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Economy

Global economy grows despite fears of US-China trade war

Trump tax cuts and Asian investment lift output, but inflation and tariffs loom

A steel plant in Chiba Prefecture, near Tokyo: Trade friction between China and the U.S. has yet to put a big dent in economic growth, but a drawn out conflict could hurt investment and business sentiment.   © Reuters

TOKYO -- Despite the many uncertainties, the global economy is expanding, lifted by big tax cuts in the U.S. and Asian investment in labor-saving equipment.

The boost to U.S. consumption from lower taxes is apparent in the sales of jeweler Tiffany, whose same-store sales jumped 9% on the year in the February-April quarter. Tax cuts and the higher spending will add 0.7 percentage point to U.S. real gross domestic product this year, according to a forecast by the Japan Research Institute.

The National Association of Manufacturers estimates that capital investment by U.S. manufacturers will rise 4.1% over the next 12 months. Tax reform is "rocket fuel" for manufacturers, a recent NAM survey said.

The global economy, whose noninflationary potential growth rate is around 3%, has expanded by around 4% from the October-December quarter of 2016 to the January-March quarter of 2018. SMBC Nikko Securities forecasts global growth will remain in the upper 3% range for the April-June quarter and beyond.

The Baltic Dry Index, a benchmark for shipping prices, has nearly doubled compared with this time last year. Eizo Murakami, president of Kawasaki Kisen Kaisha, said cargo traffic is recovering, thanks to strong iron ore shipments for China, among other factors.

Asia is also giving a lift to the global economic expansion. Spending on semiconductors, in line with Chinese President Xi Jinping's drive to promote domestic production of computer chips, is booming. According to Semiconductor Equipment and Materials International, a trade group, the global market for chipmaking equipment is expected to grow by 11% from the previous year in 2018. Growth in China is expected be especially strong, at 40%. Investment in automation is also gaining momentum in Southeast Asia.

India, the world's second most populous country after China, logged 7.7% GDP growth on the year in the January-March quarter, outpacing China's 6.8% growth. That was the country's fastest growth in the last seven quarters. Between them, China and India are expected to make up about 19% of the world's nominal GDP this year, according to the International Monetary Fund.

Meanwhile, the U.S.-China trade row is beginning to dampen business and investor sentiment. Finance ministers and central bankers expressed concern about the outlook for international trade at the Group of 20 leaders' summit on Saturday. Risks to the global economy, such as surging crude oil prices and rising U.S. interest rates, are also growing.

While experts say that the tit-for-tat tariffs imposed so far by the U.S. and China have had little effect on the real economy, the issues becomes trickier if the tariffs expand and stay for the long term.

As of now, the U.S. duties applied to Chinese goods amount to only 1.5% of China's total exports. Many of the U.S. products subject Chinese retaliatory tariffs also have substitutes. Chinese tariffs on U.S. soybeans and beef, for example, will push up prices by 0.1 percentage point or less, according to estimates by Nomura International Hong Kong.

But the U.S. government has announced that it will impose tariffs on an additional $200 billion of Chinese imports, equal to around half the goods the U.S. buys from China. That could badly dent corporate and investor sentiment.

Japanese companies that manufacture products in China and ship them to the U.S. might respond by shifting production to the U.S. if tariffs remain high. But it would be cheaper to keep their current supply chains in place if the trade dispute is settled quickly. Kuniharu Nakamura, chairman of the Japan Foreign Trade Council and trading house Sumitomo Corp., said the problem is uncertainty.

German automaker Daimler has cut its profit forecast for 2018. Daimler, which makes sport utility vehicles in the U.S. and sells them in China, expects its sales and profit margin to fall.

Mizuho Research Institute estimates that if the tussle between the U.S. and China causes a 20% decline in bilateral trade, China's growth will slow by about 3 percentage points. In China, infrastructure investment and retail sales growth have slowed as well. A drop in exports from China will also affect Asian companies, which have built supply chains to serve their Chinese counterparts.

The Composite Leading Indicators, released by Organization for Economic operation and Development, stood at 99.9 in May, due to U.S.-China trade friction and concerns over a slowdown in Europe. A reading above 100 points to expansion in six months' time.

The cooling European economy is partly a reflection of a return to trend from previously high growth, and bad weather at the start of the year. Fears of a drawn out trade war also dragged on growth figures. Worries about the trade picture contributed to the IMF's move to cut its growth forecast for the euro area to 2.2% this year. Holger Bingmann, president of the Federation of German Wholesale, Foreign Trade and Services, said he hopes the cycle of retaliatory tariffs will stop.

Rising crude oil prices and interest rate increases by the U.S. Federal Reserve are also a downside risk. More expensive crude oil will weigh on buyers such as India, which relies on imports for 80% of its oil. Higher U.S. interest rates, among other factors, led to recent sharp falls in the Argentine peso and the Turkish lira. Higher inflation could deal a blow to the global economy.

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