7 August, 2019
Frances Donold, Chief Economist, Head of Macroeconomic Strategy
On 1 August, the Trump administration announced a new set of tariffs on the remaining US$300 billion of Chinese goods to be imposed on 1 September1. The US-China trade war further escalated on Monday with the US Treasury Department designating China as a currency manipulator and the US dollar/Chinese renminbi (USD/CNY) rose above the 7.00 level2. Equity markets plunged around the world. Frances Donald, Chief Economist and Head of Macroeconomic Strategy, explains why this phase of the trade war is different.
We view this next round of tariffs as a gamechanger that alters our prior views regarding US acceleration and a stabilising China. The new tariffs have tripped the circuit breaker and in our view are likely to single-handedly reverse the course of both the US and the global economy in the third quarter. This development is particularly disappointing, given that most of our research had found green shoots of stabilisation and potential recovery in US business investment, global trade, and the global manufacturing recession. Unfortunately, heightened trade tensions nip those positive developments squarely in the bud and necessitate two key changes of view from the macro strategy team.
Why the change of view?
While markets are now accustomed to trade tensions, this newly proposed set of tariffs comes with three characteristics that are causing us much more concern than all past iterations.
Where do we go from here?
Upside scenarios are more limited now than they were six months ago. They are generally more associated with the potential for additional easing than the market currently expects from global central banks (already a tall order) and/or possible large-scale stimulus from China. Clearly, a reversal of the tariff threat would also present an important catalyst. While the above is all possible, we suggest stepping to the sidelines until we have more visibility on growth.
1 US Department of the Treasury, 5 August 2019.
2 Bloomberg, as of 5 August 2019.
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