What even is good economic news anymore?
The trade war is making it hard to absorb positive messages
CHRISTOPHER Waller, a respected governor of the Federal Reserve, brought what would normally pass for glad tidings to an influential Asian audience this week. Whether people were in the mood to receive positive messages was another thing entirely.
It’s not clear anymore what favourable developments look like. Inflation is receding and, with a bit of luck, the Fed should be able to cut its main interest rate a few times this year, Waller told the conference organised by the Bank of Korea (BOK). What about President Donald Trump’s tariffs? He’ll try to look through any short-term price spikes that flow from the levies. Assuming employment holds up, rate reductions would be “good news”, Waller added.
A poor outcome, presumably, would be one where easing is required to counter tanking growth. Last Friday, figures showed the Fed’s preferred gauge of inflation was a whisker above the central bank’s 2 per cent target.
Don’t expect the Fed to be exultant, but that’s a pretty solid performance compared with some parts of Asia. In China, deflation is the chief domestic danger. The latest Bloomberg poll of analysts forecasts that consumer prices will increase by just 0.3 per cent this year after a soft 2024. As much as the Fed fumbled the post-pandemic surge, things are much better now. The People’s Bank of China might privately wish to have America’s problems. Trump’s broadsides tend to obscure President Xi Jinping’s home-grown difficulties.
Waller was in one sense sticking to the script: The Fed began the year tipping a couple of reductions. That was before the tariffs, and threats against Chair Jerome Powell from the White House, threw doubt on the timing and magnitude of the next move. Some economists envisage a scenario where there are no cuts, and a more extreme version entertains the idea of hikes. So it’s a relief to hear someone of Waller’s stature continue to keep cuts in play. That his remarks were noteworthy – and failed to move markets much – tells us how distorted our sense of good and bad news has become.
Dim prospects
The question now appears to be: How less bad are things? When the US and China agreed to a 90-day truce in the trade tussle last month, duties were pared from astronomical levels. Markets surged and there were hopes for an accord with staying power. That’s understandable, but what got lost in the initial euphoria was that the pause still left levies much higher than before Trump was sworn in on Jan 20. Tariffs on most Chinese imports would be reduced to 30 per cent for a time to allow for talks. China’s penalties on US products would slip to 10 per cent. With Beijing and Washington now charging that each side violated the peace, prospects for a meaningful deal have dimmed.
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It’s hard to find much positive in the trade war. The reprieve can best be described as a least-worse outcome – while it sticks. The clouds over the global economy are no less real. For the US, chances of a recession remain uncomfortably high. Gross domestic product in China will probably increase 4.5 per cent this year, based on the Bloomberg survey. While that might seem not so bad in the event exporters aren’t able to access the American market, it would be down from 5 per cent, which was a stretch. A private survey released on Tuesday (Jun 3) showed manufacturing slumped in May.
Consequently, things are dour all round. The International Monetary Fund recently made sharp reductions in its forecasts, predicting the global expansion would slow to 2.8 per cent this year, down from a January estimate of 3.3 per cent. While not catastrophic, that would be one of the most disappointing performances since 2009, when output recorded a rare decline, thanks to the subprime meltdown.
Waller’s hosts are experiencing difficult times. Confidence in Korea was already shaken by a former president’s failed attempt to impose martial law; voters elected a new leader on Tuesday (Jun 3). Tariffs have put Seoul in an even less desirable place. The Bank of Korea has been cutting rates and marking down its assessment of the economy’s performance. GDP contracted in the first quarter compared with the prior three months, when it notched a mere 0.1 per cent expansion. Industrial production unexpectedly fell in April. As a key exporter and vital link in technology supply chains, Korea is a kind of live experiment in the trade conflict.
Learning to adapt
“Many businessmen here also say 10 per cent is manageable,” BOK governor Rhee Chang-yong said, while flagging the importance of Trump’s non-reciprocal levies. If you ran the prospect of a 10 per cent tariff past executives a few years ago, they would have been aghast.
In a global economy that’s at the whim of great-power politics, there’s always a new benchmark. We will learn to adapt, but not pop the champagne.
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