Thomas Gallatin / August 15, 2019

China, Tariffs, and Recession Fears Amid Strong Economy

Market volatility continues as markets rise under news of stronger-than-expected retail sales.

On Tuesday, the markets were up on the news that President Donald Trump’s third round of tariffs on $300 billion more of Chinese goods would be delayed until December. Added to this was the positive news of a restart of U.S.-China trade talks. However, the U.S. markets on Wednesday had one of their worst days in over a decade. Stocks fell 3% over bad economic news out of Germany and China, sparking fears of a possible global recession. Then came Thursday morning, with news of U.S. retail sales in July increasing well above economists’ expectations, once again propelling the markets skyward, relieving recession fears.

The truth of the matter is that market ups and downs are normal and to be expected. Furthermore, if properly managed, massive negative impacts on the economy can be avoided. A future recession is inevitable; the questions revolve around when it comes and how bad it will be. Interestingly, unlike the last two major recessions to hit the U.S., The Wall Street Journal notes that “with unemployment low, incomes rising and household saving rates higher than in the late 1990s or mid-2000s, many consumers are in better shape to weather a storm.”

Politically speaking, Democrats are hoping a recession comes sooner rather than later, as they know a strong economy makes the possibility of defeating Trump that much slimmer. Others have criticized Trump for walking a dangerous line with his tariff levies against China. As we have regularly noted, Beijing would love to wait Trump out with the hopes that he loses in 2020. The question is, can China afford to wait?

With the weeks-long Hong Kong protests — which are capturing more and more of the world’s attention — showing no signs of ending, coupled with China’s slowing economic growth, Beijing is clearly feeling the pressure. China’s communist government relies on a strong economy to placate the masses and dissuade civil unrest. If the Chinese economy further slows, Hong Kong’s freedom movement could easily spill out into the mainland.

Going forward, expect more interest-rate cuts from the Federal Reserve and the real possibility of Trump getting a trade deal worked out with China before the year is up.

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