Macro insights

US tariffs hit China, as Europe’s car industry hopes for the best

Trade negotiations between the US and China continue after the US increased tariffs on $200bn of goods from China to 25%.

While talks between the two countries continued throughout Friday, and they were described as “congenial”, “productive” and having gone “fairly well” by key participants, US President Donald Trump seems to see little need to rush a trade deal. His position suggests that the US is exactly where it wants to be with China, and there is a risk that the latest hikes could persist. We continue to expect a deal to emerge over the coming months, with White House Chief Economic Advisor Larry Kudlow suggesting the possibility of a President Trump – President Xi Jinping summit possible at the G20 meeting at the end of next month. Yet the risks of a collapse in talks and tit-for-tat retaliatory escalation is rising – although so far, while promising retaliation, China has not announced direct measures. Uncertainty around the direction of trade policy will continue and could mount, as the White House is set to deliver a verdict on auto tariffs this week (the comment is expected by Saturday). While we doubt that the US is ready for a painful trade war on two fronts, solid domestic growth momentum and the hopes that trade war side-effects will be mitigated by an accommodating Fed add to the risk of the US at least initiating auto tariff proposals over the coming weeks. In the short-term, we expect April’s retail sales on Wednesday to provide ongoing evidence of a rebound in final domestic sales in the US in the second quarter (Q2), even as one-off factors are likely to soften the headline growth rate towards 2.0%. Empire and Philadelphia Fed surveys will be watched for any signs of a softening in the headwinds to global manufacturing.

Following US-China talks, attention will turn to Europe this week: President Trump is due to give his opinion on EU auto tariffs by May 18.

Our baseline expects an extension of the deadline and no hike to tariffs. Should this prove wrong, an increase in US tariffs on European cars to 25% would dampen euro area growth by around 0.3/0.4pp per year, with Germany being the most affected. Apart from that, this week the first estimate of German Q1 GDP will be released. We expect growth to have increased by 0.3% quarter on quarter, after flat growth in Q4 18, thanks to better performance of the services and construction industries. Still depressed forward-looking indicators such as factory orders and PMIs released last week suggest that manufacturing weakness will likely continue to weigh on German economic activity, however.

South African elections see ANC secure majority, but the victory is rather sour.

The African National Congress (ANC) party, which has been governing the country since 1994, secured a majority at the general elections on 8 May, as expected, but also recorded its worst ever result (achieving only a 58% share of the vote). The party is divided and its reputation has, in the past, been dented by serious corruption allegations, which have led to Cyril Ramaphosa taking over in December 2017. This is the last chance for the leader of the ANC to restore confidence in the party, deliver on the anti-corruption promises and reform SA. The Democratic Alliance (DA), the main opposition party, recorded a weaker result, at 21% of votes, for the first time. Meanwhile, nationalist opposition parties gained ground. The Economic Freedom Fighters (EEF) – pushing for nationalisations and seizing of white-owned land without compensations – gathered 10% of the votes, up from 6%. Freedom Front Plus (VF+), a nationalist party fighting for the right of white minority groups, doubled its support to 2%. A big concern for all political parties and the country’s young democracy was voter turnout: it was the weakest since the dawn of democracy, with a big share of younger voters not even registering for vote.

Political uncertainty continues to dominate the UK.

Brexit Secretary Stephen Barclay is due to give evidence in the House of Lords on Wednesday, but domestic politics looks increasingly transfixed by the impending EU elections next week, which, as polls continue to suggest, will likely be damaging for Tories and Labour alike. Such an election outcome is likely to spur Prime Minister Theresa May to make one more attempt at passing her Withdrawal Bill before the elections on 23 May – also in the knowledge that the Tory backbench 1922 Committee meets this week, and the duration of PM May’s remaining tenure will likely top the agenda. UK labour market data for Q1 will be released on Tuesday – this is likely going to be a key report over coming months. The Inflation Report for May showed that the Bank of England (BoE) is convinced that there is a need for more monetary tightening than just one hike in the next three years, as currently priced in by markets. Our expectation is for ongoing Brexit uncertainty to slow growth more than the BoE expects over the coming quarters. Nevertheless, we likely need to see a modest rise in unemployment this year to highlight that demand growth in the economy is expanding by less than its supply potential, and to encourage the BoE to keep policy rates on hold until early next year.

Upcoming events

Euro Area: EU19 Industrial Production, German HICP, CPI and ZEW Survey and Spanish HICP (Tuesday), EU19 and German Q1 GDP and French HICP (Wednesday), French ILO Unemployment Rate and Italian HICP (Thursday), EU19 CPI (Friday)

US: NFIB small business optimism (Tuesday), Retail sales, Empire State manufacturing survey, Industrial production, Business inventories, NAHB housing market index, Long-term investment flows (Wednesday), Building permits, Housing starts, Philadelphia Fed Index, weekly jobless claims (Thursday), Michigan consumer sentiment and leading index (Friday)

UK: Unemployment and Average earnings (Tuesday), Brexit Secretary gives evidence to Lords EU committee (Wednesday), Moody’s UK rating review (Friday)

China: Industrial Production, Retail sales, Fixed asset investment and Unemployment (Wednesday), New home prices (Thursday)

Japan: Trade balance, Current account balance, Economy Watchers Survey (Tuesday)

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