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The U.S China Trade War, the UK Pound and the Eurozone Economy in Focus

Bob Mason

How is the continuing US/China trade war affecting the respective economies? Who is benefiting the most?

The big question is really whether Trump’s goal was to merely divert trade away from China or actually return manufacturing to U.S soil.

If it’s the first of the two, then the U.S may be on top from a trade war perspective. China has found itself losing out to the likes of Mexico as tariffs rolled in.

It’s not one-way traffic, however. China has hit back with tariffs on politically sensitive industries including agriculture. Soybean exports have been hit hard. When considering needed voting support from the farming belt, this may be one issue that could surface next year.

On the economic data front, it’s all about optics. The U.S trade deficit may have narrowed marginally, but certainly not to the levels that Trump may have hoped for.

Looking at the GDP numbers, the U.S economy has been a shrinking violet on relative terms. While China saw growth slow from 1.5% to 1.4% in the 1st quarter, the U.S economy is forecasted to slow from 3.4% to 1.8%. Granted, the extended government shut down will have contributed, but a weaker global economy is a secondary factor.

PMI numbers have reported a bounce back in manufacturing sector activity in China, following a string of monthly contractions. The expansion comes at a time when global demand has waned and tariffs should be biting. China may well have found an alternative avenue. Increased demand was not just domestically driven but also fueled by demand from overseas.

While hoarding ahead of tariffs continued to support demand for goods from China, demand for goods from overseas have not collapsed since the rollout of tariffs.

If Trump was looking to hand Mexico with China’s lost exports to the U.S, then job done, but that’s likely to be the worst possible outcome.

Some will argue that Trump has won this one. By the time Presidential Campaign kicks off, however, there may well be plenty of ammunition for the Democrats to make use of…

China’s Premier is going to be around a lot longer than Trump and that makes China’s strategy in the trade war a very different one to that of the U.S.

How has the Brexit delay affected the UK economy and in particular the GBP?

The UK economy has shown resilience since the initial reaction to the EU Referendum result.

We’ve seen the unemployment rate fall to the lowest level since 1975, with wage growth at its fastest pace in a decade.

Retail spending has been on the rise through the quarter, with March numbers being particularly impressive.

The private sector PMI numbers, however, have painted a somewhat different picture. Service sector activity was at its joint weakest in a decade last month. As the main contributor to the UK economy, the weak activity was attributed to uncertainty over Brexit. Weak export orders didn’t help, however. The EU economy is on the back foot and that’s never a good thing for the UK. This has ultimately contributed to a widening in the UK trade deficit.

While consumption has been impressive, the real uncertainty is on whether the increase in domestic consumption and jump in imports is as a result of hoarding ahead of a possible no deal departure from the EU.

Annually, the economy grew by 2%, hitting levels not seen since late 2017. Month-on-month, the economy grew by 0.2%. These are numbers that few would have expected when considering the lack of progress on Brexit negotiations.

So, while until now, the economy has fared better than anticipated, the next few months will be telling. Hoarding can’t go on forever and, while a weaker Pound will support demand for UK goods, consumption could hit a wall.

As for the Pound, sitting at just shy of $1.30 levels is almost as surprising as to how well the UK economy has performed.

Uncertainty over what lies ahead for Britain and a complete failure by the Tory party to unite and deliver a deal should have sunk the Pound. A slide could be on the horizon… A vote of no confidence and the prospects of a Labour Party take over and 2nd EU Referendum would test even the more die-hard Sterling bulls…

For now, support comes on expectations of Britain leaving with a deal, if it leaves at all. Time will tell whether that’s a glass ceiling…

The ECB slashed its growth forecast for 2019. What are your thoughts for the Bloc’s economy in 2019?

EU economic indicators have been far from impressive in recent months.

  • German manufacturing sector activity continued to contract in April. Of significance was new export orders seeing its 2nd largest fall in a decade.
  • While the services sector has seen a pickup in activity, it’s not been enough to offset the doom and gloom.
  • Throw in political uncertainty in Italy and Spain, the possible ramifications of a disorderly Brexit and it gets a little messier.
  • Then consider the prospects of U.S tariffs on EU goods and it could get from bad to worse.

For now, the EUR has managed to hold on. Market risk sentiment fuelled by hopes of a resolution to the U.S – China trade war has helped. All of this, in spite of a particularly dovish Draghi.

It remains to be seen, however, whether an end to the trade war will deliver the economic catalyst that many are hoping for…

This article was originally posted on FX Empire

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