Conventional globalist wisdom tells us that over time, no one country can flourish while all others founder. In the current case, the U.S. maintains the appearance of a soaring economy in some areas, such as a streak of record highs in the major three stock indexes plus low unemployment, with a rate cut almost certainly on the horizon (the CME FedWatch tool puts the likelihood of a July cut at 100%, with 62% support for a 25 basis point cut, and 33% for 50).
In the meantime, there's certainly enough talk of a potential global recession. As Forbes recently pointed out, "Calling for a recession has recently become a 'thing' for many Wall Street pundits. But after 10 years of unending U.S. economic growth, and currently fading global growth, that declaration does not qualify any of us for the investment strategy Hall of Fame."
It's a good observation, but at the same time, it's prudent to remember the amount of potential energy tied up in trade disputes, and that empirically, trade disagreements detrimental to both sides are resolved over time.
For now, the U.S. economy is tracking modest 2.5% growth for Q2 after 3.1% for Q1. It's still expansion, but it's decelerating expansion. The story is the same in China, with 6.2% GDP, down from 6.8% the same time last year. In Europe, the picture is darker, where GDP-wise, the Eurozone is barely above the 50% delineator of expansion vs. contraction, tracking 1.1% growth following a 1.9% reading this time last year. Major EU economies like Italy are in fact contracting.
A key factor in the global slowdown is the sheer number of ongoing trade issues between major trading partners. The U.S.-China imbroglio alone is enough to move the global economic needle, but the U.S. also has unresolved disputes with Europe, India, and Mexico/Canada re: the USMCA. Further, the tone of the Japan-Korea impasse--made all the more emotional over colonial-era forced labor--is increasingly entrenched and stubborn on both sides.
The common theme to four of the five disputes above is President Trump. True to his word, he is fighting for more equitable deals for the U.S., and so far, the underlying strength of the American economy has glossed over the impact of skirmishing on so many fronts at once. If the domestic economy begins to experience sustained losses due to its trade posture, such as it already has in U.S. agricultural markets, it's a smart bet that the U.S. will seek to make concessions to move its economy forward, and the world's with it.
In a way, it is a treasure chest to which only Trump has the key.
To be fair, if all trade disputes disappeared tomorrow, the effect would simply be the removal of onerous headwinds for the global economy, not to provide a tailwind as well. To truly re-fire the global growth engine, looser monetary policies must prevail--which is why the July 31 FOMC meeting is so important not just domestically, but globally. Central banks must continue to ease rates, and a dose of fiscal stimulus wouldn't hurt.
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