Weekly economic briefing: G20 Summit – US offers China a 90-day truce

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

G20 Summit: US offers China a 90-day truce

The ongoing tensions between the US and China on trade made last weekend’s G20 meeting in Buenos Aires, often seen as merely a world-leader talkfest, of real importance. Two weeks ago, the US and China failed to find common ground on their trade disputes at the APEC summit in Port Moresby, leading to an unprecedented failure to agree on a final communique. In the lead-up to the G20 meeting, US President Trump reiterated his threat to increase tariffs on Chinese exports from 1 January next year. The stakes of this year’s G20 were therefore high.

Thankfully, progress was made. President Trump and Chinese President Xi met over dinner last Saturday night at what the US reports was, for both leaders, a ‘highly successful meeting’.

Yet the US and Chinese accounts of what was agreed are somewhat different, making it unclear just how aligned the two countries now are. The US claims that China agreed both to increase imports from the US, to reduce the US’s trade deficit with China, as well as to address the long-standing concerns that the US has had regarding China’s trade and economic policies (which began well before President Trump was elected). China’s official statement was vague about how much it will increase imports from the US, and vaguer still about what policy changes it will make. Instead, China’s statement emphasises the virtue of cooperation between the ‘two major powers’.

On the trade imbalance, the US statement reads that China agreed ‘to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries. China has agreed to start purchasing agricultural product from our farmers immediately.’ In contrast, China says it ‘is willing to expand imports according to the needs of the domestic market and the people … and gradually ease the trade imbalance’.

On the US’s longstanding bug-bears with China’s policies, the US says the two leaders ‘have agreed to immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture’. China says, less specifically, that the two sides have agreed to open up their markets to each other and gradually resolve the legitimate concerns of the US.

The agreement really amounts to a 90-day cease-fire on more US tariffs on Chinese exports, but the US threat remains firmly in place. If the two countries don’t reach agreement on those policy areas of US concern after 90 days, the US says it will press ahead and raise its current tariffs on US$200 billion worth of Chinese exports from 10% to 25%. No mention was made of President Trump’s previous threat to add tariffs of between 10% and 25% on another US$267 billion of Chinese exports to the US; presumably, though, this is still in play.

A New Year’s Day escalation in trade tensions has therefore been averted, and that is good news for global trade. But the world economy is not out of the woods yet – a sharp escalation in trade barriers between the world’s two largest economies is still a very real possibility. For Australia and most other countries whose economies would be caught in the crossfire, that would be very unwelcome.

For more information on the Australian brief, please contact co-authors David Rumbens and Craig Michaels.

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

  • The global recovery since the financial crisis has not been vigorous. But it has been running for 11 years and it has absorbed a lot of workers. Globally a record 3.3 billion people are in work, 14% more than ten years ago.
  • Some economies are running out of workers. In the US, Japan and Germany the unemployment rate is at the lowest level in more than quarter of a century. UK unemployment, at 4.0%, has hit a 43-year low. Agreed, in France, Italy and Spain unemployment, though declining, is still relatively elevated. But it’s a different story in most of Northern and Central Europe. In the Czech Republic, Hungary and Poland, for instance, unemployment is at record lows and below rates in the UK or Germany. Such is the shortfall in labour supply in Poland that the authorities issued work visas to 1.7 million Ukrainians last year.
  • A shrinking working age population and seven years of growth have left Japan with acute skills shortages. Firms are competing for workers by offering more full-time contracts with generous benefits, reversing a long-term trend towards part-time and contract work. The government is even rethinking Japan’s longstanding opposition to immigration. In a move that has proved politically controversial the government is proposing to create two new visa categories for foreign workers.
  • Germany is in a similar situation. Its population is ageing, unemployment is at multi-decade lows and skills shortages are widespread. As in Japan government proposals for easing controls on skilled immigration have run into political opposition, particularly from the far-right AfD party. It is a sign of the times that Germany’s defence minister has suggested that the country might need to allow other EU nationals to serve in its armed forces to alleviate skills shortages.
  • In America and the UK a tight labour market has driven wage growth to the highest level in ten years. Both countries have seen a marked rise in workforce attrition, or the rate at which people change jobs.
  • In the UK’s case the effects of low unemployment have been exacerbated by a reversal of a long-term trend of people coming from overseas to work in the UK. In the last ten years 1.8 million of the extra 2.8 million new jobs created have been filled by overseas born workers.
  • Today this section of the workforce, which makes up 17% of all employment, is shrinking as departures of overseas-born workers exceed arrivals for the first time since the financial crisis.
  • The decline in the overseas value of UK earnings, Brexit related uncertainties and plentiful jobs in Central Europe have all contributed to this reversal. (Curiously net migration to the UK from outside the EU, which includes workers and non-workers, has risen to a 14-year high. The swing factor here seems to have been a rise in students coming to the UK from Asia and more visas being granted to families of non-EU citizens who are already here.)
  • The obvious response to a shortage of supply in any market is for the price to rise. So it is in the labour market. Companies in much of the industrialised world are facing higher wage bills. In the UK a string of companies, including Royal Mail, Ryanair and JD Wetherspoon have warned that rising wage costs will affect profits.
  • Very low levels of unemployment mean businesses will need to work hard to recruit and retain staff. Offsetting rising wage costs through raising productivity will become a greater priority. That is likely to involve more training, reorganising work and investing in labour-saving machinery and technologies.
  • In the late 1990s, at a time of very low unemployment, there was much talk among employers of how labour shortages had created a “war for talent”. That was turned on its head by the global financial crisis, creating a “war for jobs” as unemployment soared. Now, ten years on, many western economies are running out of workers. The war for talent looks as if it’s back on.

PS: Last week the National Institute of Economic and Social Research (NIESR) and the UK government released estimates of how different Brexit scenarios might affect UK growth in the long term. The Office for Budget Responsibility’s currently estimates that trend UK growth is 1.5%. Taking the average of the NIESR and Treasury estimates, a no-deal Brexit could lower the UK’s long-term trend growth rate from 1.5% to 0.9%. On the same basis a transition deal and a future free trade agreement could reduce trend growth to 1.2% per year.

The Bank of England also released estimates of how different scenarios might affect UK growth. Its analysis shows that in the worst case of a disorderly no-deal Brexit, GDP could be 8% lower than its current forecast by the end of 2023.

PPS: In February, we wrote about the high proportion of graduates – roughly half – who are employed in non-graduate roles. The Institute for Fiscal Studies last week reported that a third of English male university graduates were financially worse off at age 29 than peers who had not been to university. University is a better bet for women. 99% of female graduates see an uplift to their earnings relative to non-graduate peers at the age of 29.

OUR REVIEW OF LAST WEEK’S NEWS

The UK FTSE 100 equity index ended the week down 0.8% at 6,980.

Economics and business

  • The US and Chinese governments agreed to suspend new trade tariffs for 90 days in order to hold further talks
  • The Federal Reserve highlighted a no-deal Brexit and an Italian sovereign debt crisis as near-term risks to the US financial system
  • The Fed’s preferred measure of inflation slowed more than expected in October to 1.8%, its lowest level in eight months
  • In a doveish statement that boosted equity markets Fed chairman Jerome Powell said interest rates are “just below” the level required for steady growth
  • Net migration to the UK from the EU turned negative for the first time since 2009
  • Growth in UK consumer borrowing fell to the slowest rate in three years
  • The price of crude oil fell below $60 a barrel on concerns over global economic growth and supply increases
  • Bank of England stress tests show that UK banks should be able to withstand a more severe global recession than in 2008
  • The UK government announced it would offer small businesses loans worth £150m through peer-to-peer lender Funding Circle
  • US president Donald Trump threatened to cut all of General Motors’ subsidies after the US car manufacturer announced the closure of four US plants
  • US house prices rose at their slowest pace in nearly two years in September
  • New Zealand blocked its largest telecommunications company from buying equipment from Chinese manufacturer Huawei, which has been the subject of increasing US scrutiny
  • The FT announced that Unilever is in exclusive talks with GlaxoSmithKline to buy malted drink brand Horlicks
  • ECB president Mario Draghi reiterated the central banks plans to halt its €2.6tn monetary stimulus programme at the end of this year

Brexit and European politics

  • High-end retailer Fortnum and Masons in Piccadilly has stockpiled an extra two months’ supply of champagne to safeguard against possible Brexit related supply disruptions
  • The chief executive of the food and drink federation said warehouse capacity for frozen and chilled food “for all practical purposes [is] booked out at the moment”
  • The UK is leaving the military aspects of the European Galileo satellite programme over fears of a loss of influence post-Brexit. The UK will build its own system compatible with America’s Global Positioning System
  • UK prime minister Theresa May warned that no-deal Brexit planning will be stepped up if the EU withdrawal deal is voted down in Parliament this month
  • Shadow chancellor John McDonnell said that a second EU referendum is “inevitable” if the transition deal is voted down and the Labour party fail to trigger a general election
  • The UK and the US agreed a new “open skies” deal, which will allow flights between the two countries to continue uninterrupted after Brexit
  • Scotland’s first minister Nicola Sturgeon said there is growing support for a Brexit “compromise option” that would leave the UK in the EU single market and customs union
  • President Trump said prime minister May’s Brexit deal may affect plans for a UK-US trade deal
  • Cabinet minister Michael Gove said that there may now be a majority in the House of Commons for another referendum on EU membership
  • European council president Donald Tusk said that the EU is prepared to either cancel Brexit or let the UK depart with no deal if MPs vote down the settlement secured by Theresa May

And finally…

  • Indian police are offering a reward of 11,000 rupees for information about a nine-year-old pug called Trump which was allegedly kidnapped while being walked by a security guard in Delhi – win bigly

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