Trade conflict poses unexpected risks – ABN AMRO

According to Han de Jong, chief economist at ABN AMRO, unfortunately, the US-Sino trade conflict has re-emerged as an important factor and it’s hard to quantify the depressing effect the trade conflict had on global activity last year.

Key Quotes

“I suspect the effects were material. And the re-escalation of the conflict has the potential to do a lot more damage this year.”

“Chinese leaders have been remarkably disciplined in the conflict. Many people think China has a vulnerable position in the conflict as it has a large bilateral trade surplus with the US. But don’t forget, many US companies have large operations in China. China could make their lives very unpleasant. That could have a significant impact on the US and global economies. Perhaps that is the biggest risk to the global economy: that the Chinese lose their cool and are willing to hurt the US seriously even if it implies they will also inflict serious pain on themselves.”

“On balance, I continue to think that most of the headwinds of 2018 are disappearing, though with one notable exception so far. Weighing these things up, I find it hard to understand why things would get worse for the global business cycle.”

“Some people are watching the US yield curve, concluding that recession risks are rising. I have respect for the yield curve as an early indicator of trouble. However, there is more to look at. Recessions in the US are not only preceeded by an inversion of the yield curve, but also by a decline in corporate profits (in the national accounts). That is not happening.”

“The US economy typically falls into recession when consumer spending slumps or when asset prices fall heavily. There is little reason to expect that any time soon. US households have very healthy balance sheets at the moment, with reduced debt levels, historically low debt service burdens and a relatively high savings rate. Their confidence is strong, not surprising.”