Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Trade Tariff Economic Damage Spreading in US, China within Target in H2 2019

Economics / China US Conflict Aug 04, 2019 - 02:21 PM GMT

By: Dan_Steinbock

Economics In the second half of 2019, US economic prospects will soften, despite the Fed rate cut, whereas Chinese growth target is likely to prevail. It’s time to prepare for diminished global economic prospects in 2019-20.

After an important meeting of the Central Committee of the Communist Party of China (CPC), participants said that China seeks to make its fiscal policy more effective and to maintain “reasonably ample” liquidity.

Instead of resorting to a stimulus in the real estate market, the emphasis will be on “proactive fiscal policy and prudent monetary policy.” It is a challenging balancing act, but the right stance in the right time.



Meanwhile, President Trump pledged to impose an additional 10% tariff on Chinese imports to the US, which caused US stocks to tank 280 points. The White House needs a scapegoat as the Fed cuts cannot offset Trump’s tweet policies, US growth is slowing and a slowdown is looming in 2020.

China’s 2019 growth within range

Clearly, the CPC Central Committee seeks to avoid targeted but costly stimulus policies, which could exacerbate new risks of asset bubbles over time, but it will ensure adequate fiscal support.

Since infrastructure investment remains relatively soft by historical standards, fiscal easing on investment may prove likely in the second half of the year. It could be biased toward small enterprises and startups.

Moreover, fiscal easing is likely to be coupled with monetary support, including cuts of the banks reserve requirement ratio. Although the easing bias could cause downward pressure on Chinese bond yields and corporate spreads in the near future, the big picture suggests stabilization and resilience.

In the second quarter, Chinese economy grew 6.2%, a drop relative to 6.4% in the first quarter, yet hardly a surprise in view of global challenges. China’s economic growth is within the target range of 6% to 6.5% set by the government. Indeed, the full-year 2019 growth rate of 6.2% remains achievable, even if growth stabilizes around 6% to 6.2% in the second half.

In view of the CPC Central Committee meeting, policy authorities are likely to stick to the effort to cap debt growth. While that will support Chinese economy in the long term, the potential risk in this approach is premature tightening in the short-term. To avoid adverse outcomes, fiscal easing is likely in the second half of the year, while monetary easing will be likely to offset riskier scenarios.

Such stances could benefit Chinese stocks, which will also be supported by the anticipated foreign inflows, thanks to the inclusion of Chinese assets in international benchmarks. Despite the relatively benign macroeconomic prospects, more optimistic scenarios are constrained by the lingering trade-war uncertainty and caution in economic sentiment.

The US economy is a different story.

Fed cuts cannot contain White House’s policy mistakes

In the second quarter, US GDP grew at a 2.1% pace, which heralds “slowing economy.” Last spring, I predicted in China Daily that collateral damage in the US economy would begin to be felt more broadly by the summer. And a month ago, I argued that this damage is spreading, particularly as the White House is initiating new tariff wars against other countries around the world.

That is one reason why the US Federal Reserve - in a widely expected move, but one that critics see as a sign of diminished independence - cut interest rates by 25 basis points to a range of 2% to 2.25%, for the first time in more than a decade. The Fed also declared a premature end to its balance sheet reduction.

Ironically, the Fed’s statement – unchanged economic conditions, solid job gains, moderately-rising economic activity, though soft business investment – did not necessarily warrant a rate cut (the decision was not unanimous). What motivated Fed chair Jerome Powell’s decision may well have been the muted inflation pressures and particularly global growth concerns, which the Trump White House has undermined since the onset of its tariff wars in spring 2018.

Interestingly, the Fed cut did not cause a rally; it stumped the market. S&P 500 dropped almost 2%; 10-year Treasury yields to about 2%. The Fed cut does not imply a start of a new rate-cut cycle, but it does mean that the post-2008 recovery is now over with darker clouds looming in the horizon.

Trump tariff wars cloud US and global forecasts

When President Trump arrived in the White House, he pledged GDP growth at 4%. More recently, he projected US growth at 3%. Yet, analysts estimate US growth this year at 2.5% or less. Qualitative assessments suggest deterioration, as growth in domestic demand is slumping.

Worse, US GDP growth forecasts for 2020 indicate softening to 1.8%, possibly a (near-recession) slowdown – especially if trade and tech wars still escalate.

In the absence of negative surprises, Chinese GDP growth is likely to stay within the target of 6.2% in 2019 and possibly in 2020 as well, with supportive fiscal and monetary conditions. US tariff wars are likely to penalize Chinese economy by less than 0.5% of GDP, which could be offset by just a modest depreciation of the renminbi.

If recent policy mistakes in the White House will prevail, slower growth in investment spending, rising concern for continued trade wars and destabilizing geopolitics are likely to foster downside risks in global economic prospects, as risks for further downgrades morph into actual realities.

Dr. Dan Steinbock is the founder of Difference Group and has served at the India, China and America Institute (US), Shanghai Institute for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/  

© 2019 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Dan Steinbock Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in