2019 Midyear Global Outlook — Trade in the balance
Economic fundamentals were solid at the start of the year. Could trade disruptions put the economic expansion at risk in the second half of 2019?
After weeks of build up about a possible trade deal between the U.S. and China this month, negotiations have come to a screeching halt. Trade representatives from both sides have accused the other of unfair practices or reneging on parts of the agreement framework. In response, President Donald Trump increased existing tariffs on $200 billion of Chinese goods from 10% to 25% effective May 10, as well as threatened to place tariffs on all remaining products from China, an estimated $250-$300 billion in goods. China retaliated with the announcement it would raise tariffs on $60 billion in U.S. goods, beginning in June.
As the world’s two largest economies struggle to come to an agreement, there are growing fears that the dispute could escalate. Equity markets sent a clear message to that effect on May 13 with a massive sell off across most indexes in the U.S. and around the world.
Derek Hamilton, global economist with Ivy Investment Management Company, says it’s in the best interests of both the U.S. and China to come to an agreement, but the possibility of a recession intensifies if a stalemate lingers late into the second half of 2019.
“The cost of the increased tariffs on U.S. gross domestic product growth would likely be a couple of tenths of a percent, which the U.S. economy could absorb,” says Hamilton. ”However, the impact to business confidence could be more profound, as capital expenditure plans could wane. Another consideration is the latest proposed tariffs are on goods that are almost all consumer-facing, and companies are likely to pass the cost of the tariffs directly to consumers.”
A hit to consumption at the same time as a decline in business confidence would escalate the risk of a U.S. recession, Hamilton says.
So what’s next? The fluidity of this situation creates ongoing market uncertainty, but Hamilton says Ivy’s base case scenario has not changed. He still expects a trade deal by midyear with a recovery in the global economy in the second half of the year.
“We believe it's going to be rocky for a couple of months, but a deal between U.S. and China could happen sometime in the summer,” he says.
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