This week I’m going to kick off a new regular Monday innovation – a quick round up of macro stories that have captured my eye. Three subjects this week: trade wars, the debt mountain and gold demand ebbing away.
So, let’s start with the dreary subject of trade wars. The Donald has now decided to implement his own zero sum way of looking at the world and slapped tariffs on a bunch of imports that allegedly threaten national security. Our Prime Minister might be a tad disappointed that our Brexit Buddie is behaving beastly, but I think the rest of us can safely agree that Trump and his toady Ross is speaking complete and utter bollocks. There IS a case for nobbling the Chinese for their anti-trade practices but hitting your friends and allies with an outrageous invention that steel supplies are a national security threat is just…well….bollocks. We should be ready to stand up for industry and tell the American’s what we truly think. And then if they don’t listen, hit them hard where it hurts. And I speak as a true Atlanticist!
Anyway, here’s a good short summation of why global markets don’t seem to be too worried by all this blustering. It’s from Tomasz Wieladek over at Barclays and it contained in his Friday Thinking Macro note, entitled ‘Trade War’ in perspective. Wieladek uses a VAR framework to study the effect of US tariffs on global growth and CPI.
- US tariffs act as a negative supply shock to the world economy. Our estimates for the first year after the tariff are large, but uncertain. We illustrate the effect of a 1% US tariff as a share of imports with second-year estimates. As a result, global growth falls by 0.3pp, inflation rises by 0.4pp. With tit-for-tat retaliation, the effects double.
- US steel tariffs represent only 0.33% of US imports, even excluding exemptions. The Intellectual Property tariff of 25% on $50bn of Chinese goods is 0.5% of US imports. The threat of a 25% tariff on $100bn of Chinese goods would be double.
- Based on these numbers, the steel tariff could reduce global growth by 0.1pp and raise inflation by 0.1pp in the second year. If $50bn of IP tariffs are added and retaliated tit-for-tat, growth would fall by 0.6pp and inflation rise by 0.7pp. With $100bn and tit-for-tat retaliation, growth falls 0.9pp and inflation rises 1.1pp.
- The impact on EM is larger than on DM. A 1% tariff leads EM GDP to fall by 1.1pp and inflation to rise 1.1pp. DM growth falls only by 0.5pp, while inflation rises 0.2pp.
- Our approach may underestimate the impact of a rapid tariff rise. We likely omit second-round price and confidence effects. Global value chains could be captured by our model, as they emerged when tariffs were reduced in the 1990s. Even if the ‘true’ impact is twice our estimate, large effects still require large tariffs.
- There are several mitigating factors. While the US used tariffs in the 19th century, large retaliations were rare. A 70% success rate in WTO trade disputes will likely encourage the US and EU to keep this resolution mechanism. Services trade could rise with US business deregulation. But likely not enough to offset the EM impact.
Next up on my roundup is this cracking graphic below which looks at global debt levels from West Country based risk consulting firm CheckRisk, founded by Nick Bullman. This snappy little number should remind us that the global mountain of debt is a real systemic risk which isn’t going away. Economists need to have a long, hard think about we design a better global economic system that doesn’t rely so excessively on leverage.
My last observation comes from a note last week from BullionVault. Fans of the shiny precious metal will know that despite winning some sympathy from gold bears such as me, demand for gold hasn’t exactly rocketed, even for the physical stuff.
In fact, Bullion Vault reports that it’s users are actually selling gold as a group, taking profit last Tuesday and liquidating 75 kilos worth £2.3 million from their total holdings. From end-March’s all-time record high, clients have now liquidated almost 0.5% of their total holding, selling it down to 38.7 tonnes worth £1.2 billion.
Crucially “what began as a Trump slump for US gold coin sales in 2017 has now spread to retail gold bar investing demand in UK and Europe. And globally, Google search volumes for the phrase ‘buy gold’ have sunk to 2007 lows, back before the global financial crisis got started. Existing gold coin and bullion bar owners have meantime turned seller, steadily exiting the stockpile they began building ahead of the financial crisis.”
BullionVault suggests that “this might seem natural with the stock market setting new all-time highs. Longer-term investors wanting to defend their profits in the stock market might take the lack of interest in gold as a contrarian signal to buy.”