This Week In The Economy: Reality Bites The Stock Market, China-U.S. Meeting In November? Brexit Summit Next Week

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

Equity investors might have only just woken up to the fact that the United States’ escalating trade war with China, combined with increases in short-term interest rates by the Fed, will have a dampening effect on economic activity, but the alarm bells have been ringing for a while now.

The IMF holds a semi-annual meeting of member finance ministers and central bankers twice a year, and the WEO is usually released in the run-up to the event. Back before its April meeting, the group predicted the global economy would grow by 3.9% in 2018 and 2019. It has now downgraded its growth forecast for this year and next year to 3.7%, respectively.

In particular, “ the forecast for 2019 has been revised down due to recently announced trade measures, including the tariffs imposed on $200 billion of US imports from China,” the IMF said.

After its economy experienced 6.9% growth in 2017, China’s rate of economic expansion is expected to slow down to 6.6% this year and ease further to 6.2% in 2019 — primarily because of punitive import duties imposed by the United States.

The move is expected to result in an injection of 750 billion yuan (~$109 billion) in cash into the banking system.

The IMF report said the stimulus effect from the U.S. 2017 tax law is expected to support GDP growth of 2.9% this year, before it dips down to +2.5% in 2019.

“ US growth will decline as fiscal stimulus begins to unwind in 2020, at a time when the monetary tightening cycle is expected to be at its peak.” — IMF

As for struggling emerging market economies such as Argentina, Brazil, and Turkey, their growth forecasts were downgraded due to factors such as tighter financial conditions, geopolitical tensions, and higher oil import bills.

President Trump didn’t hesitate in blaming the Fed for this week’s stock market plunge, while emerging market countries have pleaded with the U.S. central bank to be more mindful of the impact its rate hikes will have on their economies.

But comments by Fed officials this week make it clear the Fed will continue on its path. Speaking on the sidelines of the IMF meetings in Bali, Indonesia, New York Fed President John Williams argued that the U.S. economy continued to expand “at a healthy pace” even as the Fed raised rates many times.

“Looking forward, I continue to expect that further gradual increases in interest rates will best foster a sustained economic expansion and achievement of our dual mandate goals,” he said.

The head of the New York Fed also serves as vice chair of the Federal Open Market Committee (FOMC), the Fed’s policymaking body, and is the only regional Federal Reserve bank representative with a permanent vote in the group.

The leaders of the G20 member nations are scheduled to meet in Buenos Aires, Argentina at the end of November and news reports indicate President Trump and China’s President Xi Jinping could meet on the sidelines in an attempt to break the ongoing impasse over trade and other issues.

The odds of the Trump administration ratcheting down hostilities would not have been helped by data this week showing China’s trade surplus with the U.S. grew to a record $34.1 billion in September as American exporters rushed to fill orders before the tariffs came into effect. The sale of goods to the U.S. rose 13% from a year ago to $46.7 billion, while imports of American goods increased 9% to $12.6 billion.

This is the second straight record Chinese monthly trade surplus with the United States following $31 billion in August. In addition to the scramble to get orders in before the increased tariffs, many analysts believe China’s exporters have also benefited from the weakening of its currency in recent months.

In line with this, the Bureau of Labor Statistics reported today that the prices of imports from China fell by 0.1% for the third straight month in September. However, and perhaps a sign of things to come, the price index for imports from China grew by 0.4% compared to September last year.

Negotiations between the European Union and the United Kingdom over the latter’s exit from the bloc resume next week, and there is optimism in some quarters that progress is being made towards an agreement.

A special summit will take place Oct. 17–18, and EU heads of state will be in attendance. The hope is for a much-needed breakthrough, especially on the Irish border issue and what the EU-UK customs relationship will look like in the future.

Light at the end of the now-two year tunnel would welcome, especially on the back of news this week that the UK economy experienced zero growth in August compared to July. The Office of National Statistics’ report did show that UK economic growth in Q2 improved to +0.4% after expanding by just 0.1% in Q1.

And while the UK government continues to release documents warning businesses and consumers of what disruptions to expect in the event of a hard Brexit, the Bank of England this week declared its satisfaction with preparations by UK banks.

The BOE’s Financial Policy Committee is charged with identifying and protecting the UK financial system from systemic risks. In a statement released this week from its Oct. 3 meeting, the FPC maintained its assessment that “the UK banking system would be strong enough to serve UK households and businesses through a disorderly, cliff-edge Brexit.”

And its not just Brexit the banks can handle, with the group noting lauding their capacity to also absorb additional “costs and stresses” from “intensifying trade tensions” and “a further sharp tightening of financing conditions for emerging markets.”

The statement was less complimentary, however, of the work being done by the EU to prepare, and said “timely action” is needed to mitigate risks to financial stability.

Founder — SW4 Insights. Public policy junkie and Central Bank Watcher. Recovering journalist and former Senior Director at Hamilton Place Strategies