Global Macro Trends
US-China trade war de-escalation brings US’s fiscal deficit concerns back into the forefront
The temporary truce in the US-China trade war and the prospect of reaching an agreement through negotiations is undoubtedly a significant positive development. However, given the geopolitical rivalry between the two countries, it is highly likely that tensions will continue in various sectors, with phases of easing and escalation. Consequently, many foreign companies operating within China are already exploring ways and new locations for partial relocation, laying the groundwork for the creation of new production centers and the redesign of the geopolitical map of the global supply chain. The question, of course, is the extent to which international production can economically disengage from China and how quickly this can occur.
In the US, trade policy developments caused high uncertainty and negatively impacted economic activity in the first quarter. On a quarterly annualized basis, real GDP decreased by 0.3% as per the advance estimate (Q4 2024: 2.4%), mainly attributed to a substantial rise in imports. Overall, the growth momentum appears more subdued compared to the beginning of the year, as most leading indicators are trending downward, future inflation expectations have risen significantly, and the strained fiscal situation necessitates prudent economic policies. Overall inflation in April slowed, nearing the Fed's target, while the labor market remains strong.
In the Eurozone, on the other hand, the growth rate in the first quarter surprised positively as it increased to 0.3% on a quarterly basis (fourth quarter of 2024: 0.2%). However, it remains relatively low. Inflation remains relatively close to the ECB's target, allowing potential rate cuts, while the labor market remains strong. Of course, challenges persist as highlighted by the progress of key leading indicators (business and consumer confidence), as well as the necessity of securing an acceptable trade agreement with the United States. Furthermore, there is a high likelihood that the "lost" exports from the US market may be redirected to the European market, intensifying competition and narrowing profit margins for companies.
Recent data from China indicate sustained robust growth, albeit at a somewhat moderated pace. Nevertheless, the imposition of increased tariffs by the United States, even if relatively mild, is expected to adversely impact China's growth momentum. Redirecting some exports from the United States to other markets is not an easy task, and domestic demand does not appear sufficient to absorb this redirected supply.