Financial markets are signalling serious uncertainty about the outlook for the US economy, with recession now seen as a risk.
Much of this nervousness is due to the building trade war between the US and China and concerns that this is starting to have a wider economic impact beyond the two countries involved.
Given that we are talking about the world's two biggest economies, this is perhaps no surprise, but whether it gives US president Donald Trump pause for thought as he considers what to do next is another question.
A commitment to clamp down on alleged unfair trade practices by China was part of Trump’s election campaign, but tensions have risen over the past year in a series of tit-for-tat moves involving the imposition of tariffs and other measures.
However, Trump’s announcement earlier this month that he would impose new tariffs of 10 per cent on a further $300 billion of Chinese imports from September 1st has brought tensions to a new level. Following this, China allowed its currency to devalue slightly on the markets during the week, leading to accusations from Trump that it was manipulating its currency.The ensuing war of words has deepened the conflict and even raised fears of efforts by both sides to devalue their currency to get competitive advantage.
The signs are that this building trade war is already having an economic impact, not only in the US and China, but also more widely.
The complex web of international linkages in manufacturing, services and finance spreads both positive and negative economic impacts widely and quickly. Now the talk is that the Federal Reserve Board, the US central bank, may cut interest rates for a second time in September, while the European Central Bank could also ease policy.
Tariffs may be politically popular for a period, and may protect certain sectors, but imposed for any length of time they cause significant damage. Trump’s decisions have already pushed up prices for US consumers and for businesses buying inports from China, while also having a wider impact on confidence. By doubling down and promising more tariffs, he is signalling that he will take the risk of a greater economic hit, in the hope of prising some concessions from China.
Having largely ignored this risk since Trump’s election, investors are now starting to worry. It is debatable whether a US recession is on the way, but the economy is slowing and risks are increasing. With Brexit already on the agenda, this is another danger facing the Irish economy, albeit one which would have a less dramatic impact.
It is economic folly to go down the road of tariffs – also a key issue in Brexit – and worse if the world’s two biggest economies end up in a kind of wider economic war. Yet unfortunately– as with Brexit – politics may drive an economically damaging outcome.