By Jonathan Cable
LONDON (Reuters) – The U.S. economy has pulled ahead this year, extending a lengthy expansion with help from President Donald Trump’s “America First” agenda and massive tax cuts, but upcoming data could illuminate the impact of his policies on global peers.
Trump is determined to rewrite global trade deals, particularly with China, the world’s second-biggest economy behind the United States. He has slapped tariffs on more than half of over $500 billion in Chinese imports, for which China has retaliated.
Plans for new trade talks collapsed recently and both sides appear to be digging in for a long fight. That has cast a darker shadow over the outlook for the global economy, already showing signs of strain from a rampant U.S. dollar that has sent emerging market currencies into retreat.
All 70 economists who answered an additional question in a Sept. 12-19 Reuters poll said the trade conflict between the world’s top two economies is bad for U.S. growth. They were also unanimous in saying the U.S.-China trade war threatened the outlook for the euro zone. [ECILT/US] [ECILT/EU]
Economic data in the coming week may give more solid evidence as to how China is faring.
“One eye will also be on China next week as markets attempt to assess the latest economic data for signs of any impact from trade disagreements with the U.S.,” said Ryan Djajasaputra at Investec.
The calendar consists of purchasing managers’ (PMI) surveys of services firms alongside trade and credit releases.
China’s economic growth has been slowing and September data due on Oct. 12 is expected to show dollar-denominated exports rose 9.1 percent, slower than August’s 9.8 percent increase, according to a preliminary Reuters poll.
On the same day, Beijing will publish its trade balance, including the politically sensitive surplus it has with the United States. The number could push Trump to turn up the heat on China if he thinks he is not winning the trade war.
“It seems likely that a U.S.–China trade war will result in nearly all Chinese imports into the U.S. facing 25 percent tariffs next year, with U.S. exports to China also subject to higher tariffs,” economists at Credit Agricole told clients.
That could add to inflationary pressures, particularly in the United States, and so has implications for Federal Reserve policy.
The Fed raised interest rates late last month, its third rate hike this year, and is expected to follow that up with another increase before the end of December, taking the benchmark fed funds rate to 2.25-2.50 percent.
Medians in a Reuters poll showed only two hikes next year compared to three increases based on the Fed’s own dot plots, but economists could be swayed into agreeing with the Fed if tariffs drive up inflation.
Rather than tightening, China is supporting its own economy with stimulus measures — including monetary, credit, fiscal and regulatory policy easing.
Policymakers have sought to bring financing costs down, boost lending to smaller businesses, cut taxes and fast-tracked more infrastructure projects. The central bank has cut banks’ reserve requirement ratios three times this year to pump in liquidity.
“We expect fiscal policy to remain supportive. Monetary policy should also remain accommodative,” Credit Suisse economists told clients.
Growth in China’s manufacturing sector sputtered in September as both external and domestic demand weakened, Sept. 30 surveys showed, raising the pressure on policymakers as tariffs appear to be inflicting a heavier toll on the economy.
It is a quiet week for U.S. data releases but Britain, deeply exposed to the global economy, will publish economic growth figures for August on Wednesday.
They are likely to show the pace of expansion slowed to 0.1 percent from July’s 0.3 percent as uncertainty over Brexit also weighs.
Britain is due to leave the European Union in March next year and divorce talks — which appeared to be at stalemate — are expected to step up again ahead of an EU leaders’ summit on Oct. 18.
Prime Minister Theresa May has so far shown little sign of shifting away from her “Chequers plan” — named after her country residence — to keep close ties with the EU, amid criticism at home and in Brussels.
But the EU’s Brexit negotiators see a divorce deal with Britain as “very close”, diplomatic sources said, a signal that a compromise might be in the making on the most contentious issue of the future Irish border.
“We still think a fudge can be found that avoids the ‘no deal’ scenario, but we’re unlikely to know for sure until 2019,” said ING economists.
“This only promises more uncertainty in the short-run.”
(Reporting by Jonathan Cable; Editing by Catherine Evans)