Escalating U.S.-China trade spat comes at a bad time for global growth, economist says

The escalating trade spat between the U.S. and China comes at an inconvenient time for the global economy.

The resilience of China’s economy in early 2018 has been an important buffer for global growth in the face of mounting headwinds, noted Louis Kujis, head of Asia economics for Oxford Economics, in a Friday note. But the economy is showing signs of a broad slowdown after downbeat May economic data, which Kujis expects to continue, braking growth from a pace of 6.8% year-over-year in the first quarter to 6.2% by the fourth quarter.

China’s economy was set to slow without the trade dispute and policy makers were already less likely to respond with the type of stimulus they have implemented in the past to the benefit of the domestic and global economy. The rising trade tensions only amplify the prospects of a slowdown, albeit at the margins.

“While the economic impact of the U.S. tariffs and ensuing retaliation by China will be modest, it does matter,” Kujis wrote. Assuming broadly one-for-one retaliation, Oxford Economics’s economic model suggests the trade actions will shave 0.1 to 0.2 percentage point off growth in 2018 and 2019 for both countries, he said, noting that the impact has already been incorporated into the firm’s forecasts.

Such numbers “still matter, and the increased uncertainty and risks will weigh on business confidence and investment, especially cross-border investment,” he said. “Thus, there will be an impact on growth, in China, the US and elsewhere, at a sensitive time for the global economy.”

U.S. President Donald Trump on Friday announced tariffs on $50 billion worth of Chinese imports, prompting China’s Commerce Ministry to say it would immediately launch equal tariffs on U.S. goods.

U.S. stocks ended lower Friday, but trimmed losses, with the Dow industrials  finishing around 85 points lower, or down 0.4%, near 25,090. The S&P 500  lost 0.1%.

While stocks suffered moderate losses Friday, trade-related headlines haven’t consistently weighed on equities. Heightened tensions following last weekend’s contentious Group of Seven summit, which left Trump isolated versus many of the largest U.S. allies, did little to dent sentiment early in the week.

Bullish U.S. investors have shrugged off signs of global headwinds, including trade worries, in recent weeks, paying more attention to strengthening domestic data and expectations the corporate tax cuts signed into law last year and other sources of fiscal stimulus will provide the fuel that will eventually allow the S&P 500 and Dow to challenge the all-time highs set in late January.

If attention does turn back to the global backdrop, the China outlook could be a dampener.

Kujis said Chinese policy stimulus during moments of global economic weakness have provided a buffer for growth in the country and elsewhere. This time around, Chinese policy makers have adjusted policy a bit in response to signs of global economic headwinds, but Beijing is no longer as beholden as it once was to growth targets, Kujis said.

“The mantra these days is to move ‘from quantity to quality and equality,’ while reducing financial risks and credit growth are key objectives,” Kujis said.

Meanwhile, gross domestic product grew 6.8% year-over-year in the first quarter, he said, still significantly above the target of “around 6.5%” for 2018. That means growth would need to slow significantly to prompt a substantial policy easing.

The bottom line, Kujis said, is that Chinas’s slowdown “will add to the challenges for the world economy in the coming months.”