Trade War Takes Wind Out Of Central Bankers’ Sails

The trade war that is playing out on a global scale now is hitting business outlooks — and the worldview of central banks.

That downturn in sentiment comes in the wake of tariffs levied back and forth on a plethora of goods across nations, and with sabre-rattling now translating into volleys between the United States and China. The economic skirmishes between the two nations escalated as the U.S. said it would impose tariffs on another $200 billion of goods. And, as has widely reported, the U.S. has slapped duties on any number of allies, looking to lessen trade deficits.

Thus, the heads of several central banks — ranging from the Federal Reserve to the European Central Bank (ECB) and the Bank of Japan, as Reuters reported — are ratcheting down expectations for global economic performance.

In remarks from central bankers themselves, Chair of the Federal Reserve Jerome Powell noted, “Changes in trade policy could cause us to have to question the outlook.” The newswire said this was among Powell’s “strongest remarks” yet on the issue. He added, “For the first time, we are hearing [from business leaders] about decision to postpone investment, postpone hiring, postpone making decisions … If you ask, is it in the forecast yet, is it in the outlook, the answer is no. And you don’t see it in the performance of the economy.”

The impact could be sizable, as Deutsche Bank’s own analysis states. How sizable? The tariffs that target the added $200 billion on Chinese goods could hit the U.S. GDP growth rate by as much as 20 to 30 basis points. That would reduce estimated earnings of companies that reside in the broad equity index, the S&P 500, by at least 1 percent.

Separately, Berenberg economist Holger Schmieding lumped the damage on a broader scale, and stated that the trade wars would dampen each of the economies of the EU, U.S. and China by 10 to 20 basis points.

“Undermining the rules-based global trade order would sow serious uncertainty and raise transaction costs over time. In the long run, this could undo some of the gains from globalization over the last decades.”

The U.S. was not alone in its less-than-sanguine assessment. The head of the ECB, Mario Draghi, said the volleys on trade would have to be a part of economic outlook assessments going forward. Reuters quoted Draghi, saying the assessments are “not easy and it’s not yet time to see what the consequences on monetary policy of all this can be, but there’s no ground to be optimistic on that.”

The questions that loom large, beyond even those remarks, are what happens to the U.S. and Chinese consumers (engines of global growth), as they grapple with the impact of paying more for any number of finished items — as manufacturers must pass costs on somehow — and the easiest way to boost prices. Inflation hits growth, of course, and a hit to sentiment can have a long-standing ripple effect. As wallets close, business slows, and so does further investment in technology, innovation and hiring — and a vicious cycle may, in fact, back up the grim assessments being expressed by central bankers.