Trade war’s likely toll on SA

Escalating trade tensions represent the main factor weighing on global growth. But rising global debt, China’s slowdown and financial market risk threaten to weaken growth further by undermining investment and confidence.

Less than two years ago, the world was enjoying a synchronised economic upswing, but that momentum has been derailed by US-China trade tensions. Now, concerns of a synchronised downswing are rising as the attitudes of the world’s two largest superpowers appear to be hardening.

"The fragile global economy is being destabilised by trade tensions," says OECD chief economist Laurence Boone. "Growth is stabilising but the economy is weak and there are very serious risks on the horizon."

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Apart from raising tariffs on Chinese imports, Donald Trump’s administration has also blocked Huawei, China’s world-leading advanced technology manufacturer, and other Chinese companies from using US technology — a move seemingly designed to restrain China’s economic advancement.

"The market is increasingly internalising the indications that the White House’s actions are not just motivated by the trade deficit with China, but also by longer-term strategic competition between the two superpowers," say Old Mutual Multi-Managers investment strategists Dave Mohr and Izak Odendaal.

"The trade spat is therefore unlikely to be resolved immediately," they say.

Some fear this could be the start of a new Cold War, but the extensive trade links between the two countries create a degree of interdependence that should prevent a full-blown conflict. However, much damage has already been done. World trade, a key artery of the global economy, is set to grow by just over 2% this year — the lowest rate in a decade, according to the OECD’s latest World Economic Outlook.

Growth has weakened in most advanced economies, especially Germany and Japan, where trade and manufacturing play a big role.

The US has maintained its growth momentum thanks to sizeable fiscal support, but growth is expected to moderate in 2020 as that stimulus fades.

The OECD expects global growth to slow to only 3.2% this year before edging up to 3.4% in 2020 — well below the growth rates seen over the past three decades.

The outcome could be worse if higher tariffs between the US and China are sustained, China suffers a sharper slowdown, Europe enters a long period of weak growth, or high debt levels in some countries trigger financial crises.

As ever, China’s performance is key to global economic growth. It is also vital to SA’s prospects, given that China is the main recipient of most of SA’s commodity exports.

Accommodative fiscal and monetary policy has buffered the Chinese economy since the global financial crisis. But despite the government’s commitment to "do whatever it takes", economic activity has slowed to its lowest level in three decades, dragging global growth down with it.

Economists are divided as to whether the authorities’ latest stimulus package, which will reduce the tax burden by nearly $300bn annually, will be enough to cause a sustained rebound.

Neil Shearing, chief economist at Capital Economics, believes China is experiencing both a cyclical and structural slowdown, and that its economy could slow to growth of just 2% over the coming decade. If so, global growth would tank too.

Evidence of cyclical weakness lies in the fall-off in China’s manufacturing and trade data, and a double-digit contraction in auto sales. On the structural side, demographic pressures are building, while the misallocation of resources caused by state-led investment is hammering productivity growth.

If the US-China relationship fails to stabilise, emerging markets (EMs) could be heading for a period of stagflation (low growth coupled with rising inflation), warns Citibank. Though some EMs, like Vietnam, could gain as supply chains move out of China, on balance the negative effects on growth are likely to outweigh the positive ones, it says.

S&P Global Ratings says the overall effect on SA exports is likely to be negative, though agriculture and some manufacturers may benefit from rising Chinese tariffs on US agriculture and food exports, and vice versa.

Citibank warns that the situation is also likely to be inflationary for many EMs, as a significant depreciation of China’s renminbi is likely if the trade conflict escalates. This would probably trigger widespread EM currency weakness, if not an extreme market sell-off.

In short, the US-China trade spat has derailed global growth, which will remain weak as long as trade tensions persist.

This makes it even more urgent for vulnerable countries such as SA to undertake structural economic reforms to reduce debt and bolster their own growth as much as possible.