The economic impact of the trade war (thus far) has been limited, due largely to efforts by the Trump Administration to avoid tariffs on consumer-related goods. However, if tariffs are expanded to include all imports from China, many more consumer goods will be affected, including apparel and electronics. In that event, the economic fallout is likely to be more severe.
While many market participants are focused on the direct impact of tariffs on inflation and consumer demand, we are more concerned about the indirect economic impact of expanded tariffs via the business sector. Specifically, if companies must absorb the cost of the tariffs and business profits weaken, firms are likely to cut back on investing and hiring. The latter could lead to a weaker labour market that ultimately undermines household demand, not only for higher-priced imports from China but for all goods and services consumed.
Global growth slowdown: a 2020 story?
If we are right and the cost of tariffs is borne more by companies than consumers, then the negative impact of tariffs on growth may be more insidious than expected — a slow-burn as opposed to an immediate hit. In addition, economic activity in the second half of 2019 may remain relatively resilient if policymakers take actions to offset the downside risks generated by the trade war. Thus, slower global growth may be more of a 2020 story than 2019.
In fact, across most of the major economies we follow, growth is expected to be weaker in 2020 than 2019. In some cases, the increased headwinds next year are idiosyncratic. For example, in Japan, demand is forecast to weaken following the 2020 summer Olympics in Tokyo. In the US, uncertainty over the outcome of the 2020 presidential election (and the risk that business friendly policies are reversed) could contribute to a wait-and-see attitude on the part of business.
However, the more fundamental risk surrounds uncertainty. The unpredictability around various trade outcomes and the willingness of President Trump to use tariffs as a weapon to advance his domestic agenda (as underscored by the sharp and unexpected pivot towards Mexico recently) create a highly uncertain environment in which global companies must operate. Even under a “best case” scenario -- e.g. the trade situation with China is unexpectedly and quickly resolved --- we believe lingering uncertainty over a renewed flair up will keep firms cautious. In these circumstances, a more tepid pace of business investment and hiring is to be expected. While the immediate consequence may appear limited, gradually over time, we believe the corrosive effect on broader domestic demand from increased business caution and weaker corporate activity is likely to be revealed.
In the US, business spending often leads consumer demand, a pattern that could prove relevant for the performance of the global economy in 2020. Consumer demand around the world is now quite healthy, supported by strong global labour markets and rising wages. However, business investment in many economies has begun to underperform -- a trend that will only be exacerbated by an escalating trade war. The key questions for the growth outlook remain centred around (1) the degree of retrenchment seen in the business sector in response to uncertainty and/or a full blown trade war and (2) the amount of spillover to the household sector. Our concern is that the magnitude of both will prove somewhat larger than anticipated. We will be watching the behaviour of companies, more than consumers, in the months and quarters ahead.