United States – restrictive trade measures, confirmation of the monetary policy stance and disappointing home sales
On 1 March 2018, the US president announced that he will impose high tariffs on steel and aluminium imports, of 25% and 10%, respectively. This decision was based on a study by the US Commerce Department, submitted to the President on 16 February 2018, in which it was concluded that the “quantities and circumstances of steel and aluminium imports threaten to impair the national security”, thereby allowing Mr Trump to implement these measures. Few details have been given as yet, and there is still high uncertainty regarding the trade partners that could benefit from exemptions and whether the tariffs will be tempor ary or definitive.
The main objective of the Commerce Department’s proposals is in reality to increase US steel and aluminium production, which has slowed over the past several years. In 2016, 30.1% of steel consumption was imported, i.e. 30 million tonnes of steel out of 99.7 million tonnes consumed2, while US steel production is only at 73% of its capacity (see left-hand chart). Moreover, production dropped by 11% between 2014 and 2016, from 88.2 million tonnes to 78.6 million tonnes. For aluminium, the Census Bureau indicated that imports totalled USD12.3 billion in 2016 and USD16.3 billion in 2017, while aluminium production declined by 9.5% in volume terms over the same period, from 818,400 tonnes to 740,000 tonnes. While the capacity utilisation rate for this industry was estimated at 48% by the Commerce Department, the latter considers that a utilisation rate of 80% is the minimum rate required to ensure long-term viability of the aluminium and steel industries.
However, steel and aluminium imports represent less than 2% of all goods imported to the US. Thus, from a macroeconomic point of view, imposing trade tariffs is unlikely to have a major impact on overall US prices or on GDP growth. Conversely, and a priori, two risks can be mentioned. Firstly, some sectors that are dependent on steel and aluminium imports, such as the construction and automotive sectors, could suffer from the rise in the cost of their inputs, which could have a negative impact on their investment and hiring. Secondly, the main steel exporting countries to the US could take retaliat ory measures. The share of steel exports to the US is very high for certain countries, notably Canada, for which 88.6% of its steel exports go to its southern neighbour, as well as Mexico and Brazil, for which 68% and 40.6%, respectively, go to the US. An escalation of trade tension would be damaging for all countries, the majority of which have benefited from the pick -up in world trade since mid-2016. Lastly, WTO’s reaction is not yet known, and depends on the interpretation of article XXI of the GATT, by which it authorises the implementation of temporary trade tariffs when national security is threatened. Although increased trade tariffs on steel were expected, what was surprising was that they could potentially be extended to all steel importing countr ies rather than just a few trade partners. The final report, expected this week, should give more details about the countries and products that could be exempt from the tariff barriers.
The other major event of the week in the US was Jerome Powell’s first semi-annual report to Congress on 27 February. In his introductory statement, the new Fed Chairman indicated that his plan was for monetary policy to continue along the same lines as that previously led by Janet Yellen, and confirmed that the Fed intended to continue its monetary tightening at a gradual pace. When asked about the FOMC members’ latest fed funds rate forecasts published in December 2017 - of three 25bp hikes in 2018, bringing it to 2.25% - Mr Powell indicated that economic data published since then had been stronger than he had expected, and that he had subsequently revised up his outlook for the US economy. Thus, the Fed Chairman implicitly opened the door to a possible fourth increase in the fed funds rate this year, which would raise it to 2.50% between now and December.
This slightly hawkish message from Jerome Powell reflects greater optimism with respect to the growth outlook, but does not highlight concerns regarding the inflationary risk. He confirmed that he expected inflation to pick up gradually this year and move closer to his target of 2.0% in the medium term. Moreover, despite the acceleration in hourly wages in the US in January, he stated that up until now wage growth has remained modest. Lastly, in his second testimony before Congress on 1 March, he stated that the US economy does not appear to be overheating. This message was reassuring with respect to the inflation trend and contributed to the stabilisation of inflation expectations. Thus, by way of example, the 2-year inflation swap rate was at 2.11% on 1 March (vs. 2.14% on Friday 23 February), while the 10-year inflation swap was unchanged at 2.30%.
Overall, the speech by the Fed Chairman thus fully backed our scenario in which, in a context of an acceleration in growth and a moderate rise in inflation, the Fed would gradually raise its fed funds rate this year to 2.25% by the end of 2018.
Regarding economic data, the recent US housing figures were somewhat disappointing. Annual growth in home prices of the 20 largest cities slowed slightly, from 6.4% in November to 6.3% in December. Sales of new and existing homes were down 7.8% and 3.2%, respectively, in January, in line with the trend of a slowdown in growth observed over the past two years. While in 2015, average year-on-year growth in sales of existing homes was 6.2%, it decelerated to 4.2% in 2016 and 1.7% in 2017. The slowdown was even more marked for new home sales, for which average growth dropped from 14.7% in 2015 to 9.4% in 2017.
This slowdown was accompanied by a drop in growth in new constructions, which was at 31.2% at its peak in mid-2013, vs. 4.5% in January 2018 (see left-hand chart, p.3). Home sales slowed despite the number of houses sold being far lower than before the crisis. While 2005-2006 levels were exceptionally high, new home sales in 2017 totalled just 48.1% of the sales level of 2005 and 56.4% of 2003 levels. Regarding existing homes, 2017 sales represented 78.2% of 2005 levels and 89.6% of 2003 levels (see right-hand chart, p.3). In this context, there is a potential for a rebound in home sales that, if it brings a rise in construction, would not be inflationary. The construction sector was showing signs of improvement in January, with building permits up 7.4% in January compared to December and housing starts up 9.7%.
Europe – strong growth in Q4 in the euro zone and Switzerland
In Europe, GDP data confirmed strong growth in the last quarter of 2017. Figures published for Germany and France showed that the two main euro zone countries continued to benefit from the drop in the euro between mid-2014 and April 2017. Thus, in Germany, quarterly GDP growth was 0.6% (thanks notably to the 0.6 percentage point contribution of net external trade), following 0.7% in Q3, leading to an acceleration in the y-o-y figure from 2.7% to 2.9%. For full-year 2017, average German growth came in at 2.5% on average, after 1.9% in 2016. Meanwhile, France’s GDP growth was 0.6% quarter-on-quarter (with a 0.6 percentage point contribution from net extremal trade) following 0.5% in Q3. On a year-on year basis, growth in France thus increased from 2.3% to 2.5%, and averaged at 2.0% for 2017 vs. 1.1% in 2016.
In Switzerland, GDP grew more strongly than expected, thanks notably to the acceleration in construction investment and despite a negative contribution from foreign trade: it was up 0.6% q-o-q after a 0.7% increase in Q3, and 1.9% y-o-y vs. 1.2%. However, due to weak activity in Q1 2017, average GDP growth for the year was just 1.0%, compared to 1.4% in 2016.
We continue to anticipate that growth in the euro zone could slow slightly in 2018, while GDP would return to its potential, and that the appreciation of the euro since April 2017 will begin to weigh on external trade. In this context and in the absence of inflationary pressure, the ECB is likely to maintain an accommodative monetary policy.
In Switzerland, on the other hand, GDP growth could continue to accelerate in 2018, buoyed notably by the positive effect of the drop in the franc against the euro since April 2017. We nevertheless continue to forecast that inflation will not see a marked rise, due notably to the weak GDP growth over the full year in 2017. We thus expect the Swiss National Bank to maintain its monetary policy unchanged throughout 2018.
China – start of the national people’s congress and 2018 targets
In China, the National People’s Congress opened on Monday 5 March for two weeks. It is likely to approve a major constitutional change that would abolish the limit of two five-year presidential terms. Xi Jinping could then remain in office beyond the end of his second term in 2022. The Congress is also set to establish priorities for the country’s medium-term economic policy. These are likely to be in line with the priorities set by the 19th Communist Party Congress held last Octobe r, and reiterated during the Central Work Economic Conference in December. Thus, the continuation of structural reforms aiming to lower systemic risk in China - via tighter financial regulations, the deleveraging of the country, the reduction of surplus production capacity and eliminating poverty - should be officially confirmed. The neutral monetary policy stance of the PBoC and the creation of a structure governing the financial supervisory bodies are also expected to be announced. These developments would underline the role of State authorities in China’s economic model, which should play a decisive part in the catch-up of the value chains carried out by the Chinese industry and the trend toward more socially inclusive growth (see our Weekly Economic Insight of 23 October 2017). Lastly, Premier Li Keqiang has unveiled his target of growth of close to 6.5% and inflation of 3% for 2018, while the objective for the fiscal deficit is down from 3.0% in 2017 to 2.6% of GDP.
Sophie Casanova - Economist, Central banks,
François Léonet – Economist, Emerging markets
Lisa Turk - Economist, the United States