Trump & Trade: Feeling the pressure - ING

James Knightley, Chief International Economist at ING, points out that the US President Trump has announced the latest round of tariffs on $200 billion of Chinese imports, which will start next week and with the president's approval rating at a four-month low and the mid-terms fast approaching, there is no prospect of an imminent easing in tensions.

Key Quotes

“The US had already imposed tariffs on $50 billion of Chinese imports so this takes us up to $250 billion of goods that are taxed - just under half the value of all Chinese imports last year. However, should China retaliate – Bloomberg headlines suggest there will be retaliatory tariffs launched simultaneously - then all Chinese imports into the US will face tariffs. As such this is a real ratcheting up of trade tensions that certainly heightens the risks for global and US growth.”

“The economy and trade had been seen as Trump’s strong point, however, his presidential approval rating has dropped four percentage points over the past month to just 38%. This is lower than any other president at this stage in his presidency in the past 70 years and these latest trade protection measures could be seen as an effort to bolster his standing.”

“Risks for the economy

With the Republicans lagging well behind the Democrats in generic polls there is a growing likelihood of a split Congress – House controlled by Democrats and Senate controlled by Republicans, Trump may increasingly be limited to executive powers, which include trade. This suggests little prospect of a de-escalation from the US side anytime soon.

In terms of the economy, President Trump has arguably tried to limit the damage to the US by excluding some products and starting the tariff at 10%, but this will still put up costs that may well be passed onto consumers.

For now, the US economy is very strong with the Atlanta Fed Nowcast GDP estimate suggesting GDP is likely to have accelerated to 4.4% from 4.2% in 2Q18. But the effects of a strong dollar, higher US interest rates, fading US fiscal stimulus and emerging market woes are likely to gradually exert a toll. Trade tensions will only exacerbate the downside risk.

We look for GDP growth to slow to closer to 2% next year with the Federal Reserve taking a more gradual approach to rate hikes of just two 25 basis point moves for the full year 2019 versus four in 2018.”