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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

US trade gap hits 10-year high as Trump's trade war backfires - as it happened

President Donald Trump at the White House in Washington, D.C.
President Donald Trump at the White House in Washington, D.C. Photograph: UPI/Barcroft Images

Finally, the US stick market has closed in the red.

The S&P 500 lost 0.6%, the Dow finished 0,5% lower and the Nasdaq shed almost 1%

Matthew GrenierSpecialist Matthew Grenier works on the floor of the New York Stock Exchange.

The trade figures haven’t brought much cheer to Wall Street today, where the Dow is down 149 points or 0.6% at 25,656.

The slightly-weaker-than-expected ADP jobs report has dampened the mood, while investors are still looking for progress on the US-China trade talks.

Marketwatch’s Paul Brandus agrees that Donald Trump has pushed up the US trade gap, by making the deficit larger.

He says Trump’s tax cut forced the US to borrow more, with predictable (and indeed predicted) consequences...

Here’s a flavour:

“If foreigners buy more government bonds (which is how the Treasury borrows money), that causes an appreciation of the exchange rate,” points out Sherman Robinson, a senior fellow at the Peterson Institute for International Economics in Washington. “This makes our exports more expensive abroad and imports cheaper to U.S. citizens.”

Which means foreigners buy fewer of our exports and we buy more of their imports. It’s that simple.

Thus the law of unintended consequences: Trump said his policies would curb both the debt and the trade deficit—but he has only made both worse.

More here.

A reminder of the key points in the US trade data:

Full story

Here’s our news story on the US trade figures.

Economist Jeoff Hall points out that December’s US-China trade gap was a record - and much, much wider than at the end of Barack Obama’s presidency.

More reaction to the US trade figures:

America’s widening trade gap is likely to drag economic growth down in 2019, predicts Andrew Hunter of Capital Economics.

He writes:

The widening in the trade deficit to a 10-year high of $59.8bn in December, from $50.3bn, confirms that net trade was a drag on GDP growth in fourth quarter, and we expect that drag to intensify in the first quarter....

Import growth is on course to pick up, but the decline in December will hold back real exports, particularly with global demand continuing to weaken. With real consumption growth also set to slow following weakness in December, the upshot is that GDP growth remains on course to slow to only around 1.5% annualised in the first quarter.

Last year Donald Trump imposed tariffs on $250bn of Chinese imports in an attempt to close the US trade gap. He also brought in levies on steel and aluminium from around the world, plus tariffs on some goods from Europe.

So the $621bn question is... why did the trade deficit get bigger?!

One key factor is that Trump also stimulated the US economy by cutting taxes, giving consumers and businesses more money to spend.

Inevitably, some of that money went on imports from abroad - especially as the US dollar has strengthened, giving Americans more purchasing power. That creates a wider trade gap.

That strong dollar also makes it harder for US companies to sell goods abroad.

Another factor: it takes time to construct factories so that goods made in China can be made in the US instead. In the short term, US companies have had to swallow tariffs on Chinese imports, rather than buy domestically instead.

Gregory Daco, chief economist at Oxford Economics, tweets that protectionism isn’t the answer.

Updated

Bloomberg’s Shawn Donnan has points out that America’s services surplus with the rest of the world grew last year (but not enough to keep up with the rising goods deficit).

CNN’s Christine Romans agrees the White House won’t be happy with these trade stats:

President Trump may regret tweeting last year that “trade wars are good, and easy to win”.

The Washington Post says today’s US trade figures show that Donald Trump’s trade policies aren’t helping the US economy.

They also point out that the trade in goods deficit (ignoring services) has hit a record high.

US posted record-breaking $891.2 billion merchandise trade deficit in 2018, despite Trump’s ‘America First’ policies

President Trump’s tariffs and tough policies have failed to shrink a trade gap that he argues represents a massive transfer of wealth from Americans to foreigners. He begins his reelection drive with a core campaign promise unfulfilled — and with a recent flurry of economic research showing that his embrace of tariffs is damaging the U.S. economy.

Updated

US trade gap surges, in blow to Trump

Newsflash: the US trade deficit with the rest of the world has soared to its highest level since 2008, in a blow to Donald Trump’s economic plans.

The gap between US imports and exports soared in 2018 to $621bn, up from $552.3bn in 2017.

In December alone, the US trade deficit jumped by 18.8%, to $59.8bn, as exports fell and imports rose.

This shows that Trump’s trade dispute are not helping America rebalance its trade position.

The president will be particularly unhappy to learn that the trade gap with China has surged to a record high.

The US-China trade deficit rose by 11% to $419.2bn in 2018 - a year in which both sides slapped tariffs on each others exports.

Newsflash: US companies created 183,000 new jobs in February, according to the ADP monthly survey of private sector employment.

That’s below the 190,000 which economists expected. It may mean that Friday’s non-farm payroll (NFP, the broader measure of US employment) will be a bit weaker than expected.

But.... January’s ADP reading has been revised HUGELY higher, from 213,000 to 300,000.

That’s effectively catches up with last month’s NFP, which smashed forecasts with a 304,000 increase in employment.

Cunliffe: There'll be another debt crisis....

The Northwest Palace of the Assyrian city of Nimrud, built in the 9th century BC. Debt has been with us just as long.
The Northwest Palace of the Assyrian city of Nimrud, built in the 9th century BC. Debt has been with us just as long. Photograph: Heritage Images/Getty Images

Most of John Cunliffe’s speech is devoted to the issue of what might cause the next financial crisis.

In Cunliffe’s view - that crisis will probably be caused by banks overextending credit, fuelling an asset boom that eventually bursts, leaving to losses as asset prices fall.

Taking a historical, Cunliffe points out that debt which bears interest, or credit, has a long and not very proud record of growing faster than economic growth can justify.

Citing the creation of debt in bronze age Mesopotamia, Cunliffe says:

Debt contracts are essentially claims on the future and the future, when it arrives, does not always honour them.....

Later in the speech, he predicts

I expect the next ‘crisis’ to involve some form of over-valuation of assets, over-extension of credit and losses when this corrects.

Early near eastern societies realised the dangers of excessive debt, which is why they operated debt amnesties and Jubilee mechanisms. But even then, financial crises would flare up - famously under Roman emperor Tiberius.

Sir John romps through the history books, saying:

The re-imposition of long forgotten constraints on the ownership of land seems to have triggered the great financial crisis of AD 33, leading to fire-sales and a crash in land values, default of leveraged landowners and a credit crunch throughout the Roman Empire.

The default by King Edward III of England on the massive amounts he had borrowed from the leading Florentine banking families contributed – along with a bank run by the Neapolitan nobility and the bankruptcy of the Florentine Commune – to the Florentine credit crunch of the 1340s. Edward borrowed to finance what became the Hundred Years War and defaulted when it became apparent that he could not win the war and capture the revenues he needed to repay the debt.

So, what keeps Sir Jon awake at night? He says there are several causes, but a debt crisis looms largest over the Cunliffe pillow...

I might have talked today about the rapid and extensive evolution of market-based finance in recent years such that it now accounts for nearly half of the international financial system. It carries different and perhaps lesser risks than the banking system. But we know much less about how it might respond in stress and have fewer policy tools to address vulnerabilities. I might equally have talked about cyber risk or the impact of a credit correction in China. It is of course the job of policymakers like me to assess and address potential vulnerabilities like these, and we report on them regularly.

But to me the bigger point is that at some point, in some way a correction will be triggered when the future, for whatever reason, does not match up to expectations of those who have lent and borrowed and bought assets. Our fundamental task is to ensure that when that happens, the correction can be absorbed and does not lead to a ‘great crisis’, as it did 10 years ago, with all the social and economic loss that entails.

Updated

BoE's Cunliffe: Extremely disorderly Brexit is top economic risk

Deputy Governor of the Bank of England Jon Cunliffe.
Deputy Governor of the Bank of England Jon Cunliffe. Photograph: Jonathan Brady/AFP/Getty Images

Sir Jon Cunliffe, Deputy Governor of the Bank of England, is giving a speech at the London School of Economics now.

In the speech, Cunliffe warns that Britain’s departure from the EU poses the biggest threat to UK financial stability, saying:

The most prominent short-term risk facing the UK today of some financial sector correction is the possibility of an extremely disorderly Brexit.

Such an outcome may not be what we expect to happen or what is likely to happen but rather the worst possible case. The risk has not been generated by the financial sector. But, if it occurred, it would almost certainly lead to a correction in UK asset prices and losses for UK banks.

[A disorderly Brexit means Britain suddenly leaves the EU without a transition deal, and with businesses and government departments unprepared.]

Cunliffe adds that the City is ready for whatever Brexit outcome arises... but that preparedness doesn’t mean it would go smoothly.

He says:

In short we have acted to make sure the system is resilient to a worst case major economic shock from Brexit. That does not mean losses would be avoided.

Or that it would be without volatility: financial stability does not mean market stability. But it does mean that the financial system would not contribute to and amplify the shock, and would be able to continue to provide critical economic services to the economy.

Doubtless the OECD would agree, having issued its own No-Brexit warning this morning (details here).

But don’t forget, yesterday, BoE governor Mark Carney told the House of Lords that a no-deal Brexit would be less harmful than the Bank previously forecast, thanks to recent contingency planning.

Updated

It’s been a fairly dull morning in the financial markets.

Australia’s worryingly weak growth figures dampened the mood, and the OECD’s downgrades added more gloom.

The German and French stock markets have both dipped. Britain’s FTSE 100 is up, but that’s partly due to the pound being hit by Brexit worries.

European stock markets
European stock markets Photograph: MeetingRoom/Refinitiv

Connor Campbell of SpreadEx says:

The OECD became the latest institution to ring the Brexit alarm bells. It stated that the UK economy is expected to grow 0.8% in 2019, just shy of half the already paltry 1.4% posted last year. And that’s with a deal; without and the OECD warned the UK could plunge into a recession that would ‘generate sizeable negative spillovers on growth in other countries’.

Britain wasn’t the only nation dealt a worrying report card by the OECD. For 2019, China is now expected to see GDP of 6.2%, 0.1% lower than November’s forecasts and a significant drop from 2018’s 6.6%; the US is estimated at 2.6% against last year’s 2.8%. As for the Eurozone as a whole, the region is forecast to grow by a measly 1%, mainly due to the faltering economies of Germany and Italy.

OECD: No-deal Brexit means a recession

The OECD has a stark warning for the UK too -- growth in 2019 is likely to be the weakest since the financial crisis.

It now expects the UK will only grow by 0.8% this year, down from 1.4% in 2018. Today’s report shows how growth has lagged behind other G7 members since the 2016 referendum, as companies have refused to invest.

OECD’s economic outlook for the UK
OECD’s economic outlook for the UK Photograph: OECD

But... things could be a lot worse if Britain crashes out of the EU without a deal. The OECD fears this would trigger a full-blown recession in the UK, and spillover problems in other economies.

“The costs would also be magnified if this also induced a further decline in business and financial market confidence and disruptions in financial markets.

In such a scenario, the likely near-term recession in the United Kingdom would generate sizeable negative spillovers on growth in other countries.”

Here’s the full story:

There’s no cheer for Italy or Turkey in today’s report -- the OECD thinks their economies will shrink this year.

Here’s a full list of the OECD’s new growth forecasts, and the downgrades compared with November’s forecasts:

OECD growth charts

Here’s the key messages from the OECD today (you can see its presentation here).

OECD economic outlook
OECD economic outlook Photograph: OECD
OECD economic outlook
OECD economic outlook Photograph: OECD

The OECD’s top economist, Laurence Boone, has a sharp warning for policymakers - they needs to do more to prevent the slowdown turning into a downturn.

She says:

“The global economy is facing increasingly serious headwinds.

A sharper slowdown in any of the major regions could derail activity worldwide, especially if it spills over to financial markets. Governments should intensify multilateral dialogue to limit risks and coordinate policy actions to avoid a further downturn.”

Ouch! The OECD has more than halved its forecast for Germany’s growth in 2019, from 1.6% to just 0.7%.

That would be a real blow to Germany, which shrank slightly in the second half of 2018.

The OECD says it has slashed its growth forecasts due to the slowdown in Europe, and the risks from China.

It warns:

The global economy is slowing and major risks persist, with growth weakening much more than expected in Europe.

Economic prospects are now weaker in nearly all G20 countries than previously anticipated. Vulnerabilities stemming from China and the weakening European economy, combined with a slowdown in trade and global manufacturing, high policy uncertainty and risks in financial markets, could undermine strong and sustainable medium-term growth worldwide.

OECD cuts growth forecasts

NEWSFLASH: The OECD thinktank has slashed its growth forecasts, warning that Brexit uncertainty and trade disputes are hurting the global economy.

The OECD now expects the world economy will expand by 3.3% in 2019, down from 3.5% previously. For 2020, it expects growth of 3.4%, down from 3.6% before.

It has downgraded its view of the US, the UK, the eurozone, China, Australia and Canada, plus a swath of emerging market countries.

OECD growth forecasts
OECD growth forecasts Photograph: OECD

More to follow!

In the financial markets, the pound is dipping as traders fret about Brexit.

The UK’s efforts to win new concessions from Brussels over the Irish Backstop seem to be making little progress, despite deploying the Attorney General’s vocal charms this week.

This has sent sterling down 0.2% to $1.315.

Goldman Sachs employees will be chucking out their ties and high heels and ordering new t-shirts and trainers today, after the Wall Street bank tore up its dress code.

The firm is moving to a “flexible dress code”, recognising the fact that workplaces everywhere are becoming more casual.

In a company-wide memo, staff were told:

“Of course, casual dress is not appropriate every day and for every interaction and we trust you will consistently exercise good judgment in this regard.

“All of us know what is and is not appropriate for the workplace.”

Staff may be relieved to escape the tyranny of starched shirts and designer jacket-and-skirt combos. But they now face a new challenge - what exactly is ‘appropriate’ for the day’s business?

Obviously no-one wears bowler hats in the City any more, and the tech boom has created a new wave of millionaires who take dressing down to new heights. It’s not what you wear, but what you can do, right?

Even so, Goldman Sachs staff are being advised to leave the extra-tight t-shirts at home....

More here:

Carlos Ghosn released

A masked man, center, believed to be former Nissan Chairman Carlos Ghosn, leaves Tokyo’s Detention Center in Tokyo, Wednesday, March 6, 2019. Ghosn was released Wednesday after putting up 1 billion yen ($8.9 million) in bail.(Kyodo News via AP)
A masked man, center, believed to be former Nissan Chairman Carlos Ghosn, leaving Tokyo’s Detention Center. Photograph: 164520+0900/AP

After nearly four months of imprisonment, Carlos Ghosn has finally been released from Tokyo’s detention centre.

Ghosn tasted freedom (through a face mask) after his new lawyer persuaded the court that the former Nissan boss wasn’t a flight risk. He still faces charges of financial misconduct, but has

My colleague Justin McCurry reports:

Ghosn, whose prolonged custody has sparked international criticism of Japan’s “hostage justice”, was driven past hundreds of reporters, photographers and TV crews on Wednesday afternoon, a day after a court in Tokyo granted him bail.

Live TV footage showed Ghosn, dressed in a dark blue uniform, light blue baseball cap and surgical face mask, being escorted out of Tokyo detention centre by several officials and taken to a silver van. Reports said that a a car from the French embassy had arrived at the detention centre, as media helicopters swirled overhead.

The Frenchman, who was born in Brazil and is of Lebanese descent, is thought to have been driven straight to his residence in the Japanese capital where he must live under strict bail conditions until his trial begins, possibly not for several months.

Those bail conditions include cameras outside his home, restrictions on mobile phone use, and no internet access. Strict indeed. But after reportedly losing 10kg on a diet of rice, Ghosn must still be pleased to put the detention centre behind him....

A masked man, center, believed to be former Nissan Chairman Carlos Ghosn, leaving Tokyo’s Detention Center.
A masked man, center, believed to be former Nissan Chairman Carlos Ghosn, leaving Tokyo’s Detention Center. Photograph: KYODO/Reuters

Adam Cole of Royal Bank of Canada also believes Australia’s central bank could be forced to cut interest rates soon:

He told clients:

Australia’s Q4 GDP rose 0.2% q/q – below consensus (0.3%) and well below the RBA’s expectation of around 0.6%.

The key domestic demand components were all weak and our economists suggest the door for rate cuts has opened further and the downside risks to their flat profile have increased.

Neil Wilson of Markets.com says Australia’s slowdown is a worrying sign:

China’s softness is a key factor and the weaker outlook for the world’s second biggest economy is a long-term drag for Australia, never mind what happens on trade with the US.

If you look at the global economic outlook, the Aussie is a proxy for that bullish sentiment and the news and date are we seeing is not terribly rosy.

These growth figures are a body blow to Australia’s centre-right government, explains my colleague Amy Remeikis:

Scott Morrison has increasingly staked the Coalition’s election chances on the economy, warning repeatedly “the economy will be weaker under Labor”. This week the prime minister again sounded the alarm that voters could see a return to 1991 recession conditions under a Shorten government.

Morrison honed his message in a speech to the Australian Financial Review Business Summit on Tuesday, shaping the election as a contest between “enterprise and envy”.

But Australian Bureau of Statistics data released on Wednesday show the economy grew by 2.3% over the year, and just 0.2% for the December quarter, short of the Reserve Bank forecast of 0.6% and market expectations.

The Australian dollar has fallen faster than England wickets on a bad day at the Gabba, hitting a four-month low.

With growth so weak in the last quarter, traders are calculating that Australia’s central bank must be more cautious. It could even cut interest rates to help the economy.

Australian GDP
Australian GDP Photograph: Bloomberg TV

Jasper Lawler of London Capital Group says:

The Aussie dollar dropped to a 4-month low of 0.7028. The Aussie dollar could see further downside.

Even though the Reserve Bank of Australia continue to put on a brave face, the economic backdrop remains uncertain and data is tilting to the weakside, boosting speculation of a rate cut from the central bank.

Updated

Australia’s growth figures are even worse if you adjust for population changes.

On a per-capita basis, Australia’s GDP has actually shrunk for the last six months, which puts the country into a ‘per capita recession’.

That’s because the population grew by 0.4% during the quarter, while GDP only rose by 0.2%.

That doesn’t mean that recent migration is bad for the economy, of course -- quite the reverse if anything! But it may show that the underlying picture is weaker than the headline numbers show.

Updated

Australian slowdown is latest blow to global economy

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The global slowdown has claimed another victim. Australia - for so long one of the bright sparks in the world economy - has suffered a sharp slowdown.

Official figures show Australia’s economy only expanded by 0.2% in the final three months of 2018, much slower than the 0.6% which economists expected.

That follows lacklustre growth of 0.3% in July-September, meaning Australia’s economy weakened in the second half of last year.

Given Australia’s close links to China’s economy (through commodities trading) it’s a clear sign that the Chinese slowdown - and the trade war with the US - is sending dangerous ripples through the global economy.

And with China cutting its 2019 growth target yesterday, it’s becoming clear that the slowdown could last for a while.

Australian government spending and household consumption added some growth, while investment dropped.

On an annual basis, Australia’s economy only grew by 2.3% in the last quarter - the lowest since mid-2017.

Economists say the figures are a worry.

As Callam Pickering, economist at jobs site Indeed, put it:

“Good news was hard to find in the latest assessment of the Australian economy.

“Households are holding up okay despite lacklustre wage growth, although the key question is how long can that persist?”

Also coming up today

The OECD think tank issues its latest assessment of the world economy today, which may show the impact of trade war concerns and Brexit on growth.

We also get new US trade figures, plus the monthly ADP survey of private sector job creation, which will be closely scrutinised ahead of Friday’s Non-Farm Payroll report.

The agenda

  • 10am: OECD releases its interim economic outlook
  • 1.15pm GMT: ADP report on US private sector employment in February
  • 1.30pm GMT: US trade balance for December
  • 3pm GMT: Bank of Canada interest rate decision

Updated

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