Trade war casualty in US: cheap prices for everyday goods

In this file photo taken on June 13, 2018, soybeans are loaded from a grain bin onto a truck before taking them to a grain elevator in Dwight, Illinois. (AFP)
Updated 29 July 2018

Trade war casualty in US: cheap prices for everyday goods

  • American Airlines responded to $2 billion in additional fuel costs this year by cutting some planned additional capacity and defer deliveries of new planes
  • GM has managed to offset about half the $2 billion through negotiations with suppliers and hopes consumers will shoulder at least some of the rest

NEW YORK: The US economy may be roaring ahead, but American consumers face the prospect of paying more for everyday goods, due in part to trade tariffs.
Big companies reporting earnings over the last week or so described price hikes on everything from soda to airplane tickets to household paint and tools.
Some of the price hikes are still in the planning stages and not all companies are sure they will be able to make higher prices stick due to competitive pressures.
“We have implemented price increases for these implemented tariffs,” said Donald Allan, chief financial officer at Stanley Black & Decker, whose products include hammers, saws and power tools.
The 175-year old Stanley expects to generate $190 million more in revenues in 2018 from price hikes, Allan said on a conference call this month.
Soda giant Coca-Cola also recently enacted price hikes in North America, in part because of tariffs on steel and aluminum that raised costs of cans and some production processes.
Coca-Cola chief executive James Quincey acknowledged that retailers were not thrilled with the development.
“Clearly these conversations are difficult, I think it’s working its way through,” he told analysts this week.
“Ultimately the beverage industry is not the only industry that is facing pressure from changing imports and the need to take pricing,” he said. “That’s just partly the general environment.”
At paint company Sherwin-Williams, executives hinted at price hikes due to inflation in petroleum-linked commodities.
“Our historic practice has always been to talk with our customers first and then the investment community,” chief executive John Morikis told Wall Street analysts.
“We are going to protect our margins and we’re going to talk to consumers first. And you can connect the dots from there.”

Analysts see a number of factors behind higher commodity prices, with US tariffs on steel and aluminum imports a frequently-cited catalyst.
But while trade actions by US President Donald Trump have gotten much of the attention, analysts note that prices of many goods — including steel and oil — were already elevated before the trade war took center stage.
Higher inflation also typically accompanies increased macroeconomic growth, which was estimated on Friday at 4.1 percent in the second quarter by the US government, the fastest level in six years.
Inflation also surfaced as a concern in the first- quarter earnings season, but more companies are now discussing price hikes and some companies said the problem has worsened as Trump has expanded the attack to more countries and regions and as the steel and aluminum tariffs moved from threat to reality.
JJ Kinahan, chief market strategist at TD Ameritrade, said it was still premature to view inflation as a major worry.
“What makes me hesitant on inflation is not how it starts but that it can rise really quickly,” he said.
Economists fear that a sudden surge in prices could spark more aggressive interest rate hikes from the Federal Reserve, which could itself derail growth.

For companies, the issue of how to respond to elevated commodity prices has compelled difficult choices between accepting lower profits, cutting other spending and lifting retail prices.
General Motors suggested this week that it expects to eat at least some of the hit from $2 billion in higher costs due to metals tariffs and the strong dollar. GM trimmed its 2018 profit forecast, a move that sent shares diving.
GM has managed to offset about half the $2 billion through negotiations with suppliers and hopes consumers will shoulder at least some of the rest, said chief financial officer Chuck Stevens.
“To the extent we can, we’re recovering that through pricing,” Stevens said. “Obviously the market in the United States is challenging.”
American Airlines responded to $2 billion in additional fuel costs this year by cutting some planned additional capacity and defer deliveries of new planes.
These moves will trim $1.2 billion in capital spending over the next three years.
Executives said they also hoped to lift prices on tickets.
“We see a strong demand for the product, and so we’re optimistic that there’s the chance to recover some of the cost of the increase in the price of jet fuel,” said president Robert Isom.
“But over the long run, it depends on the economy and it depends on how much supply is out in the marketplace.”

IMF downgrades outlook for world economy, citing trade wars

Updated 15 October 2019

IMF downgrades outlook for world economy, citing trade wars

  • Growth this year will be ‘weakest since the 2008 financial crisis,’ according to 2020 forecast

WASHINGTON: The International Monetary Fund is further downgrading its outlook for the world economy, predicting that growth this year will be the weakest since the 2008 financial crisis primarily because of widening global conflicts.

The IMF’s latest World Economic Outlook foresees a slight rebound in 2020 but warns of threats ranging from heightened political tensions in the Middle East to the threat that the US and China will fail to prevent their trade war from escalating.

The updated forecast released on Tuesday was prepared for the autumn meetings this week of the 189-nation IMF and its sister lending organization, the World Bank. Those meetings and a gathering on Friday of finance ministers and central bankers of the world’s 20 biggest economies are expected to be dominated by efforts to de-escalate trade wars.

The new forecast predicts global growth of 3 percent this year, down a 0.2 percentage point from its previous forecast in July and sharply below the 3.6 percent growth of 2018. For the US this year, the IMF projects a modest 2.4 percent gain, down from 2.9 percent in 2018.

Next year, the fund foresees a rebound for the world economy to 3.4 percent growth but a further slowdown in the US to 2.1 percent, far below the 3 percent growth the Trump administration projects.

IMF economists cautioned that that even its projected modest gains might not be realized.

“With a synchronized slowdown and uncertain recovery, there is no room for policy mistakes, and an urgent need for policymakers to cooperatively de-escalate trade and geopolitical tensions,” Gita Gopinath, the IMF’s chief economist, said in the report.

Last week, the US and China reached a temporary cease-fire in their trade fight when President Trump agreed to suspend a tariff rise on $250 billion of Chinese products that was to take effect this week. But with no formal agreement reached and many issues to be resolved, further talks will be needed to achieve any breakthrough. The Trump administration’s threat to raise tariffs on an additional $160 billion in Chinese imports on Dec. 15 remains in effect.

The IMF’s forecast predicted that about half the increase in growth expected next year will result from recoveries in countries where economies slowed significantly this year, as in Mexico, India, Russia and Saudi Arabia.

This year’s slowdown, the IMF said, was caused largely by trade disputes, which resulted in higher tariffs being imposed on many goods. Growth in trade in the first half of this year slowed to 1 percent, the weakest annual pace since 2012.

Kristalina Georgieva, who will preside over her first IMF meetings after succeeding Christine Lagarde this month as the fund’s managing director, said last week that various trade disputes could produce a loss of about $700 billion in output by the end of next year or about 0.8 percent of world output.

IMF economists said that one worrying development is that the slowdown this year has occurred even as the Federal Reserve and other central banks have been cutting interest rates and deploying other means to bolster economies.

The IMF estimated that global growth would have been about one-half percentage point lower this year and in 2020 without the central banks’ efforts to ease borrowing rates. “With central banks having to spend limited ammunition to offset policy mistakes, they may have little left when the economy is in a tougher spot,” Gopinath said.

In addition to trade and geopolitical risks, the IMF envisions
threats arising from a potentially disruptive exit by Britain from the EU on Oct. 31. The IMF urged policymakers to intensify their efforts to avoid economically damaging mistakes.

“As policy priorities go, undoing the trade barriers put in place with durable agreements and reining in geopolitical tensions top the list,” Gopinath said. “Such actions can significantly boost confidence, rejuvenate investment, halt the slide in trade and manufacturing and raise world growth.”

The IMF projected that growth in the 19-nation euro area will
slow to 1.2 percent this year, after a 1.9 percent gain in 2018. It expects the pace to recover only slightly to 1.4 percent next year.

Growth in Germany, Europe’s biggest economy, is expected to be a modest 0.5 percent this
year before rising to 1.2 percent next year.

China’s growth is projected to dip to 6.1 percent this year and 5.8 percent next year. These would be the slowest rates since 1990, when China was hit by sanctions after the brutal crackdown on pro-democracy demonstrators in Beijing’s Tiananmen Square.