AMP Capital chief economist Shane Oliver says the relationship between the US and China could worsen a bit further in coming months and trigger market volatility, with both countries entrenching their positions in the trade war over tariffs.
“Investors need to be aware that relationship could deteriorate a little bit further,” Oliver says.
“Ultimately we expect there will be some sort of negotiation. But as more of the tariffs go into place they could start to have a bit more of a negative impact on both the US and China. That’s something that may cause ongoing volatility in markets.”
Oliver says the US/China relationship has been a focus of geopolitics and markets this year, as President Trump uses tariffs to pressure China to change its trading practices.
“There was an agreement back in May, but within a week or so that seems to have come to an end as the US continued with its threat of tariffs,” Oliver says. “As a result, you have seen some deterioration in the relationship?”
Oliver says the US has probably underestimated Chinese resolve. “Some believe that the Chinese feel they are not going to give into blackmailing by the US.”
But the Chinese are aware the trade situation could threaten their economic growth, Oliver says, with the trade war having the potential to cut China’s growth rate by 0.5%.
The Chinese are trying to offset that impact by stimulating their economy. “You’re talking here potentially about tax cuts, fiscal stimulus and some easing in monetary policy as well,” Oliver says, adding the Chinese have also allowed their currency, the Renminbi, to fall relative to the $US.
“Rather than giving in to the US, the Chinese seem to be digging in to some degree and trying to continue to keep the economy going, which I think they will, by stimulus measures.”
But Oliver says the US is also digging in. “The Americans under President Trump seem content to let this go on a while longer.”
The entrenched positions mean the trade war and relationship between the US and China “could get a little bit worse before it gets better.”
Oliver says “there is a good chance we may not see an agreement between the US and China until after the mid-term elections, so not until after November this year, possibly into 2019.”
“Fortunately, profit growth globally is good, monetary policy is still relatively easy. That means the broader trend in markets, hopefully, still remains up. But obviously, this trade situation, and the relationship between the US and China, could cause ongoing volatility in the months ahead.”
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