Major countries import less

Kia ora,

and welcome to Monday's Economy Watch where we follow the economic events and trends that affect New Zealand.

I'm David Chaston and this is the International edition from Interest.co.nz.

Today we lead news the world trade landscape is changing with imports falling worldwide.

Firstly, it does look like the "end of the beginning" in the US-China trade war has arrived. The so-called 'phase one' deal has been agreed and the US won't impose the next set of tariffs. Neither will China. And unlike other claims, this one has been confirmed by Beijing. Market reactions are mixed. American equity and bond markets weren't enthusiastic. But the Shanghai equity market rose an impressive +1.8%. Tokyo rose even more, up +2.6% and Hong Kong was also up +2.6%. It will be interesting to watch Wall Street when it opens tomorrow.

The deal sees the US halve tariffs on about $120 bln of trade while the Chinese don't have to reduce any tariffs but they said they will. China will buy some ag products, but actually how much is in doubt. It sets up a 'dispute resolution' process but that is one where each side becomes judge-jury-executioner for any claim and is in fact just a kangaroo-court basis, pretty amateur. The key element is that the ambition is very low with enforcement a joke. So this deal is more theatrics than ground-breaking and the international community won't be following this model.

This is a time however when we can assess the impact so far of the trade war, not only on the US and China, but other large economies as well. Import volume data compiled by interest.co.nz (from OECD data) shows that imports fell the least in the US, and only recently. From its peak in June 2019, American imports have fallen just -0.5% of GDP since. That compares with a -0.8% of GDP fall in Japan, a -0.9% fall in the EU and a -1.4% fall in China. So it has been China and not the US who has used this time to wean itself off of imports and most of those are from the US. Basically the Americans have kept on buying Chinese goods, and the American public or businesses have paid the higher tariffed prices. So perhaps it is no surprise that Washington has wanted a deal, one that seems to have damaged their trade, but their superpower rival very little.

The 'phase one' trade deal won't move either China's or the US's trade, even 0.1% of GDP, either way.

Maybe there is another reason for the muted Wall Street response; weak November retail sales. They rose at only a very modest pace in November, virtually flat from October and only up +2.9% above the same month a year ago and a slower-than-expected start to the holiday shopping season. And given that American inflation is up +2.1% in the year, the gains look very mediocre. Business inventories were up +3.1% in the year.

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In China, foreign direct investment levels are rising. They are up +6% in 2019 so far, a gain of US$124 bln. Almost 30% of that is in high-tech sectors and that portion grew a remarkable +28% in the year.

Data for Japanese industrial production for the year to October looks very discouraging, down -7.7% and that is a faster rate of decline than for the year to September. But that was in the shadow of their GST increase, and when the typhoon hit. Looking forward, they are more optimistic with 2020 growth of +1.4% partly as a result of an infrastructure stimulus boost.

In India, the presumption is that their export prowess is all about services - call centers, IT services and the like. But it turns out these service exports are growing slower than their overall economy and declining. They were up just +5.25% in the year to October.

The latest UN climate negotiations in Madrid look like they have gone nowhere.

The IMF is warning Australian regulators to be ready to act should rapid housing debt growth continue on current trends, saying "looser financial conditions could re-accelerate asset price inflation, boosting private consumption but also adding to medium-term vulnerabilities given high household debt levels".

The UST 10yr yield is at 1.82% and very little different from this time last week

Gold is at US$1,476/oz and up +US$16 for the week.

US oil prices are up further to just on US$60/bbl and the Brent benchmark is now just at US$65/bbl.

The Kiwi dollar will start the week firm at 66 USc. On the cross rates we are holding at 95.9 AUc. Against the euro we are little-changed at 59.3 euro cents. That puts our TWI-5 at just on 71 and marginally firmer for the week.

You can find links to the articles mentioned today in our show notes.

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