“Recession is so far in the distance I can’t see it,” White House Chief Economic Advisor Larry Kudlow said late last year. Just 11 years out from the great global financial crisis, the Trump administration is sticking to its story that the US economy has never looked better with joblessness at multi-decade lows and the stock market within spitting distance of its all-time October high.
The market’s been on a roll, spurred by the news that Disney is about to muscle its way into the video-streaming business where it’ll take on global heavyweight Netflix. Also, Uber, which says helpfully in its prospectus it may never turn a profit, is set this month to launch its mega-IPO to raise up to $120 billion.
This rosy picture is all the more amazing because US President Donald Trump is still stoking a blazing fire with his uncalled-for tariff war against China. At one point last year, Chinese automobile sales in February were down 15 per cent over the previous year and they’ve have been experiencing similar falls for several months now. That’s hit every global automobile company, including US giants like GM which are well-entrenched in the Chinese market. Jaguar’s plant in Changshu has been closed for long stretches as sales have slid. Now, Chinese sales have picked up but only slightly, mainly because of VAT cut to 13 per cent from 16 per cent.
Is the US economy heading for a new slowdown as many economists predict, despite upbeat indicators constantly emerging? The US expansion will be the longest on record if it lasts till midyear. “Everything’s looking distinctly toppy,” a Dubai-based global wealth manager said warily. The question of slowdown or recession affects all of us because it’s hard to see the Indian economy thriving if the US, and with it the world economy, goes into a tailspin. Also, China is so crucial to the global economy that if it does take a serious tariff-war hit, that’ll impact everyone.
There are signals the Americans and Chinese may call a truce in the near future but there have been previous false dawns in that area. And the trade war has already hit many fragile sectors in the US like farm produce. The Chinese were, till recently, the biggest soybean buyers, but sales from September till February were down by about two-thirds to nine million tonnes. Now, though, there are indications the Chinese may ease up on farm produce and shift tariffs to other sectors.
If that does happen, it would be a major peace offering to Trump as it would lower political temperatures in states like Iowa that voted for him in 2016. One farmer who grows soybean and corn, both been hit by the Chinese tariffs, estimates his returns are down to a third of what they were before. But for some farmers, the troubles don’t end there.
They use China-imported chemicals and other products now also subject to tariffs and pushing up costs. Other Trump-voting states like oil-producer Texas, (the Chinese import $5 billion worth of US oil), are also feeling the pinch. Hi-tech industries, too, have been hit because China imports $7 billion worth of semiconductors, amongst other products.
Starting a trade war was by all measures an extraordinarily reckless move by Trump and economists and think-tanks now say the US’s taking a bigger hit from the trade battles than the Chinese. According to the Institute of International Finance (IIF), the US exports about $130 billion worth of goods to China and that could be down by a staggering $40 billion in one year.
On the knife’s edge
But the Chinese are poised on the knife’s edge too. They’re playing a carefully calculated game and since December have launched infrastructure projects worth a colossal $163 billion to prevent the economy stalling. They’re pushing money into infrastructure projects like the Shanghai Urban Rail Transit, estimated to cost $44 billion. It’s a dramatic reversal for the Chinese who’d hit the brakes on infrastructure throughout 2018 in a bid to ensure their debt didn’t spiral out of control.
The Chinese are still coping with the debt overhang built up during the 2008 Great Recession, and international analysts reckon China will still face a slowdown this year because exports and construction are losing steam.
It doesn’t appear, though, the dangers of triggering trade wars have dawned on Trump even now. He is constantly talking tough to woo his base, which he believes is impressed by his belligerence. He’s still threatening to hit global automakers with tariffs even though this could backfire against American companies which have factories both in the US and Canada and which move parts and finished products back and forth under the North American Free Trade (NAFTA) which Trump insisted on revising but finally settled for minor changes.
In fact, Gita Gopinath, the IMF’s chief economist, warned last week tariffs on automobiles from Europe and Japan could have a greater impact than the US-China trade war because it would hit many countries and disrupt global supply chains. Trump has threatened tariffs on 25 per cent of imported vehicles from Europe and Japan.
He has also threatened tariffs on Mexico if it doesn’t close its border and stop the immigrant flow. Even India’s been drawn into a trade battle with the US announcing it’ll remove New Delhi from the Generalised System of Preferences that allows the country to dispatch $5.6-billion worth of goods duty-free to the US, due to Washington’s anger over India’s “trade barriers.” The global economy has survived so far despite Trump’s frequent tantrums, but there are economists who predict 2019 will be the make-or-break year and see US trade policy as a major stress on the global economy. Economic growth has slowed since the second quarter of 2018 and there are no signs of a pick-up. Some economists also believe last year’s relatively strong economic performance was boosted by one-off stimulants like tax cuts.
Trump is having none of this bearish talk. But there are indications the public is tiring of his disruptive histrionics as he picks one fight after another. Even farmers who backed Trump in 2016 are watching ruefully as his ‘America First’ trade war plays out, unconvinced they’ll emerge winners.
The world is also watching and hoping the global economy will survive Trump’s four-year term. If the economy does stumble badly, we know who Trump will blame — everyone else from the US Federal Reserve to other global economies. Still, if the economy lurches into a sharp slowdown before the 2020 US elections, voters may not buy that explanation.
via Is the US economy heading for a slowdown? – The Hindu BusinessLine