The act of balancing economic growth

US fiscal-led growth accelerated again, bringing another batch of strong activity indicators.

Strong US retail sales and a solid rebound in industrial production signaled a meaningful acceleration in activities in the second quarter ( 2Q). We have revised higher our 2Q18 growth estimate to 5.5 per cent.

On the external demand side, we believe that households are now beginning to feel the pinch of the tariffs on some final goods.

Home appliance prices have spiked and consumer goods imports have correspondingly started to slow.

There are also transitory factors that point to a narrowing of the trade deficit.

This week will see the release of US’ advance 2Q GDP estimate.

On the monetary policy front, Fed chairman Jerome Powell retained an optimistic tone on the US economic outlook, consistent with two further 25bp rate increases in the Fed funds rate this year, which we see as likely to occur in September and December.

The main risk to the US and global economy, in our view, is that individuals, businesses, and financial markets have underestimated the desire of the Trump administration to re-orient trade flows and that further steps to implement tariffs will lead to a reduction in confidence, a slowdown in hiring, and a correction in equity markets.

There is little to no evidence that this is occurring presently in a way that would cause us to significantly revise our outlook for the economy in the coming quarters.

Survey data do point to the potential of escalating tit-for-tat protectionism to weaken activity.

owever, at present, this remains mostly a concern rather than a reality.

As for China, things may look slightly different.

The Chinese authorities are finding it difficult to balance the two objectives of delivering strong growth while gradually deleveraging to reduce financial stability risks.

On a quarter- on- quarter basis, Chinese GDP growth slowed notably to 6.4 per cent from 7.2 per cent in 1Q.

The outcome is consistent with the broad-based moderation in industrial production ( IP), fixed asset investment ( FAI), and retail sales.

Looking ahead, we see downside risks to our 2H18 and 2019 growth forecasts arising from the government’s so- called ‘structural deleveraging’ campaign and a further escalation of the trade war.

The earlier-than- expected US announcement of a tariff list covering US$ 200 billion in Chinese goods, which could take effect as early as September, suggests an increasing probability that one of our risk scenarios could turn into our base case scenario.

In view of the delicate balancing act required, we think the government is willing to finetune some policies to prevent systemic risks or a market panic.

The new easing moves by the PBoC and CBIRC to boost SME lending confirm that a more coordinated policy response is underway.