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May 02, 2018

Global Economy: Trade war flags risks for global growth

  • The United States (US) Fed raised the federal funds rate by 25 basis points (bps) in March
  • On-going tariff war between US and China poses a downside risk to China’s growth
  • Tension in the Middle East regarding Iran sanctions raised energy indices in March

The world dived for cover as the US and China indulged in retaliatory trade action, pushing global trade along the path of uncertainty. The Trump administration slapped tariffs on its major Chinese imports as a counter to China's alleged unfair trade practices and intellectual property theft. China fired a salvo by imposing tariffs on its US imports. S&P Global has flagged that a trade war involving China could affect Asia-Pacific business activity and growth, given regional supply chains and China's sheer economic weight.


US Fed hikes federal funds rate by 25 bps


The US gross domestic product (GDP) growth for Q4 of 2017 was revised to 2.9% (earlier 2.5%) on-quarter, lowercompared with 3.2% in Q3. The deceleration was on account of a downturn in private inventory investment and netexports, which was partially offset by an increase in private consumption expenditure, government spending, andfixed investment. Overall, in 2017, the economy posted strong 2.3% growth compared with 1.5% in 2016, led by a pickupin private consumption expenditure and fixed investment. The annual Consumer Price Index (CPI)-linked inflationrose to 10 bps on-month to 2.2% in February, led by a sharp spike in gasoline prices. In its March meeting, the FederalOpen Market Committee (FOMC) raised the target range for the federal funds rate by 25 bps to 1.50-1.75%, in line withmarket expectations, citing strengthening economic and labor market conditions.


The dollar index gained 0.5% on-month on average in March as the markets cheered the strong economic data,including the jobs data for February, and the FOMC rate hike. However, further gains were capped by the Sino-US spat,which dampened investor sentiment.