According to the IMF, the trade war is hurting China. President Trump has echoed similar views several times.

Trade war hurting China

In a recent report, the IMF said that the trade war is hurting China. According to the IMF, “the intensification of trade tensions has inevitably affected the Chinese economy to an extent,” However, the IMF added that “the impact is manageable.” Notably, the IMF shared similar views in the past. Last month, the IMF lowered the global 2019 GDP forecast. While the IMF lowered China’s GDP forecast by 10 basis points, it increased the US GDP forecast to 2.6% from 2.3%. So far, US economic growth has been better-than-expected this year. The US GDP expanded at an annual pace of 3.1% in the first quarter. The advance estimate showed GDP growth of 2.1% in the second quarter. In both of the quarters, the US GDP growth beat analysts’ estimates by a wide margin.

Trump agrees with the IMF

In the past, President Trump said that US tariffs hurt China. He also said that companies left China due to the trade war. Last month, Nikkei reported that companies like Amazon (AMZN) and Microsoft (MSFT) plan to shift some of their supply lines from China. Several other economic indicators show that the trade war has a negative impact on China. President Trump said that China needs a trade deal with the US amid its slowdown. However, China said that the tariffs haven’t impacted its growth. China’s economy has been expanding within the range that its leadership set for this year.

Trade war hitting global growth

According to President Trump, higher interest rates and the US dollar pulled down US economic growth. However, manufacturing and corporate investments had a negative impact on the US economy. Manufacturing activity and corporate investments have stalled due to the trade war. Notably, the IMF said that the trade war hurt global growth. Last month, the IMF said that the global slowdown was “self-inflicted.” Fed Chair Jerome Powell thinks that the trade war is a risk for the US economy. While lowering rates last month, Powell said that trade uncertainty and the global slowdown were two of the reasons.

Currency manipulation

The US declared that China is a “currency manipulator.” The IMF endorsed President Trump’s views that the trade war impacted China. However, the IMF doesn’t agree with the US allegation that China manipulated the yuan. Bloomberg reported that IMF the mission chief for China, James Daniel, said on a conference call that the yuan was “broadly in line with fundamentals.” The US-China trade tensions have escalated in August. President Trump announced tariffs on the remaining Chinese goods. In retaliation, China stopped buying agricultural products from the US. The weakening yuan would add fuel to the trade war.

Markets

The US-China trade war has already hit global market sentiments. The SPDR S&P 500 ETF (SPY) has lost 2.0% this month. The iShares China Large-Cap ETF (FXI) has lost 5.7%. FXI is flat for the year. Last year, Chinese equity markets underperformed US equity markets. If stock markets are an indicator, the trade war seems to be hurting China more than the US. Last year, tax cuts boosted the US economy. So far, China has shied away from big bang fiscal measures.

Could trade war lead us to a recession?

Morgan Stanley expects a recession if the trade war escalates. In June, Jeffrey Gundlach had a 65% probability of a US recession within a year. The IMF also sees trade and Brexit uncertainty as downside risks to the global economy. The IMF expects a 3.2% GDP growth for 2019, which is the lowest level in a decade.

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