The global economy needs more than a vague Trump trade truce
It is 43 years since gatherings of world leaders identified by a “G” (as in Group of) came into being at the first meeting of the G5 at Rambouillet near Paris. It gave way to the G7, briefly to the G8 and, during the global financial crisis, the widerG20 grouping of nations. It had the virtue of including big players from outside the elite grouping of advanced western economies.
It is fair to say thatthe vast majority of these summits have failed to set the pulse racing, becoming better known for their lavish menus, the money spent by the hosts and for a time, it should be said, spectacular journalists’ goody bags, than for any decisions or content. It was a welcome surprise, therefore, when last weekend’s G20 summit in Buenos Aires produced an outcome that financial markets could celebrate.
President Trump met President Xi, together with their entourages, and lowered the temperature on their trade war.
Precisely what was agreed is open to dispute. There is a vast difference between a Chinese promise to look at something, such as abolishing tariffs on imported American cars, and what Washington believed was a firm commitment to do it. These matters remain to be hammered out.
There was a firm commitment from America, however, to suspend the planned increase in tariffs from 10 per cent to 25 percent on $250 billion of Chinese imports. The increase, due to take effect on January 1, has been put on hold for 90 days. When the world’s two biggest economies are engaged in a trade war, it is bad news for the world economy. When they dial down the rhetoric on that trade war, it has to be good news.
That is not the only good news for the global economy that markets have been able to digest in recent days. America’s Federal Reserve is on course for an interest rate rise this month, but Jerome Powell, its chairman, has offered a doveish assessment of the extent to which it will be required to raise rates next year. Some now think that there will be only two increases, some none at all. That will be music to the ears of Mr Trump, who has criticised the rate rises, and will ease fears that an aggressive Fed will put too many strains on the world, in particular emerging market economies.
There is another piece of good news as we approach the end of the year. Though the oil price has perked up a little as a result of the G20, at roughly $62 a barrel, Brent crude is about 25 per cent lower compared with a few weeks ago. That can be seen in prices at the pumps, which have come down in advance of the Christmas driving season. And while therelationship is fuzzier than it used to be, in normal circumstances a lower oil price is generally good for the global economy, equivalent to a tax cut in consuming nations. So three potential bits of good news for the world economy at the end of a year that has turned out to be rather disappointing and thus for an open economy like that of Britain, which at the moment needs all the help it can get. So is it time to celebrate?
On two of the bits of good news, it is possible that the markets have overinterpreted the Fed chairman’s doveishness and that less has changed than meets the eye. We are still talking of a situation in which the world’s most important central bank is gradually removing monetary stimulus. Oil prices, meanwhile, have been nothing but volatile. What has gone down could easily go up again.
As for the Trump Xi trade truce, a clear concern is the different interpretations put on the Buenos Aires talks by the two sides. Mr Trump is no constant friend with his allies, as Theresa May has discovered, and is likely to turnon a sixpence when dealing with his enemies. American newspapers suggest that his appointment to lead the next phase of negotiations of Robert Lighthizer, the US trade representative and a China hardliner, points to tensions ahead. A temporary truce may be as good as it gets.
The big question is whether, caveats aside, this late burst of good news can turn around a slowing global economy. According to economists at UBS, the investment bank, “global growth has hit a major air pocket”, with its sharpest slowdown in six years. They monitor 210 indicators in 25 countries to come up with a “now-cast” for world economic growth, which has slowed from 4.5 per cent at the start of the year to only 3 per cent now.
The big reason for that slowdown is simply put and was entirely predictable: Mr Trump’s attempt to emulate Herbert Hoover by engaging in protectionism. The UBS indicators that have shown the sharpest slowdown are those related to the global trade cycle. World trade growth is about to go negativein cash terms.
Alastair Winter, economist with Daniel Stewart, the broker, monitors 150 indicators in G20 countries and has come to a similar conclusion about the global slowdown as UBS. And, as he puts it about the apparent outbreak of trade peace between America and China, “while it brings some relief, it is tempered by the rather different spins each side has put on it. Trade disputes will not be settled easily with so many macho ‘nationalist’ leaders in so many countries.”
We should never look a gift horse in the mouth, nor deny that recent news has provided some welcome positives, but the fact that financial market enthusiasm about the China-America trade truce was so shortlived, indeed a flash in the pan, tells us something.The protectionist threat hanging over the world economy has not gone away. Only when we can be sure that it has will it be possible to celebrate.
David Smith is Economics Editor of The Sunday Times