Latest International economic and market outlook.
Washington and Beijing have reached a limited agreement to pause the trade war between the world’s two largest economies. The US agreed not to impose fresh tariffs on over $150bn of Chinese consumer goods and to halve levies on $120bn of imports that were introduced in September. In return, China committed to increasing its imports from the US and promised better protection of intellectual property rights. The deal is due to be signed on 15th January, before Trump travels to Beijing to begin “phase two” talks. News of the trade deal and several rate cuts by the Fed have prompted widespread optimism in financial markets. After recently signalling that a recession could be imminent, the US yield curve is now at its most positive in more than a year, suggesting that the Fed has successfully steered the US economy through a global growth scare.
The eurozone economy looks to have registered its seventh year of consecutive growth in 2019. Such growth should continue this year as there is increasing evidence of stabilisation in the global economy, partly due to renewed central bank easing. However, downside risks remain, most notably a potential negative shock from deteriorating trade relations. Indeed, while the Conservative’s resounding victory in the UK general election should provide some clarity on Brexit, the EU will have just 11 months to agree a future trade relationship with the UK before the end of the transition period. This timetable looks ambitious and there is still the risk of a disruptive No Deal exit if no agreement is reached. Meanwhile, trade tensions with the US could worsen as early as January. The Trump administration is due to decide on whether to impose tariffs on French products, including wine and luxury goods, in response to France’s digital tax. Europe has warned it would retaliate if the US approves new levies.
Japan’s economy continues to demonstrate sluggish but resilient growth. While domestic consumption and investment have been solid, the external sector has been a notable drag as global trade tensions continue to take a toll. Activity will likely remain subdued in 2020, particularly given the recent consumption tax hike. That said, the economy should benefit from spillover effects from the 2020 Olympics in Tokyo, a potential Sino-US trade war thaw, and ongoing monetary and fiscal easing. Indeed, the Japanese government recently announced a $120 billion spending package, the impact of which should start to be seen in the middle of 2020.
We expect to see further targeted easing in China such as additional RRR cuts. However, such efforts will be a far cry from the huge stimulus packages that we have seen in the past. As a result, the economy should continue its structural slowdown, largely due to base effects and the country’s ongoing shift towards consumption-based growth. While China’s growth rate will trend lower over time, there should be some stabilisation this year if fading trade wars concerns allow business confidence to pick up.
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