- Donald Trump foresees a recession in China if it does not forge a trade deal with the US. He has also said his tariffs are driving China’s slowdown.
Yesterday, Trump tweeted, “’If they don’t get this Trade Deal with the U.S. done, China could have it first recession (or worse!) in years. There’s disinvestment in China right now. Also, the Fed is too tight (I agree).’ Steve Moore, Heritage Foundation.” On multiple occasions, Trump has said that US tariffs are hurting the Chinese economy. And in fact, the Chinese economy is slowing down. In the second quarter, the country’s GDP growth was at its slowest in 27 years.
Could China fall into a recession?
After China’s GDP growth fell to multiyear lows, Trump pushed it to enter into a trade deal with the US to avert the slowdown. However, China snubbed Trump’s comments. Foreign Ministry spokesman Geng Shuang referred to the country’s first-half economic growth as “not bad performance.” He added, “As for United States’ so-called ‘because China’s economy is slowing so China urgently hopes to reach an agreement with the U.S. side’, this is totally misleading.”
While China’s economic growth has slowed down, the economy is growing within its 2019 target of 6.0%–6.5%. Although retail sales, industrial production, and fixed asset investments were far worse than expected, recession looks out of sight for the economy—it’s still growing in excess of 6%.
US-China trade deal
Trump also tweeted, “we will soon be winning big on Trade, and everyone knows that, including China!” The US and China announced a trade war truce in July after Trump met with Chinese president Xi Jinping. However, it now looks like we’re back to where we were in May in terms of trade tensions. That month, Trump called off the truce, accusing China of reneging on its commitments.
Trump thinks the US economy is doing well
In another tweet, Trump said, “Walmart, a great indicator as to how the U.S. is doing, just released outstanding numbers. Our Country, unlike others, is doing great!” Walmart stock (WMT) jumped after the company reported strong earnings. The US economy is doing relatively well considering the global slowdown, which seems to be worsening in Europe and China. Some are even predicting a recession in Germany, Europe’s biggest economy. And while the US economy is doing well, growth has certainly slowed. The US economy expanded by 2.1% in the second quarter, compared with 3.1% in the first quarter. Although Trump seems to believe the economy is thriving under his watch, it may not be as strong as he thinks.
Analysts predict recession
Several analysts are predicting a recession if the trade war escalates. Morgan Stanley has said that the global economy could plunge into recession, and JPMorgan Chase has placed the odds of a recession at 40%, given the trade war. CNBC reports JPMorgan Chase economist and global economic research head Bruce Kasman said, “I think we have a heightened risk of recession. I think the reason is that we’re seeing the intensification of the big drag in the global economy this year: The falling business confidence related to geopolitical concerns, particularly trade conflicts.” The US economy can’t be totally immune to a global slowdown. Incidentally, Fed chair Jerome Powell cited global slowdown and trade tension risks when the Fed lowered rates last month.
Chinese equity markets have sagged this year. The iShares China Large-Cap ETF (FXI) has fallen 1.3% year-to-date. In contrast, the SPDR S&P 500 ETF (SPY) has risen almost 15.0%, and Alibaba (BABA) and JD.com (JD) have gained 21.8% and 44.1%, respectively. BABA and JD are benefiting from China’s rising e-commerce sales.