FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 22, 2019

IN THIS ISSUE:

1. IMF Reduces 2019 Global Economic Forecast to 3.0%

2. US/China Trade Talks – Progress or Just Teasing Us?

3. Everyone Loses in Unwinnable US/China Trade War

Overview

The global economy has been slowing over the last few years, there’s no question about that. Yet it is nowhere close to falling into a recession, despite growing predictions in the last few months. Let’s take a look at some numbers below.

There was some hope last week that the trade war with China is moving toward some possible resolution, at least according to President Trump. He said a “Phase One” deal was struck in the negotiations last week, the details of which are expected to be hammered out in the next 3-4 weeks. The Chinese did not confirm or deny. I’ll give you what details we know as we go along.

Let’s hope this latest Phase One US/China trade deal leads to the end of this trade war eventually, especially since a new larger round of tariffs, on both sides, are slated to go into effect on December 15. As should be clear by now, no one wins in a trade war.

On a personal note, I had hip replacement surgery one week ago today, and the procedure was successful. I had never been a patient in a hospital before, or had any kind of surgery, so I was quite nervous going in. But I’m glad I got it done, even though I have a lot of rehab ahead of me, and I’m glad to be back in the saddle.

IMF Reduces 2019 Global Economic Forecast to 3.0%

The International Monetary Fund (IMF), the world’s crisis lending bank, met in Washington last week and announced it has cut its 2019 global growth forecast to 3.0%, down from 3.2% in July. The IMF cited continued concerns about the growing trade war between the US and China – even though some progress was made in the US/China trade talks last week, which I will discuss below.

While the IMF’s latest downgrade to its global growth forecast is a disappointment, no doubt, there is no indication the global economy is headed for a recession anytime soon. A recession is defined as two consecutive quarters of negative economic growth, and the global economy is nowhere near that point. Yet the trend is concerning, as you can see.

The good news in last week’s IMF report was that the bank feels the worst of the global economic slump may be over, and it forecasts world growth of 3.4% in 2020. The IMF cautions, however, that next year’s stronger forecast depends on a lot of things going right, and that the latest progress on the US/China trade deal continues. That remains to be seen, of course.

My point today is that the global economy is nowhere near a recession, despite what you may read elsewhere. That is not to say, however, that no individual countries are struggling economically; in fact, several are – especially those who rely heavily on exports, as we see below.

US/China Trade Talks – Progress or Just Playing With Us?

US and Chinese trade negotiators met in Washington last week, and late Thursday President Trump announced that an initial Phase One agreement had been reached. Mr. Trump said China agreed to a “very substantial phase one deal” that will be written over the next three to four weeks. Trump also said the deal would address intellectual property and financial services concerns, as well as Chinese purchases of about $40 billion to $50 billion in additional US agricultural products.

China’s Minister of Commerce, Gao Feng, who attended last week’s trade talks did not confirm or deny that such a deal had been struck as he departed the meetings to return to China. He did, however, reiterate China’s long-held position that the US must reverse its tariffs on all Chinese goods before a larger deal can be struck. Speaking in Mandarin he said:

“China’s position, principle and goal for the China-U.S. trade negotiations has never changed. Both sides’ ultimate goal for the negotiations is to end the trade war and cancel all additional tariffs. This is good for China, good for the U.S. and good for the world.”

This language does not confirm that a Phase One deal was struck, so we’ll just have to wait and see over the next month if more substantive confirmation arises, as Trump claims.

I concluded a few months ago that China was not likely to strike a major trade deal with the US until after next year’s presidential election. At that time, former Vice President Joe Biden was comfortably ahead as the likely Democratic nominee, and most polls showed him beating President Trump, perhaps handily, in next year’s election.

My feeling was that China would prefer to negotiate a major trade deal with Biden rather than Trump. However, a lot has changed since then. First, Mr. Biden is no longer the clear frontrunner for the Democratic nomination, and far-left Senator Elizabeth Warren is now the presumed frontrunner.

Second, the Chinese, like the rest of us, have no idea where Ms. Warren stands on trade, especially with China. Likewise, it is highly questionable whether a liberal wingnut like Ms. Warren could beat President Trump next year. Personally, I think she is too far left to win in the Rust Belt where the election will once again be decided next year. Of course, I could be wrong.

And third, China’s economy has faltered in recent months. It’s GDP fell to 6.0% in the 3Q, down from 6.2% in the 2Q, the weakest in 26 years. While China remains one of the most robust economies in the world, the trend is weakening, and this worries Chinese leaders significantly.

Considering China’s weakening economy and the likelihood that President Trump could be re-elected next year, maybe China decided to toss him a bone by agreeing to a modest Phase One trade deal last week. We’ll just have to see what gets hammered out over the next 3-4 weeks.

Maybe it’s something or maybe it’s nothing. But one thing is sure: President Trump desperately wants to strike a trade deal with China before the election. I’ll keep you posted.

Everyone Loses in Unwinnable US/China Trade War

Ever since President Trump initiated this trade war with China last year, I have maintained that there are no winners in such disputes, and that the American people will be the biggest losers because higher tariffs on imports from China will result in higher prices Americans will have to pay for those goods and services.

President Trump, as you will recall, has maintained that it is China who will foot the bill for his trade tariffs, but we all know that simply is not true. While Mr. Trump has not admitted this directly, he has backed off his claims that China pays the tariffs.

In late June, the leaders of China and the United States announced at the G-20 meeting in Osaka, Japan, that they had reached a détente in their trade war. President Trump claimed that the two sides had set negotiations “back on track.” He put on hold new tariffs on Chinese goods and lifted restrictions preventing US companies from selling to Huawei, the blacklisted Chinese telecommunications giant. Markets rallied, and media reports hailed the move as a “cease-fire.”

That supposed cease-fire was a false dawn, one of many that have marked the on-again, off-again diplomacy between Beijing and Washington. All wasn’t quiet on the trade front, and the guns never stopped blazing. In September, after a summer of heated rhetoric, the Trump administration increased tariffs on another $125 billion worth of Chinese imports. China responded by issuing tariffs on an additional $75 billion worth of US goods.

The United States is tentatively set to institute further tariffs on Chinese goods on December 15, bringing the total value of Chinese goods subject to punitive tariffs to over half a trillion dollars, covering almost all Chinese imports. China’s retaliation is expected to cover 69% of its imports from the United States.

If all the threatened hikes are put in place, the average tariff rate on US imports of Chinese goods will be about 24%, up from about 3% two years ago, and we will all feel that in our pocketbooks. Tariffs on US goods exported to China would hit about 26%, and Chinese consumers would indeed feel that in their pocketbooks as well.

Hopefully the next round of tariffs slated for December, and the Chinese retaliation sure to follow are now on hold in light of the latest possible Phase One agreement reached last week.

The point is, no one wins in a trade war – period. Unfortunately, President Trump doesn’t seem to understand this. He has said in the past that “trade wars are easy to win.” And as noted above, he seems to believe (or wants to believe) that China will pay our tariffs, not American consumers. Who knows: China may be telling its people the same thing – that the US will pay for China’s retaliatory tariffs on our goods.

Yet as we know it is American and Chinese consumers who will ultimately pay the tariffs, and this is bad for both economies. Let’s hope this dispute does not escalate in December.

Best regards,

Gary D. Halbert

SPECIAL ARTICLES

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