President Trump announced on Thursday that he will impose tariffs on a further $300billion of Chinese imports. In a dramatic escalation of the trade war, the US will impose the tariff, starting at 10% from September 1. However, in a series of tweets, President Trump said the tariff could rise to 25% or higher. The move is in addition to the 25% tariff already in place on $250billion of Chinese goods.
The move means that all Chinese exports to the US will soon be covered by a tariff of one sort or another and, crucially, this latest move covers a range of consumer goods not included in previous tariffs. US consumers are therefore more likely to feel the impacts of these tariffs than those already in place. The move came just a day after the US Federal Re-serve had cut US interest rates by 0.25% for the first time since the financial crisis to help protect the economy a slow-down in global trade. The aggressive move by President Trump will ramp up the pressure on the Federal Reserve, and other central banks, to cut rates again in the near future.
Back in the UK, there were mixed messages on Brexit. While Michael Gove wrote in the Sunday Times last weekend that the UK is operating on the “assumption” of a no-deal Brexit, prime minister Boris Johnson later chipped in to describe the chances of leaving with no deal as “vanishingly small”. The pro-Brexit ‘war cabinet’ he has assembled, however, along with the war chest of several billion pounds to prepare for a no deal exit, suggests otherwise, and markets are increas-ingly pricing in a no-deal departure. The Bank of England kept interest rates on hold this week and downgraded its out-look for UK growth. It now says there is a 30% chance of a UK recession in the first quarter of 2020. Markets now put the chance of a rate cut by December at almost 60%, as traders try to assess the reaction of the Bank of England to the range of possible Brexit scenarios. They appear to have deemed a cut most likely but analysts say that if the UK leaves in a chaotic no deal scenario, it will require more than one 0.25% cut to mitigate the damage. All this is taking its toll on the pound. Its value has plummeted to its worst level in nearly three years against a basket of major currencies. It has fallen to $1.21 against the dollar and to just 1.09 against the euro. Some analysts predict there could be far worse to come, and it could drop to just $1.15 or lower.
In other news, UK consumer confidence improved in July, according to the closely-watched GfK Consumer Confidence index. But more bad news emerged for the British economy on Thursday as a survey of the manufacturing sector showed the worst slowdown in production in seven years. The IHS Markit Purchasing Managers’ Index produced a read-ing of 48 in July: any reading below 50 means the sector is contracting. “July saw the UK manufacturing sector suffocat-ing under the chokehold of slower global economic growth, political uncertainty and the unwinding of earlier Brexit stockpiling activity”, said Rob Dobson, director at IHS Markit. He added that the escalating trade war between the US and China makes a pickup in activity unlikely in the near future.
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