The United States and China exchange tariff threats, moderation in us consumption growth and a drop in Swiss imports

Macro Highlights - 4/9/2018

In short
  • The United States threatened China with an increase in trade tariffs on 1,300 products, but the Chinese quickly retaliated. It’s a power struggle with limited macroeconomic impact at this stage
  • Job growth in the US was disappointing in March, as was consumption growth in February, in line with our forecasts of a moderate acceleration in GDP in 2018
  • In Switzerland, the trade surplus jumped thanks to a fall in imports in the chemicals/pharma and automobile sectors. Even corrected for this temporary factor, trade remains well oriented

United States – the Trump administration has threatened to increase trade tariffs on more than 1,300 products imported from china, the macroeconomic impact should be limited at this stage

President Trump began to tackle the US trade deficit the day after the adoption of his tax reform. After threatening to suspend the North American Free Trade Agreement (NAFTA) and imposing trade barriers on steel and aluminium imports, he is now targeting China.

The US Trade Representative has published a list of more than 1,300 Chinese products (link to the detailed list) to which a 25% tariff increase should be applied. This sanction follows a study carried out at the request of the US president, which notably points a finger at intellectual property theft, cyberattacks orchestrated by Beijing, and unfair business practices in terms of Chinese acquisitions of US companies.

In response to the announcements by the US, China retaliated by indicating it would set up trade barriers on agri-food products (soya, wheat, corn, etc.) coming from the US. For the time being these are only threats.

If the Americans do apply trade tariffs on the 1,300 products coming from China, the impact on the US economy is likely to remain contained:

  • The value of the 1,300 Chinese products affected by the tariffs was estimated at USD50 billion, i.e. just 2.1% of US goods imports in 2017. This means that the impact of the tariff increase on consumer prices should be negligible, especially as companies could turn to other countries for provisioning.
  • The products targeted by the tariffs are above all related to the industrial, technology and transport sectors, as the US government chose to eliminate products that would have directly impacted US consumers. The US sectors that could be faced with a slight rise in prices are, according to our calculations, the same sectors that are set to benefit the most from the tax cuts. The tax reform could thus enable these industries to absorb a part of the price increase.

However, if China were to impose trade tariffs on certain food products imported from the US, American farmers could suffer from a slight drop in their exports. This retaliatory measure could make the Republicans uncomfortable due to the concentrati on of agricultural production in the upper Midwest of the United States (see left-hand chart), and in swing states, which have not yet been won over ahead of the mid-term legislative elections in November 2018 (among others, Ohio, Indiana, Wisconsin and North Dakota).

Lastly, while the measures announced will probably not be applied as they currently stand, and the macroeconomic impact should remain contained, the uncertainty arising from these threats could temporarily weigh on certain investments.

United States – disappointing job growth in march and a slowdown in household consumption

Beyond political and trade conflicts, the real challenge at hand remains the trend in the US economy.

The March employment report was lacklustre. While the unemployment rate remained stable at 4.1% and y-o-y growth in wages was up slightly at 2.7%, job creation was disappointing. This is in line with our expectation of a slowdown in employment growth in 2018 compared to 2017, due to the low unemployment rate, despite a participation rate that should continue to increase slightly.

4 In March, 103,000 jobs were created, after 326,000 in February. On average in Q1, companies created 202,000 new positions, down slightly compared to the 221,000 recorded in Q4 2017.

Weak consumption was confirmed in January and February, notably due to the stabilisation of disposable household income growth.

  • Consumption growth slowed from 2.9% in Q4 2017 to 2.8% during the first two months of 2018. Not only has growth in real disposable income (i.e. adjusted for inflation) stabilised at 2.2% since December 2017, the savings rate of households also increased slightly, following a sharp decline in 2016 and 2017, from 2.4% of disposable income in December 2017 to 3.4% in February 2018.
  • As illustrated in the right-hand chart on page 2, the stabilisation of growth in disposable income can be explained by several factors: firstly, the contribution of household wages to growth in disposable income was weaker (red bars, non- deflated data), while that of dividend and interest income also diminished, due to the drop in financial markets (light blue bars). Moreover, inflation accelerated slightly, from 2.1% in the last quarter of 2017 to 2.2% at the start of 2018, weighing on the purchasing power of households. These factors were nevertheless offset by the drop in income tax, in effect from January 2018 (dark blue bars).

Lastly, the leading indicators derived from purchasing manager surveys were down in March in both the manufacturing and non- manufacturing sectors. They nevertheless remain well above 50, indicating expansion in the economy.

  • For the manufacturing sector, the index was down from 60.8 in February to 59.3 in March. This slight decrease is due to declines in most of its sub-components, notably new orders, production and employment. For the non- manufacturing sector, the index was down from 59.5 to 58.8, mainly due to a weaker business outlook and fewer new orders, while the “employment” component remained in line with its average of the past 10 months.
  • The average of the ISM indices in the first quarter of 2018 nevertheless remained above the levels observed in 2017. Thus, the ISM Manufacturing index was up from an average of 58.7 in Q4 2017 to 59.7 in Q1 2018, and the ISM Non- Manufacturing index increased from 57.7 in Q4 2017 to 59.4 in Q1 2018.

The slowdown in consumption growth and sound lead ISM indicators are in line with our forecast of a moderate acceleration in GDP growth to 2.5% in 2018, stimulated more by corporate investment than by household spending.

Switzerland – the fall in imports boosted the trade balance in february

External trade remains one of the main GDP growth drivers in Switzerland. In 2017, due to the past high level of the franc, notably against the euro, as well as exceptional factors such as the normalisation of pharmaceutical exports, which had grown strongly the year before, external trade did not support growth as much as it did in 2016: it contributed 0.7 percentage points to annual GDP growth of 1.1%, while in 2016, it had contributed 1.6 percentage points to GDP growth of 1.4%. Its trend will certainly be decisive once again for Swiss GDP growth in 2018. Moreover, while the trend in the trade balance disappointed in January, it was, conversely, very positive in February.

The Swiss trade surplus increased sharply in February. Adjusted for seasonal effects, it reached CHF3.2 billion, up from CHF1.1 billion in January, its highest level since December 2017, which was above the 2017 average of CHF2.9 billion. But while exports continued to rise (in nominal terms they were up 1.8% month-on-month and 2.3% in real terms), the rebound in the trade balance nevertheless mainly resulted from a fall in imports (imports recorded a 9.8% decrease in nominal terms and 9.5% in real terms).

This decline in imports could only be temporary, however. As highlighted by the Swiss Federal Customs Administration, the chemicals/pharmaceuticals and auto sectors alone explain 93% of the drop in imports in February. Moreover, both had seen strong growth in January, bringing them to historical highs (from 1997), and were behind the 61% rise in imports that month.

Thus, it is possible that the high trade surplus of February will not be renewed in the coming months. Nevertheless, we continue to expect that the past drop in the franc against the euro (-9.4% since April 2017) and, especially, the favourable trend of world demand, are set to enable external trade to contribute positively to GDP growth in 2018.

Sophie Casanova - Economist, Central banks,
Lisa Turk - Economist, the United States,