This Week In The Economy: China Strikes Back As Trade War Escalates, New Front Opening With EU/Japan?
By: Brai Odion-Esene
Tags: Trade, Economics, Trump, Canada, China

This Week In The Economy: China Strikes Back As Trade War Escalates, New Front Opening With EU/Japan?

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers. Brai Odion-Esene May 17, 2019·5 min read

China Strikes Back As Trade War With U.S. Escalates

The Trump Administration last week raised tariffs on $200 billion in Chinese imports and, as expected, retaliation from Beijing wasn’t far behind. China announced it will hike tariffs on $60 billion worth of U.S. imports starting June 1, when custom duties on select goods will jump from 10% to 25%.

Among the U.S. goods to be hit by the highest tariffs are a wide range of food products — including cooking oils, frozen vegetables, wine, beer and other beverages — industrial minerals and chemicals, textiles and clothing, jewelry, metal products, machinery parts, and consumer items.

The latest salvo in the ongoing trade war between the world’s largest economies will hit consumers directly unless an agreement is reached. Retail giant Walmart warned this week that increased tariffs on goods from China will mean increased prices for shoppers.

On the flip side, however, global companies like Walmart will likely seek to shift operations to, and find new suppliers, in low-cost countries such as Indonesia, Thailand, and Vietnam — which would be a boon for their economies while potentially keeping a lid on costs for U.S. consumers.

All eyes will be on the G20 leaders meeting in Japan at the end of June, where Trump and China President Xi Jinping will likely hold talks on the sidelines.

U.S. To Wage A Trade War On Multiple Fronts?

The U.S. could open another front in its quest to revamp trade relationships by going after the European Union and Japan unless they reduce imports of automobiles to the United states.

In an executive order signed this week, Trump is giving the EU and Japan 180 days to agree to a deal that would “limit or restrict” imports of automobiles and their parts in return for delaying new auto tariffs.

The U.S. Commerce Department conducted a review and concluded the imports of cars into the U.S. are a threat to national security because they have hurt domestic producers and their ability to invest in new technologies.

“ United States defense and military superiority depend on the competitiveness of our automobile industry and the research and development that industry generates,” the White House said in a statement.

U.S. Manufacturing Sector Continues To Struggle, Retail Sales Remain Sluggish

Factory production in United States has been weak so far this year, hit by a combination of protectionist trade policies and weak global economic activity. Data released this week underscored it will take some time for the malaise to end.

Industrial production in April fell 0.5% in April, this after a mere 0.2% increase in March, and declines of 0.5% and 0.4%, respectively, in February and January. For the first quarter as a while, industrial output is down 1.9% compared to Q1 2018.

Manufacturing production fell 0.5% in April after being unchanged in March, the index for mining advanced 1.6% in April, while the index for utilities plunged by 3.5%.

Things aren’t much better on the consumption side. April retail sales were weak, down 0.2% compared to March, underscoring the fragile state of consumer spending — a fact made worse if the increased tariffs discussed above feed through in the form of higher prices. Sales excluding autos and gasoline also fell 0.2%.

Source: FTN Financial

There was some positive news in the housing market this week, as applications for permits to build private housing units rose last month, as did the number of new housing projects. Privately‐owned housing units authorized by building permits in April were at 1,296,000, 0.6% above the March rate of 1,288,000, although 5% below the April 2018 rate of 1,364,000.

Privately‐owned housing starts in April were at 1,235,000, 5.7% above the March estimate of 1,168,000, but again 2.5% below the April 2018 rate of 1,267,000. Single‐family housing starts in April were at a rate of 854,000; this is 6.2% above the March figure of 804,000.

Euro Area Economy Grew In Q1, Industrial Production Still A Concern

The eurozone economy ended the first quarter on a somewhat positive note, with GDP growing by 0.4%. This improves on the 0.2% growth rate reported in Q4 2018. Compared with Q1 2018, GDP rose by 1.2% in the euro area.

However, the struggles of its manufacturing sector continue, with euro area industrial production falling by 0.3% in March. This follows a 0.1% decline in February. Compared with March 2018, industrial production decreased by 0.6% in the euro area.

Sentiment is particularly downbeat in Germany, the bloc’s manufacturing powerhouse. A survey released this week shows financial market participants continue to expect “restrained economic growth” in Germany for the next six months.

“The most recent escalation in the trade dispute between the USA and China again increases the uncertainty regarding German exports — a key factor for the growth of the gross domestic product.” — ZEW Centre for European Economic Research

IMF Warns of ‘Significant’ Risks Facing Germany

In an assessment of Germany released this week, part of regular consultations with members, the International Monetary Fund warned the risks facing Europe’s largest economy “are significant,” listing threats such as; a further escalation of trade tensions, a more pronounced China slowdown, a “disorderly” Brexit, and renewed stress in the euro area.

“A slowdown in global demand and other temporary setbacks hit the economy unexpectedly hard in the second half of last year, highlighting its vulnerability to external shocks, notably growing international trade tensions,” the IMF said.

Furthermore, it noted Germany’s aging population and the fact that its technological prowess “is being challenged,” while lower incomes have remained stagnant and the energy transition is progressing only slowly.

Canada’s Central Bank Warns of High Debt Levels Among Canadian Households, Companies

“The vulnerabilities associated with high household debt and imbalances in the housing market have declined modestly but remain significant.” That was the conclusion of the Bank of Canada in its latest Financial System Review released this week.

“ We need to remain vigilant as the overall level of indebtedness continues to be high, with a large portion of that debt held by highly indebted households,” the report said.

The BOC also warned that “fragile corporate debt funding” is emerging as a vulnerability, noting that many companies have become more indebted — especially those with lower credit ratings. While investors’ appetite for high-yield bonds and leveraged loans has driven this increase in borrowing, this also means these companies could see their funding dry up should investor sentiment turn negative.