Sino-US tensions to weigh on global economic growth, Moody's says

Business | 14 May 2019 1:02 pm

Moody's Investors Service said escalating trade tensions between the U.S. and China will weigh on global economic growth, adding that the risk of a complete breakdown in trade talks has certainly increased.

On Friday, the U.S. administration increased tariffs on US$200 billion of Chinese imports, and China announced yesterday that it will increase tariffs on about US$60 billion of U.S. goods in retaliation on June 1.

The tariff increase is a significant setback in the trade negotiations the U.S. and China have engaged in during the past one and half years, which added to existing uncertainty around the global trading environment and came as growth in the global economy had appeared to be stabilizing, Moody's noted.

It expected the rise in tensions between the U.S. and China will contribute to a renewed slowdown in systemically important regions of the global economy, not only though the trade channel but also through the impact on sentiment and risk aversion.

"Global financial markets have been buoyed in recent months by the prospects of an end to monetary-policy tightening in the U.S. and optimism about a resolution of trade talks between the U.S. and China. An abrupt breakdown in trade talks, if that were to occur, will inject considerable policy uncertainty, increase risk aversion and lead to an abrupt repricing of risk assets globally. Tighter financial conditions will return and, notwithstanding the dovish policy stance of the U.S. Federal Reserve, will pose a negative confidence shock that drags down global growth," Moody's said.

Economic growth in both the U.S. and China will be hurt by the imposed tariffs and the tariffs will act as a tax on U.S. businesses and households, and temporarily raise inflation.

"In China, increased U.S. tariffs will have a significant negative effect on exports amid an already slowing economy. Further policy easing will mitigate only some of the impact, particularly on the outward-oriented private sector made up of small and medium-sized companies with limited shock-absorption capacity. And increased uncertainty and weaker business sentiment will hinder private investment decisions," Moody's said.

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