US-China tensions a strain on global economy, says Citi
Storm clouds are gathering over the global economy amid rising tensions between the world's two superpowers, tightening US interest rates, and a slowdown in investment in the Middle Kingdom.
Storm clouds are gathering over the global economy amid rising tensions between the world's two superpowers, tightening US interest rates, and a slowdown in investment in the Middle Kingdom.
And there may come a day where countries such as Australia must choose whether they're in the US or China camp, says Ebrahim Rahbari, Citi's head of global macroeconomics.
Rahbari told a Citi investment conference in Sydney today he was struck by an overwhelming sense of pessimism, saying the global economic outlook was gloomy.
"In general, I think we must recognise that at this stage the incoming news suggests that the global economy is slowing, global growth is slowing, and in particular the industrial and manufacturing side of the economy is slowing," he said.
Citi head of global macroeconomics Ebrahim Rahbari: 'In some shape or form we are late cycle'
"We're once again at a point where I think the global outlook looks somewhat gloomier and growth is getting less and less balanced."
Rahbari cited as key concerns the global economy being in what he sees as late cycle and record low investment growth in China.
"Part of the equation is that in some shape or form we are late cycle," he said, "and the relevant aspect of being late is rising real interest rates in the US and tightening monetary conditions globally.
"In addition, there are several other shocks, and at the heart of them is what's going on in China. We do think the slowdown of the investment sector in China, particularly around infrastructure, has been a big factor is slowing down the global economy."
One exception, however, is the US market, which according to Rahbari, shows no signs of a slowdown.
"The US economy is ‘booming’, and growth remains strong and broad-based," he said. "At this point, it's hard to spot any signs of weakness.
"And the secret to what's driving it – fiscal stimulus and energy prices are boosting US growth. Deregulation is also helping."
Rahbari says that principally this is good news, against the backdrop of a slowing global economy, but warns it could make life harder for the rest of the world, particularly emerging markets.
Trade war is only just beginning
On global trade, Rahbari insists that despite the Trump administration's eagerness to redress all aspects of the US trade, including with Europe, Canada and Mexico (NAFTA), that tensions have narrowed to US-China. And on this front, the trade war is only just beginning.
"US Vice-President Mike Pence's speech in Hong Kong earlier this month resonated strongly. He stressed that this isn't a short-term negotiation, or something that will be resolved by once the US mid-terms have passed," Rahbari said.
"The majority of the tariffs announcements have only been in affect for one month (or so), and it would be our expectation that the bulk of tariffs have not been applied."
"We're in early days … and the impact is likely to rise next year, with the effects felt much more strongly in now and in the first quarter next year."
But Rahbari doubts these issues are solely about trade. Citing a recent US strategy document, he says they are about US national security interests, challenges to global power structures, positioning and strategy.
"If we accept that US-China trade tensions go beyond trade, then I think the implication in the end could really be quite dramatic. Over time, we might see fairly tectonic shifts in the way that economies are positioned and the way that supply chains operate."
For Australia and the Asia-Pacific, these shifting global power structures as having deep, long-term implications and Rabhari warns countries may be forced to decide whether they back the US or China.
"For any country which has significant relations with China and the US, there might be a time where policy makers need to pick sides," he said.
"I know for a fact that the foreign policy apparatus in Australia is very aware of this issue and is trying to navigate it."
Rahbari points to El Salvador's decision to sever diplomatic ties with Taiwan – a territory which China claims as its own - to focus on "the one and only China". This decision riled the US and forced it to review security and aid packages.
"This crystallises what's in store for US-China relations, and diplomatic relationships globally."
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Emma Rapaport is a reporter with Morningstar Australia, based in Sydney.
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