It was the week that the world had been waiting for. The long-awaited “phase one” trade deal between the US and China was signed on Wednesday. The deal falls far short of a comprehensive trade deal between the two largest economies, but is a welcome first step. As part of the agreement, China is required to increase purchases of US goods and services by $200bn over two years compared to 2017 levels. In return, the US will halve the tariffs it has imposed on $120bn of Chinese goods, although it will continue to levy tariffs on a further $250bn of Chinese imports.
Some analysts are sceptical that China will be able to meet these obligations, and it appears that the US is intent on keeping the status quo until after the after the presidential election in November. Under the terms of the agreement, tariffs will remain in place on Chinese goods for at least 10 months, at which point the US will review progress on its list of demands, including stronger measures to counter IP theft and an abolition of Chinese state subsidies for businesses. Put together, it appears unlikely that a comprehensive “Phase two” deal will be completed this year.
On Friday, China’s Bureau of Statistics said the Chinese economy grew by 6% in the year to December, the lowest rate since 1990 but in line with expectations. GDP growth hit 6.1% in the 2019 calendar year, while other data for December exceeded expectations; retail sales rose at an 8% annual rate (forecast 7.8%) with production up 6.9% (forecast 5.9%). Fixed asset investment was up 5.4% (forecast 5.2%), providing some momentum going in to 2020 and the trade truce.
Closer to home, alarm bells started ringing at the start of the week when the Office for National Statistics (ONS) revealed that the UK economy contracted in November, leading to its worst annual performance in nearly eight years. The reading from the ONS, showing economic activity shrank by -0.3% in November, was way below the flat reading of 0% figure that had been forecast. The details in the ONS release are concerning, with the manufacturing sector contracting by 1.7% and the key services sector, which accounts for around 80% of GDP, falling by 0.3% in November, more than offsetting the 1.9% growth in the construction sector. On a less volatile quarterly basis, the UK economy grew by 0.1% in the three months to November, but the trend is clearly downwards. Head of GDP at the ONS, Rob Kent-Smith, said: “Overall, the economy grew slightly in the latest three months, with growth in construction pulled back by weakening services and another lacklustre performance from manufacturing. “The UK economy grew slightly more strongly in September and October than was previously estimated, with later data painting a healthier picture.” However, he added: “Long term, the economy continues to slow, with growth in the economy compared with the same time last year at its lowest since the spring of 2012.”
The news immediately led to speculation of an imminent rate cut; money markets are now pricing in a 50% chance of a 0.25% rate reduction when the Bank of England’s Monetary Policy Committee meets on January 30th. The pound fell to below $1.30 against the US dollar for the first time this year on the news. The case for a rate cut was boosted on Wednesday when the latest inflation data showed that the cost of living rose by just 1.3% in the year to December, falling from 1.5% in the previous two months and further away from the Bank of England’s target rate of 2%. Taken together with the poor GDP data, markets are now pricing in a 100% probability of an interest-rate cut by August.
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