Global Daily – Still time to avoid a real trade war

by: Bill Diviney , Arjen van Dijkhuizen , Aline Schuiling

Global Trade: US-China tariffs still at the proposal stage – Trade tensions have come back into focus, with China today proposing retaliatory measures to the US’s publication yesterday of a list of USD50bn of Chinese imports to be targeted with 25% tariffs. The measures proposed by China also target up to USD50bn of imports from the US (including aircraft, autos and soy beans), with an identical 25% tariff. While the rhetoric is ratcheting up, and markets are reacting accordingly, the tariffs are still at the proposal stage. On the US side, there is a consultation period lasting at least until 22 May, after which a final list of products will be proposed. China meanwhile has stated that the date of implementation for its measures is dependent on actions taken by the US. As such, there remains a significant window between now and any imposition of tariffs, during which negotiations can take place potentially to avoid or to reduce the scope of the tariffs. Indeed, US Commerce Secretary Wilbur Ross remarked today that “even shooting wars end in negotiations,” which supports our view that the US’s goal is to bring China to the negotiating table. While markets are likely to remain sensitive to headline risk for the time being, the developments are so far consistent with the timeline laid out in the presidential memo two weeks ago, and our base case remains that a genuinely damaging trade war will be avoided (see here for reasons why). (Bill Diviney and Arjen van Dijkhuizen)

Eurozone Macro: Inflation rises on Easter-related food prices and holiday trips – Preliminary HICP inflation increased to 1.4% yoy in March, up from 1.1% in February. The breakdown of the main categories reveals that food price inflation had a significant upward impact, which is very likely related to the timing of Easter. Indeed, the inflation rate of food, alcohol and tobacco jumped by 1.2 percentage points to 2.2% yoy between February and March. This jump should be reversed in April-May. Core inflation, excluding food, alcohol and tobacco stabilised at 1.0% in March. Within core inflation there was a shift towards higher services price inflation (to 1.5% from 1.2%) and lower non-energy industrial goods inflation (to 0.2% from 0.6%). Earlier published inflation data for Germany had shown that the timing of Easter had resulted in a jump in the prices of holidays and weekend trips, which suggests that at least part of the rise in services inflation in the eurozone also was of a temporary nature. All in all, the inflation report confirms that underlying inflationary pressures in the eurozone remain weak. Indeed, the key driver of core inflation – wage growth – remains subdued given that there is still substantial slack in the labour market. Our base case is that core inflation will take time to embark on a clear upward trend. We expect a slow rise in the second half of the year, but for inflation to remain well below the ECB’s 2% target throughout 2018 and 2019. (Aline Schuiling)

China Macro: PMIs point to resumption of gradual slowdown – Over the past couple of days, China’s PMIs for March have been published, both by NBS and Caixin. The overall picture was quite mixed. The ‘official’ PMIs published by NBS (with a stronger focus on the larger, state-owned firms) showed an improvement compared to February. The official manufacturing PMI recovered to 51.5, up from the 19-month low of 50.3 reached last month. Still, the March number is quite similar to the levels seen in late 2017/early 2018, suggesting that the sharp drop in February was strongly related to the lengthy Chinese New Year holiday break. The non-manufacturing PMI published by NBS edged up to 54.6 in March, also remaining somewhat below the levels seen in late 2017 and January 2018. In contrast, Caixin’s PMIs (concentrating more on smaller and private firms) suggest that economic momentum is slowing. The manufacturing PMI fell by 0.6, to 51.0, the services PMI by almost two full points, to 52.3, which took the composite PMI to a four-month low of 51.8 in March. The overall picture suggests that – if we look through the Chinese New Year distortions – the economy resumed its gradual slowdown in March, in line with our baseline scenario. We expect annual GDP growth to slow from 6.9% in 2017 to 6.5% in 2018 (partly reflecting Beijing’s ongoing financial deleveraging campaign) and alternative growth indicators to slow moderately as well. While downside risks are rising, with trade frictions with the US intensifying as mentioned above, we still think we would need to see a significant further escalation before we have to materially lower our growth forecasts for China. (Arjen van Dijkhuizen)