Trade tensions have a corrosive impact on markets, business sentiment and the consumer. Many headlines on trade tensions have largely focused on China, but there are ongoing trade negotiations with most major U.S. trading partners. In May, it was the unexpected announcement of tariffs on Mexico that shattered market complacency. Indeed, much of the volatility so far this year has come from trade-related headlines, not economic data.
Uncertainty about trade isn’t just impacting the U.S. economy; it is dragging down global growth. In Germany, trade concerns have taken their toll on business confidence, and China’s economy is slowing as well. The IMF noted the negative effects of policy uncertainty related to trade when it downgraded its 2019 global GDP estimate, and its advanced economies forecast is now just 1.8% for 2019.1
The threat to economic growth from trade tensions comes from multiple directions. For businesses, there is the direct impact of higher input costs. But uncertainty poses a serious headwind for large multinational companies that often have international production and revenue chains. Changing these is expensive and time-consuming.
Households, so far, have been left largely shielded from tariffs. That stands to change as tariffs that went into effect on June 1 will likely hit the consumer later this summer. Historically there is a grace period for goods in transit, which delays the impact of tariffs for several months. Last year, inflation on the sliver of consumer products that were subject to tariffs rose over 2.04%.2 These weren’t large enough categories to impact the entire CPI, but the latest round of tariffs casts a much wider net than prior rounds. In an expansion that has been notorious for sluggish real wage growth, tariffs act as a tax on households that could weaken consumer spending.
Like the rest of the markets, watching for evolving news on trade negotiations has become a full-time sport. But tensions seem to have risen, not cooled, after years of discussions. We see a meaningful risk of a flare-up in trade tensions or disruption from new tariffs pushing the economy from moderate growth to no growth, or worse.
1 The World Economic Outlook, IMF, April 2019.
2 BLS, FS Investments, as of June 30, 2018.
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