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U.S.-China Trade Truce a Provisional Shot in Arm for Global Economy

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December 3, 2018

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By Enda Curran (Bloomberg) — The U.S. and China trade war truce is a clear boost for slowing global growth.

Most economists had already factored into their year-ahead forecasts an escalation of tariffs and retaliatory measures by both countries. Instead, the temporary freeze on further trade actions means economies could outperform.

“First-quarter growth will likely be better than our current baseline forecast,” Wang Tao, head of China economic research at UBS Group AG in Hong Kong, wrote in a note.

Agreeing to hold off increasing tariffs on $200 billion worth of Chinese goods from 10 percent to 25 percent will reduce the drag on the world’s second-biggest economy to 0.5 percentage point, from an initially expected 0.9-point hit, according to Bloomberg Economics’ Tom Orlik.

That’s a clear positive for export-led Asian economies that are central to China’s manufacturing supply chain. The region accounts for more than 60 percent of global growth. Its expansion is projected by the International Monetary Fund to slow to 5.6 percent in 2018 and 5.4 percent in 2019.

The trade cease-fire may push U.S. companies to use the 90-day window to accelerate purchases of foreign goods, repeating the move they made earlier this year as the Trump administration geared up to impose tariffs.

Such effects will be reflected in economic data over the next several months, with “better two-way trade volumes” and “some precautionary inventory building of imported goods to hedge against the risk that the tariff hikes are back on again in 2019,” according to CIBC World Markets chief economist Avery Shenfeld.

Analysts aren’t convinced that a breakthrough deal on trade between the U.S. and China can be achieved within the foreseen timeline. The concern may continue to weigh on business sentiment, prompting companies to delay investments.

“It prolongs the period of uncertainty,” said Ward McCarthy, chief financial economist for Jefferies LLC. “That’s going to chip away at growth over the course of 2019.”For now, the truce is a near-term fillip, according to analysts at Morgan Stanley led by Chetan Ahya, the bank’s chief economist.

“The agreement to put tariff hikes on hold for now imparts modest upside risks to global growth, particularly for China,” they wrote.

© 2018 Bloomberg L.P


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