US trade tariffs against China, accommodative monetary stance in Brazil and Russia and euro zone PMIs have dropped once again

Macro Highlights - 3/27/2018

In short
  • The Trump administration has announced its intention to impose tariffs on goods imported from China, in order to defend itself against Beijing’s “economic aggression”. Few details have been given
  • China should favour a proportional approach, responding with trade measures comparable to the US actions
  • In Brazil and Russia, the central banks lowered their key rates by 25bp in a context of weak inflation. They have left open the option of future rate decreases
  • In the euro zone, PMIs dropped again in March, which tends to confirm a slowdown in growth in GDP in 2018, as we expected

The United States – the white house is combating intellectual property theft by imposing trade tariffs against china

To defend itself against China’s “economic aggression”, President Trump announced on 22 March that he intends to impose tariffs on USD60 billion in imported goods. The United States has accused Beijing of intellectual property theft, notably by obliging US companies wanting to set up in China to form partnerships with local players1. The objective announced by the Trump administration is to reduce the United States’ trade deficit with China by USD100 billion, which in 2017 stood at USD375.2 billion (excluding services, see left-hand chart).

In the memorandum published by the White House, the following measures were put forward:

  • To propose in the next 15 days a list of products imported from China that will be subject to higher tariffs. While the exact tariffs are still to be determined, the US president mentioned a rate of close to 25% in his announcement. Once this list is published, there will be a 30-day consultation period before the final measures are applied.
  • To demonstrate China’s discriminatory licensing practices and its unfair trade practices to the WTO.
  • To propose within the next 60 days actions aiming to limit Chinese investments in the US that are either s teered or facilitated by Beijing, especially in industries or technologies important to the US economy.

The details of these measures, which will be provided in the upcoming weeks, should enable us to assess the impact on the US economy. The USD60 billion in imported goods affected by these tariffs represent 2.6% of total Chinese goods exports. In the face of these events, China reiterated its wish to avoid a trade war, while adding that it was not intimidated by such a prospect. It is thus probable that China will favour a proportional approach, retaliating with measures comparable to the US actions in order to avoid an escalation. Thus, in reaction to the US steel and aluminium trade tariffs, China drew up a list of 128 US products – for an amount of close to USD3 billion, compared to total annual US exports to China of USD130.4 billion – that could be hit with higher trade tariffs if an agreement between the countries is not found. The exported goods include wine, dried fruits and pork. The list does not include the United States’ main exports to China, which are soya, aerospace components and vehicles.

Lastly, prior to the entry into force of the new trade tariffs on US imports of steel (25%) and aluminium (10%) on Friday, 23 March 2018, the Trump administration granted some temporary exemptions, until 1 May 2018, to the following countries: Argentina, Australia, Brazil, Canada, Mexico, EU member countries and South Korea. These exemptions pave the way for a negotiation period, suggesting a more flexible attitude than initially announced by the US administration.

Brazil & Russia – key rates cut by 0.25%

The week was also marked by the meetings of several central banks. Among developed countries, the Fed’s decision was thus highly awaited (see. Focus p.5), while among emerging countries the central banks of Brazil and Russia also held their meetings.

The Banco Central do Brasil maintained its accommodative monetary cycle by lowering its policy rate on 21 March by 25bp to 6.50%, a historical low. This decision was taken in the context of a continued economic recovery in Brazil (see right -hand chart, p 2). The monetary policy committee (COPOM) underlined this improvement in Brazil’s fundamentals while considering that an accommodative monetary stance – i.e. interest rates below their neutral level – was appropriate. The COPOM thus opened the door to a possible future 25bp cut in its key rate at its meeting of 16 May, on the basis that additional monetary stimulus would lower the risk of a too gradual convergence of Brazilian inflation towards its target. Inflation is in fact at a low point of 2.8%, while the Brazilian Central Bank revised its inflation forecasts downward for end-2018, to 3.8% vs. 4.2% previously in February. Conversely, the central bank’s projections for the end of 2019 were lowered only marginally, from 4.2% in February to 4.1%, which is not significantly different from the inflation target of 4.25% for 2019. As the COPOM noted, a continuation of the downwards rates cycle is not a certainty, given that it also depends on international events. As such, a hardening of the United States’ protectionist stance could weigh on investors’ confidence with regard to emerging assets. In this context, a depreciation of the Brazilian real would push up domestic inflation via higher prices for imported goods.

In Russia, the central bank also lowered its key rate by 25bp, to 7.25%. The Central Bank of Russia revised its inflation forecasts downward to 3-4% for the end of 2018 while anticipating real growth of around 1.5-2% over the coming year, in line with the potential of the Russian economy. The Russian central bank announced it would maintain its monetary stance; rates could thus stand at 6-7% during the year, a level it considers to be neutral.

Euro zone – the PMIS tend to confirm a slowdown in activity

Purchasing manager confidence continued to weaken in the euro zone in March. PMIs dropped further, and more sharply than was expected by the consensus. Thus, for the euro zone as a whole, the manufacturing sector index was down from 58.6 to 56.6 (vs. 58.1 expected), its lowest level since July 2017. In the services sector, the index declined from 56.2 to 55.0 (vs. 56.0 expected), equivalent to its October 2017 level. Lastly, the composite index, a synthesis of activity in the two sectors, fel l from 57.1 to 55.3 (vs. 56.8 expected), its lowest level since January 2017.

In detail, most components of the surveys lost ground. We would nevertheless highlight that the negative trend observed for components relative to orders has continued since January for the manufacturing sector and since February for the services sector. Thus, for the manufacturing survey, new orders were down from 58.1 to 55.4 (their lowest level since November 2016) and new export orders fell from 56.8 to 54.7 (their lowest level since December 2016). While in the preliminary publ ication no information was provided on orders in services, the new orders index of the composite survey was down from 56.5 to 55.0 (its lowest level since January 2017).

By region, the surveys published for Germany and France followed the same trend as for the euro zone, in both the manufacturing and services sectors. As a result, the German composite index dropped from 57.6 to 55.4 and its French equivalent was down from 57.3 to 56.2, returning to their lowest levels since July and August 2017, respectively.

Overall, these purchasing manager indices tend to support our scenario according to which, after having benefited from a catch- up trend in 2017, GDP growth in the euro zone could slow in 2018. The trend in components relative to orders tends, moreover, to confirm that foreign trade could offer less support to growth than it had in 2017 as, despite strong world demand, the ris e in the euro since April 2017 (by close to 9.0% in effective terms and, in particular, by 17% against the dollar) would start to weigh.

The slowdown in GDP growth and the lack of inflationary pressure would, according to our scenario, lead the ECB to maintain an accommodative monetary policy. We thus maintain our forecast that the ECB will end its asset purchase programme in September 2018 but will maintain its key rates at their current levels and continue to reinvest the amounts from its securiti es maturing in 2018 and 2019.

Sophie Casanova - Economist, Central banks,
François Léonet – Economist, Emerging markets,
Lisa Turk - Economist, the United States