Trade uncertainty has a much greater impact on global trade than tariffs. This is done through three channels: investments (delays in investment plans), consumption (savings rates all over the world), as well as inventories and prices.
We estimate that while tariffs in the US inhibited the growth of world trade by -0.3 percentage points. in 2018, the uncertainty of trade in the US cost 0.5 pp.
The level of inventories in the US in relation to China, a good indicator ahead of the deterioration in global trade growth, has historically reached a high level. We estimate that the growth rate of global trade and global gross product will be lower. The introduced tariffs burden growth, the uncertainty of trade costs increases.
Uncertainty hinders development through three channels:
Investments – Companies delay their investment and employment decisions, waiting for the results of trade talks between the US and China.
Consumption – consumers increase prudential savings and delay shopping decisions.
Inventories and prices – With the decline in demand and trade barriers in major economies, the least competitive companies have difficulties in selling their goods.
This leads to an increase in inventories and a slowdown in production, but also to a vicious circle in which enterprises start to lower prices to be able to sell their goods (these actions result in lower inflation readings – Q1 and Q2 2019).
Three main factors that may extend the negotiations:
- Economic and political impact.
Both markets are looking for political and economic influences, even though they are not at the same stage. The US is withdrawing from the role of a global supplier of public goods, China is trying to gradually fill the void.
- China’s failure to comply with US demands.
China is likely to make concessions to trade by offering more goods from the US. In terms of market openness and greater freedom of investment flows, I would be skeptical – in combination with high indebtedness, it could pose a threat to their stability. It is unlikely to solve the strategic problems and differences in the balance between the two countries.
- The prolonged negotiations will lead to a growing volatility in global sentiment.
The difference in the approach to negotiations makes them difficult. President Trump’s proposals to maintain tariffs, despite signing an agreement with China, show how the area of negotiations is limited.
The prolonging negotiations will have their implications:
Implication No. 1: a negative shock for trade and global gross product growth.
If the US administration goes further and taxes all other Chinese exports, 25% (we think this is unlikely because in this case it would affect many consumer goods) and USD 200 billion of car imports by 25%, this would lead to a commercial war scenario. This would mean that average tariffs in the US would be close to 12%, reducing by 2 percentage points of global GDP growth, leading the global economy into a recession.
Implication No. 2: credit market – a significant increase in spreads.
We expect a significant widening of spreads to 200 bp from 155 bp today for the US corporate BBB segment. In China, industrial profits fell by -3.3% in the first quarter of 2019. We are observing an increase in credit risk in China due to poor sales prospects for exporters and increased indebtedness, as the authorities increase accommodative resources (bank loan for the private sector +13% y/y).
Implication No. 3: a negative shock related to the increase in uncertainty.
The investment cycle shaped by the increase in uncertainty at the global level. We do not expect de-escalation in the short term. Uncertainty will probably remain high and make investment plans more difficult. For each four-month trade uncertainty, we estimate that the cost will be -0.1 p.p. global economic growth.
Implication 4: central bank activities.
The FED and the ECB are likely to adopt a dovish position. We do not expect interest rate cuts in the short term, but interest rate cuts by the Fed in QI 2020 are possible. China is likely to see a wave of interest rate cuts in 2019 as a stimulus, even by 100 bps.
Implication No. 5: stock markets – get ready for volatility.
One can imagine another sale similar to Q4 2018. By the end of 2019 expected volatility of the S & P 500 index at 25% down in the face of neutral data (30%), with the possible descent of S & P 500 to 1745 in the face of a sharp downturn (50 %). The assets perceived as a safe heaven will gain on this: the US dollar, 10-year T-Treasuries, precious metals and niche cryptocurrencies. We see the possibility of RMB approaching 7 RMB for USD until the end of 2019 (6.7 end of QI), as a result of intensifying mitigation efforts by Chinese authorities on the local market.
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The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all RCieSolution management teams. Are subject to revision over time.