U.S.-China conflict unlikely to be resolved any time soon – ABN AMRO

Han de Jong, the chief economist at ABN AMRO, says that they have lowered some growth forecasts in response to the most recent further escalation of the trade conflict between the US and China.

• “While negotiations were still ongoing, president Trump suddenly announced a 10% tariff of USD 300 bn worth of US imports from China. China retaliated by allowing the currency to break 7 yuan per dollar and by announcing fewer, not more, agricultural imports from the US. The US then labelled China a currency manipulator’. We do not think the Chinese will want to use the exchange rate without limits as a weapon in this war. But it is clear that they let the currency weaken somewhat from time to time. When the negotiations broke down unexpectedly in May, the yuan moved quickly from 6.70-6.75 to just above 6.90.
• The Chinese response makes it unlikely that a resolution to the conflict will be reached any time soon. We must therefore expect regular outbursts of tit-for-tat measures. Every time that happens, business confidence is shaken and that damages the global economy.
• The latest escalation comes at a time when the manufacturing sector is in recession in many countries and weak in others. This increases the downside risks. Recession between now and the end of 2020 in any of the main economies is not our base case. However, the risks have risen.
• Following a downward adjustment we made to our growth forecasts for many countries in June, our projections were below market consensus. We have now lowered them a little further and are still below the consensus. The deteriorating outlook will trigger more central bank action that previously expected and this will have an effect on bond markets.”