Aftershocks from an EU Retaliation Could Send US into Recession

The US trade in goods and services figures for August show that the US goods and services deficit increased slightly to $54.9 billion in August, from $54 billion in July, and the trade deficit with China fell to $28.9 billion, from $29.6 billion in July.

Celine Hartmanshenn, Global Head of Credit from Stenn Group, an international provider of trade finance, provides her thoughts on the deficit fall.

The trade gap between China and the US is shrinking, reflecting the overall softening of global trade volumes and hinting at the movement of supply chains out of China.

US macro indicators are mixed. Unemployment remains low and prices are in check. But consumer and business spending has cooled, manufacturing output is at its lowest level in a decade, and the services sector – which accounts for 80% of economic activity – is slowing down. The lingering uncertainty stemming from the trade war and sagging global economy has caused the outlook for 2020 to dim, with the expectation of the US limping along at 1-2% GDP growth. It’s not an outright recession, but it’s certainly not a boom either.

There’s no denying that the US-China trade war is a drag on the US economy. The disruption to supply chains is expensive for businesses, the tariffs now cover a wide range of goods, and because financial markets can’t quickly adjust, they are more volatile.

So, what’s the solution? Certainly not a tariff war with the EU. The US will implement its first tariffs on aircraft and agricultural goods in 2 weeks. The EU is likely to retaliate. The aftershocks could easily tip the US into recession.

The world will be watching this month as China and the US go back to the negotiating table. Whether they like it or not, these two economies are interconnected. China is dealing with massive overcapacity, high debt levels and a need for US dollars. And the US relies on China pumping these dollars back into the US to fund its debt.

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