Macro Update: Trade war versus recovery

Macro 5 minutes to read

Christopher Dembik

Head of Macro Analysis

Summary:  The high hopes of early 2019 are giving way to a decidedly more mixed and volatile macro environment.

At the beginning of this year, the consensus expected a V-shaped recovery over the course of H2. All the latest economic data, however, paint a very different picture. Risks to growth are increasing and this trend was already in place before the trade war negotiations broke down so brutally. This give you a sense of what may be coming up over the next few quarters if the trade war gets nastier and the US decide to implement 25% tariffs on the remaining $300 billion of Chinese imports.

The current global macro picture is worrisome:

• No Asia rebound story
• Chinese slowdown reminiscent of 2016
• Negative economic data starting to pop-up here and there in the US
• Europe not immune to trade war

The latest Asian export data published over the past three days confirm that there is something more than the Lunar New Year impact afoot in APAC. The April data indicate that the slowdown continued in major exporting countries and based on South Korea’s May exports, is even worsening. This is the clear consequence of both the trade war and lower growth momentum. So far, there is no winner from trade war as the contraction in exports is broad-based across Asia:

April Japanese exports in April came out at -2.4% year-on-year for fifth consecutive month of decline. Taiwanese exports for the same month were in contraction again, at -3.7% y/y. This is a better print than was expected by the market (-6.4%) but as we all know, one data point does not make a trend. Things are likely to deteriorate in May. The Ministry of Economic Affairs expect y/y exports to be between -7.6% and -10%. 

Thail exports for April were down 2.6% – the second straight month of decline, with exports having contracted in five of the last six months. South Korean exports over the first 20 days of May were down 11.7% y/y and exports to China collapsed to -15.9%. Looking at the semiconductor sector, which gives a broad view of the state of the global economy, things are even worse with exports down 33.0% versus 13.5% in April.

Looking at China’s data, the evolution reminds us a lot of that of 2016 – another year of soft growth and exports. The comparison is interesting as it suggests that the outlook is not as bad as many believe. Retail sales and auto sales are much weaker this time, pointing to weak domestic demand, but industrial production, capacity utilisation and confidence indicators are better. Concerning exports, the trend is negative but no worse than in 2016.
Key indicators
As was also the case in 2016, the state sector has started to serve as a shock absorber, with state investment growth moving higher to offset the deceleration in private investment. This trend is likely to become clearer as the trade war intensifies.
China investment (state and private)
In our view, the US is more vulnerable to trade war consequences due to policy constraints. The US Q1 GDP print was very strong, but it hid some negative economic surprises. The growth pulse derived mostly from an increase in stockpiling, which is not the sign of an incredibly dynamic economic. Over the past few months, we had negative data popping up here and there: y/y industrial production has declined for the past five months, retail sales are weak on the back of contraction in auto sales and the OECD leading indicator is back to where it was in Autumn 2009, in the midst of the great financial crisis.

On the top of that, the risk is looming that the Trump administration increases tariffs on List 4 imports from China. This could completely erase the benefit of the tax cuts for US consumers, which puts a heavy risk on the economic outlook. 

Looking at this morning's data, Europe is not, contrary to common belief, immune to trade war. Lower global trade growth continues to be an growing threat to Germany as the latest data confirm new orders acontraction in new orders and lower IFO business confidence at 97.9, from 99.2. Expectations were flat at 95.3, which is also not a very positive sign.

Divergence between the service sector, which is still strong due to resilient domestic demand, and the externally exposed manufacturing sector is likely to remain wide in coming months, adding downward pressure to the economy. Domestic demand is indeed resilient, with consumption reaching its strongest contribution to German Q1 GDP growth in 12 years, but clouds are gathering. Consumer optimism as measured by the GfK survey is weakening, running at only 6.1% in April versus 37.4% in April 2018 – quite a swing over 12 months!Upcoming figures could move lower still as the trade war's impact is felt.
Divergence (manufacturing vs. service sector)
This is our central macro scenario:

• Global growth is doomed to decline in the coming quarters, with more risks to growth in the US than in China due to policy constraints.
• China is likely in a wait-and see position and will do all its best to mitigate the negative effects of the trade war, including boosting further consumption and infrastructure spending and ensuring sufficient supply of liquidity to the economy.
• Emerging market countries and Asia are the most exposed to the immediate downturn, which will lead to a sharp decrease in investment, lower profitability and cost-cutting.
• The eurozone is not immune to the ongoing slowdown but could resist longer due to resilient private consumption in the largest economies.

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