Daily Management Review

Analysts find main threats for the US economy


Next year, the main threat to the US economy will be a trade war with China, according to economists surveyed by The Wall Street Journal (WSJ). Many of them expect that the US Federal Reserve will even have to lower interest rates again starting from 2020. Meanwhile, China is also facing a slowdown in the economy.

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Public Domain Pictures
60 economists took part in the WSJ survey on December 7–11, although not all of them answered the questions. Nearly half, or 47.3% of respondents, called the trade conflict with China the main threat to the US economy in 2019. Another 20% of economists indicated instability in financial markets, and 12.7% indicated a slowdown in business investment. Only four experts agreed with the opinion of US President Donald Trump that the main risk is the Fed raising interest rates. All these risks are interrelated, warns Professor of Economics at the University of Georgia Rajeev Dhawan: "Both the rise in interest rates by the Fed and the trade war will lead to a slowdown in business investment."

At the G20 summit in early December, the United States and China agreed on a three-month truce in a trade war. The parties promised not to introduce new import duties and resume negotiations during this period. In particular, Washington wants to reduce the deficit in trade with China and force Beijing to abandon the practice of forced transfer of technology by foreign companies. If the parties do not agree in 90 days, the United States will raise import duties on Chinese goods by $ 200 billion from 10 to 25%. The situation has been complicated by the arrest of the Chief Financial Officer of Huawei Meng Wanzhou in Canada. The US authorities are accusing her of violating sanctions against Iran and demand her extradition to the United States.

Nevertheless, Chinese and US officials insist that this will not prevent negotiations, and on December 10, Deputy Chairman of the State Council of the People's Republic of China informed the Americans about his agreement to reduce tariffs on car imports from the United States from 40 to 15%. “The negotiations will be long and exhausting,” said David Berson, chief economist at Nationwide Mutual Insurance.

Only 10% of economists surveyed by the WSJ predict a recession will start in the US in 2019. However, more than half expect it to happen in 2020. Many of them also believe that the Fed will have to reduce interest rates from 2020. Almost all of the experts surveyed, except for one, are confident that the Fed will raise interest rates by 0.25 pp to 2.25–2.5% at the end of its next meeting on December 18–19. But if earlier they were waiting for three rate increases in 2019, now the median of forecasts is only two increases. Economists associate the possible change in the Fed's monetary policy with trade conflicts, slowing inflation and other risks.

The central bank representatives themselves have recently hinted at the fact that the Fed may choose a waiting approach next year. So, Fed Chairman Jerome Powell said in November that interest rates are already close to the neutral level, when they do not slow down or accelerate the economy.

According to economists' median forecasts, interest rates in the United States have reached only 2.89% by the end of 2019, and 2.93% by the middle of 2020, but then they will start to fall and will be 2.82% by the end of 2021. For comparisons: in November, economists predicted that interest rates would be equal to 3.15% at the peak in 2020. The Fed itself will present its actual forecast on Wednesday. In September, the regulator expected rates to rise to 3.25–3.5% in 2020

China's problems

The latest data does point to problems in the Chinese economy. The growth rate of retail sales in the country in November was the lowest in 15 years, and industrial production in almost three years. This means that Beijing may need new measures to stimulate the economy, despite the fact that in the summer it ordered an increase in infrastructure costs, and the People's Bank of China infused additional liquidity into the financial system, writes Financial Times.

Before that, other warning signs appeared. In November, China’s imports grew by only 3% in real terms, although analysts polled by Reuters had expected growth of 14.5%. Exports rose 5.4% against the expected 10%.

In addition, car sales in China fell by 14% in November from a year earlier, which was the worst result in more than six years. Demand for cars in the country has been falling for five months in a row, and by the end of the year their sales may decline for the first time since the 1990s. According to experts, this is largely due to the cessation of tax benefits that have stimulated sales in recent years. But people are also worried about the trade war with the United States and the economic situation. 

source: ft.com, wsj.com