estimated 10,000 of whom are exiting the workforce every day – would put pressure on wages as it did during the pandemic, a trend that only recently started to ease.

“We can assume he will throw enough sand into the gears of the immigration process so you have meaningfully less immigration, which is inflationary,” Yaros said.

Since labour costs and inflation are two important measures that the US Federal Reserve weighs when setting its benchmark interest rate, the central bank could announce further rate hikes, or at least wait longer to cut rates.

That would make recession a “serious threat once again”, according to Moody’s.

Adding to those inflationary concerns are Trump’s proposals to extend his 2017 tax cuts and further lower the corporate tax rate from 21 percent to 20 percent.

While Trump’s proposed tariff hikes would offset some lost revenue, they would not make up the shortfall entirely.

According to Moody’s, the US government would generate $1.7 trillion in revenue from Trump’s tariffs while his tax cuts would cost $3.4 trillion.

Yaros said government spending is also likely to rise as Republicans seek bigger defence budgets and Democrats push for greater social expenditures, further stoking inflation.

If President Joe Biden is re-elected, economists expect no philosophical change in his approach to import taxes. They think he will continue to use targeted tariff increases, much like the recently announced 100 percent tariffs on Chinese electric vehicles and solar panels, to help US companies compete with government-supported Chinese firms.

With Trump’s tax cuts set to expire in 2025, a second Biden term would see some of those cuts extended, but not all, Colyar said. Primarily, the tax cuts to higher earners like those making more than $400,000 a year would expire.

Although Biden has said he would hike corporate taxes from 21 percent to 28 percent, given the divided Congress, it is unlikely he would be able to push that through.

The contrasting economic visions of the two presidential candidates have created unwelcome uncertainty for businesses, Colyar said.

“Firms and investors are having a hard time staying on top of [their plans] given the two different ways the US elections could go,” Colyar said.

“In my entire tenure, geopolitical risk has never been such an important consideration as it is today,” he added.



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China Stainless Steel Mogul Fights to Avoid a Second Collapse



Chinese metal tycoon Dai Guofang’s first steel empire was brought down by a government campaign to rein in market exuberance, tax evasion accusations and a spell behind bars. Two decades on, he’s once again fighting for survival.

A one-time scrap-metal collector, he built and rebuilt a fortune as China boomed. Now with the economy cooling, Dai faces a debt crisis that threatens the future of one of the world’s top stainless steel producers, Jiangsu Delong Nickel Industry Co., along with plants held by his wife and son. Its demise would send ripples through the country’s vast manufacturing sector and the embattled global nickel market.



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Why Trump’s re-election could hit Europe’s economy by at least €150 billion



A Trump victory could trigger a 1% GDP hit to the eurozone economy, with Germany, Italy, and Finland most affected. Renewed NATO demands and potential cessation of US aid to Ukraine could further strain Europe.

The potential re-election of Donald Trump as US President poses a significant threat to the eurozone economy, with economists warning of a possible €150 billion hit, equivalent to about 1% of the region’s gross domestic product. This impact stems from anticipated negative trade repercussions and increased defence expenditures.

The recent attack in Butler, Pennsylvania, where former President Trump sustained an ear injury, has boosted his re-election odds. Prediction markets now place Trump’s chances of winning at 71%, a significant rise from earlier figures, while his opponent, Joe Biden, has experienced a sharp decline, with his chances dropping to 18% from a peak of 45% just two months ago.

Rising trade uncertainty and economic impact from tariffs

Economists James Moberly and Sven Jari Stehn from Goldman Sachs have raised alarms over the looming uncertainty in global trade policies, drawing parallels to the volatility experienced in 2018 and 2019. They argue that Trump’s aggressive trade stance could reignite these uncertainties.

“Trump has pledged to impose an across-the-board 10% tariff on all US imports including from Europe,” Goldman Sachs outlined in a recent note.

The economists predict that the surge in trade policy uncertainty, which previously reduced Euro area industrial production by 2% in 2018-19, could now result in a 1% decline in Euro area gross domestic product.

Germany to bear the brunt, followed by Italy

Germany, Europe’s industrial powerhouse, is expected to bear the brunt of this impact.

“We estimate that the negative effects of trade policy uncertainty are larger in Germany than elsewhere in the Euro area, reflecting its greater openness and reliance on industrial activity,” Goldman Sachs explained.

The report highlighted that Germany’s industrial sector is more vulnerable to trade disruptions compared to other major Eurozone economies such as France.

After Germany, Italy and Finland are projected to be the second and third most affected countries respectively, due to the relatively higher weight of manufacturing activity in their economies.

According to a Eurostat study published in February 2024, Germany (€157.7 billion), Italy (€67.3 billion), and Ireland (€51.6 billion) were the three largest European Union exporters to the United States in 2023.

Germany also maintained the largest trade surplus (€85.8 billion), followed by Italy (€42.1 billion).

Defence, security pressures and financial condition shifts

A Trump victory would also be likely to bring renewed defence and security pressures to Europe. Trump has consistently pushed for NATO members to meet their 2% GDP defence spending commitments. Currently, EU members spend about 1.75% of GDP on defence, necessitating an increase of 0.25% to meet the target.

Moreover, Trump has indicated that he might cease US military aid to Ukraine, compelling European nations to step in. The US currently allocates approximately €40bn annually (or 0.25% of EU GDP) for Ukrainian support. Consequently, meeting NATO’s 2% GDP defence spending requirement and offsetting the potential reduction in US military aid could cost the EU an additional 0.5% of GDP per year.

Additional economic shocks from Trump’s potential re-election include heightened US foreign demand due to tax cuts and the risk of tighter financial conditions driven by a stronger dollar.

However, Goldman Sachs believes that the benefits from a looser US fiscal policy would be marginal for the European economy, with by a mere 0.1% boost in economic activity.

“A Trump victory in the November election would likely come with significant financial market shifts,” Goldman Sachs wrote.

Reflecting on the aftermath of the 2016 election, long-term yields surged, equity prices soared, and the dollar appreciated significantly. Despite these movements, the Euro area Financial Conditions Index (FCI) only experienced a slight tightening, as a weaker euro counterbalanced higher interest rates and wider sovereign spreads.

In conclusion, Trump’s potential re-election could have far-reaching economic implications for Europe, exacerbating trade uncertainties and imposing new financial and defence burdens on the continent.



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