Two of the world’s most powerful players celebrated last week, one his country’s New Year, the other his substantial policy achievements. China’s president Xi Jinping was celebrating the arrival of the Year of the Pig, America’s President, Donald Trump, his substantial achievements on the economic policy front during the year of, well, of the Donald.
Xi’s was the more modest affair. He hobnobbed with China’s masses, patted children on the head, and avoided any discussion of the state of China’s economy. Donald Trump’s State of the Union speech was more triumphal, a celebration of himself. Both men had good reason for their different approaches to their constituents.
China’s economy is faltering. Economic growth has dropped to its lowest level in the past three decades. Retail sales are down, as are auto sales, and the manufacturing sector is slowing. Total debt relative to GDP now exceeds 253%, up from 140% in 2008, and Charlene Chu, a senior partner in Autonomous Research and an expert on Chinese debt, estimates that 24% of all bank loans will not be repaid. S&P guesstimates that local government debt stands at $6 trillion, “a debt iceberg with titanic credit risks.” Entire cities are proving to be no Fields of Dreams – developers have built them but no one has come. The government is pouring $218 billion into the financial system by reducing reserves banks must hold, but many observers expect those funds to end up in inefficient state-owned enterprises rather than in the hands of hard-pressed private entrepreneurs. Not exactly such stuff are dreams are made on, least of all Xi’s famous “Chinese Dream.”
Trump, on the other hand, had reason to abandon his usual modesty: the facts are on his side. His tax cut and deregulatory program produced an American economy that, he proudly declared, is “the envy of the world … we have created 5.3 million new jobs … wages are rising at the fastest pace in decades … unemployment has reached the lowest rate in half a century … unleashed a revolution in American energy … the hottest economy anywhere in the world.” A President who acted like a President would have an easy time being re-elected on numbers like that.
Trump might have added that fourth quarter profits of companies that have so far reported are up 12%, and share prices have risen by about 10% since their low on January 3, but profits are a naughty word for some of the Democrats in his audience: they booed him when he declared, “America will never be a socialist country.”
For very different reasons, both Xi and Trump are eager to settle their trade dispute. Xi has learned just how dependent his economy, and by extension his regime (now facing organized protests from unpaid and laid-off workers) is on the U.S. market. Exports to America are down as a result of the tariffs Trump has already levied, and will decline even further if the President extends those tariffs to a broader range of goods, and increases them, as he has threatened to do unless China abandons its outrageous trade practices. Xi needs these tariffs to go away, and is more rather than less likely to ignore the advice of some on his negotiating team that he need not make any concessions because Trump is so eager for a deal that he will be content with vague, unenforceable promises of market-opening measures over several years.
His negotiating partner, sitting atop a much healthier economy than China’s, nevertheless is coming under fire from American sectors suffering from retaliatory tariffs. As a goodwill gesture XI ordered Chinese companies to step up purchases of soy beans – they will go into China’s reserves, and therefore will not be subject to the tariffs that have diverted purchases from American farmers to cheaper soy beans in Brazil and elsewhere. But that is too little and too late to ease the pain of the farmers who voted in such large numbers for Trump. They have been suffering from low commodity prices for some time, and the loss of China’s market has made their bad situation worse. Bankruptcies in major agricultural states have increased by anywhere from 59% to 100% in the past decade. Industries that use steel and other products subject to retaliation by US trading partners are also beginning to wonder whether the game being played by Trump, the self-styled “Tariff Man”, is worth the candle.
Unfortunately, even if the two economic giants reconcile, which remains likely despite Friday’s announcement that their planned meeting has been postponed, the road ahead will remain potholed by troubles in Europe:
- Germany’s exports, domestic auto sales, business confidence and manufacturing output are all in decline, prompting the European Commission to cut its forecast of this year’s growth from 1.8% to 1.1%.
- Italy is in recession, burdened by the fourth-largest debt of any country in the world and EU rules that make a fiscal stimulus impossible.
- Britain’s economy is slowed by the determination of the Brussels bureaucrats to make a painful Brexit an object lesson to other countries restless to regain control of their fates.
The European Commission has cut its 2019 growth forecast for the eurozone’s 19 members from 1.9% to 1.3%.
- On the policy front, the European Central Bank is tightening monetary policy, and the German government is considering doing the same with its fiscal policy by raising taxes, both odd moves in a weakening economy. The cocktail of adverse economic trends and those policy decisions, if imbibed, will likely prove lethal to the economic health of the Eurozone. Which is one reason the ECB is having a policy re-think: Benoit Couvre, a member of the Bank’s executive board, announced on Friday that eurozone “risks have moved to the downside.”
So it all comes down to America, which most experts say will not be able to repeat the economic performance trumpeted by the President in last week’s speech. Growth is expected to drop to around 2.5% from 3%. Vehicle sales are soft, and only those debt-laden students with access to credit from Mom&Pop Plc can enter the property market.
Still, the economy is running strong, as Trump claims. Interest rates and inflation are low, the President had Fed chairman Jay Powell to dinner at the White House and the knives were used only on steaks, the auto industry is planning to tempt consumers with 48 new models this year, the U.S. job creation machine rumbles on, and a 2.5% growth rate would have been wildly cheered only a relatively few quarters ago.
On the policy front, the Fed’s monetary policy mavens have recognized the folly of their rate-raising ways, and the new intake of Democratic congresspersons is pressuring to loosen fiscal policy, although they probably don’t realize that is what more spending is. This year of the Donald just might turn out better than many recession-predicting pessimists believe.