This Week In The Economy: Yet Another US Debt Limit Standoff, Japan & South Korea Enter The Trade War Arena
Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.
Deja Vu: Budget/Debt Limit Negotiations Drag On As Deadline Looms
In was is now a regular event on the calendar, the White House and Congress are once more locked in prolonged combat over spending levels for government funding over the next two years (taking a political hot potato off the table before election season) and addressing the urgent need to raise the debt ceiling before the U.S. Treasury is unable to pay the country’s bills.
Negotiators for the Trump administration, led by Treasury Secretary Steve Mnuchin, are pushing for around $150 billion in budgets cuts to be part of any final agreement, while also asking for increases in defense spending. The Democrat-controlled House, led by Nancy Pelosi, have rebuffed this demand while also seeking increases in non-defense spending to match any money allocated to the military.
The Treasury has warned Congress it will likely run out of cash in early September and risk defaulting on its obligations — urging lawmakers to raise the debt limit before the legislative branch leaves for summer recess on August 1. The U.S. government already hit the current $22 trillion borrowing limit on March 2nd, and has been relying on ‘extraordinary measures’ since then to keep the lights on.
While there is technically time for a deal to be struck and a major crisis averted, what should be a routine process has become more and more drawn-out and unpredictable every year. This has injected unnecessary uncertainty into financial markets observing nervously from the sidelines, while further denting investors’ confidence in the full faith and credit of the United States government.
China’s Economy Grows At Slowest Pace In Almost 30 Years
The pace of economic growth in China for Q2 slowed to the lowest rate seen in 27 years, as the world’s second largest economy absorbs body blows from the ongoing trade war with the United States, less demand from a sluggish global economy, and weak domestic consumption.
China’s Q2 real GDP grew by just 6.2%, down from 6.4% in Q1, and a far cry from the years of double-digit growth witnessed during the late 2000s. The Chinese government noted that it is “ faced with complex environment both at home and abroad,” as talks continue to resolve trade tensions with the U.S. while policymakers continue efforts to reinvigorate domestic activity.
See here more a more detailed discussion on what this means for China’s economic prospects.
As for the prospects of an agreement between China and the U.S. that takes the threat of an all-out trade war off the table, this probably doesn’t help:
Fed Chief Reiterates Vow To Take Action to Support Economy To Counter Low Inflation, Slowing Business Investment
Federal Reserve Chair Jerome Powell this week gave another strong indication the U.S. central bank is likely to cut short-term interest rates when senior officials meet at the end of this month.
Speaking at a conference in Paris, Powell noted that on the domestic front, fixed investment by businesses seems to have slowed notably — a sign of negative sentiment. “Moreover, the manufacturing sector has been weak since the beginning of the year, in part weighed down by the softer business spending, weaker growth in the global economy, and, as our business contacts tell us, concerns about trade tensions,” he said.
Powell’s assessment is backed up by the Fed’s ‘Beige Book’ report released this week, which warned of “widespread concerns about the possible negative impact of trade-related uncertainty” among the companies surveyed by the central bank’s regional branches.
Powell also noted that, “U.S. economic developments affect the rest of the world, and the reverse is also true” — with potential risks not just from trade developments and weak global growth, but also unresolved issues such as the U.S. debt ceiling and Brexit.
With Fed officials also worried about “a more prolonged” miss on its 2% inflation target, Powell reiterated that many are now of the opinion that there is a stronger case for the Fed to ease monetary policy. “We are carefully monitoring these developments and assessing their implications for the U.S economic outlook and inflation, and will act as appropriate to sustain the expansion,” he said.
The Consumer Is Alive And Well: U.S. Retail Sales Surge In June
Powell did point out in his prepared remarks that growth in consumer spending, which had been soft in the first quarter, “looks to have bounced back.”
This statement was supported by data released this week, which showed U.S. retail sales up 0.4% in June, and 3.4% better than June last year. Total sales for Q2 were up 3.4 percent compared to the same period a year ago.
Sales excluding gasoline and motor vehicles were up 0.7% and, in a sign of the times, internet sales were up a whopping 1.7%, matching the increase seen in May, while sales at department stores fell by 1.1%.
South Korea Central Bank Cuts Interest Rates, Downgrades Growth Outlook
In what is being described as a surprise move, South Korea’s central bank lowered interest rates for the first time in three years and projected the economy will grow at a slower pace this year and in 2020.
The Bank of Korea lowered its key interest rate by 25 basis points to 1.5%, citing weak activity both at home and in the global economy. It now expects the economy to grow by 2.2% this year, a downward revision to its April forecast of +2.5%. Consumer spending is predicted to be slower, while business investment as well as exports “are expected to be sluggish.”
Goods exports in particular are forecast to be “substantially” less than 2018, not just because of the knock-on effects from the U.S.-China trade dispute, but also export restrictions imposed by Japan earlier this month.
The government in Tokyo has tightened controls on the export of semiconductor materials to South Korea, such as photoresists and other sensitive chemicals used to produce semiconductors and display screens for smartphones and TVs. The move could hit the country’s tech industry and economy hard, as memory chips account for a major share of South Korea’s exports.
While the move could hurt conglomerates such as LG and Samsung, it could also have broader ramifications for the global economy such as price hikes and significant supply chain disruptions.