US-China trade war could accelerate global downturn, say economists

More tariffs from Washington will be a major drag on Chinese growth, JP Morgan says, as its predicts more Fed rate hikes

The US-China trade standoff will continue to weaken confidence in the global economy into next year, economists have warned, as the increasingly gloomy outlook for growth dragged on share markets across the world.

Plunging oil prices and intensifying concerns about technology stocks in the US spread contagion to Asia Pacific markets on Wednesday after renewed losses on Wall Street.

But as the broad losses in Wall Street pulled its key indices into the red for this year, economists at JP Morgan warned that the trade dispute between the world’s two biggest economies threatens more trouble ahead.

“We forecast that the US imposes an additional 25% tariff on virtually all goods imports from China early next year. This will drag materially on activity in China and could accelerate the decline in global business confidence now underway,” the JP Morgan team wrote in a note to clients.

Although they forecast that the Chinese authorities will throw more policy stimulus to offset a hit from the tariffs and keep GDP growth at 6%, the team predicted that markets must prepare for the Federal Reserve to raise borrowing costs another four times next year.

The prospect of more rate hikes will set alarms bells ringing in emerging markets, which have already been squeezed of liquidity by the rise of the US dollar over the past few months.

Stocks from Sydney to Shanghai were in the red on Wednesday afternoon, although they had pared earlier, heavier losses. The Nikkei in Tokyo was off 0.3% while the Australian benchmark index dropped 1.2% in the morning to a fresh 21-month low.

Oil prices, which dropped 6% on Tuesday, pushed energy stocks lower as investors fretted about weaker global growth and specualtion about the end of the tech stock boom. Brent crude was up 1.2% in early trade on Wednesday.

Soichiro Monji, senior economist at Daiwa SB Investments in Tokyo, told Reuters: “It is difficult to pinpoint a single factor driving the global risk aversion. Apple and trade tensions seem to be touted as factors every other day, but it is difficult to blame them for all the woes.

“The markets appear to be starting to prepare for a loss of momentum in the global economy, although it is doing quite well at the moment.”

Plummeting oil prices – weakened by wider uncertainty in global shares – had hurt Australian energy stocks, with the sector dropping by more than 3% early on. The Aussie dollar had slipped to US72.14c overnight but recovered to US72.37c.

The ASX200 hasn't been spared from this cycle. The index fell with far greater force than was anticipated during yesterday's, as the broad-based evacuation from equities persisted. Read on @KyleR_IG

— IG Australia (@IGAus) November 20, 2018

The falls come as two closely watched indicators survey pointed to trouble ahead for the Australian economy.

The Westpac–Melbourne Institute leadingindex, which indicates the likely pace of economic activity three to nine months into the future, fell from 0.41% in September to just 0.08% in October.

Westpac’s chief economist, Bill Evans, said: “With this latest slowdown, the index growth rate continues to point to slowing momentum into the new year.

He blamed weak wages growth, falling property prices in Sydney and Melbourne and a very low savings rate for the poor outlook for consumer spending.

In addition, the NAB monthly cashless retail sales index published on Wednesday said data mapping suggested that the official Australia Bureau of Statistics measure of retail sales would grow at a worse-than-expected 0.2% month-on-month in October.

The big four banks were all down, with the losses led by ANZ, which posted a 0.77% drop to $25.105. Commonwealth Bank, whose chair, Catherine Livingstone, was on the stand at the banking royal commission on Wednesday morning, fell 0.6%. Tech shares continued to fall, losing more than 2.8% early, with telco stocks also down.

Australian Associated Press and Reuters contributed to this report.


Martin Farrer

The GuardianTramp

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