Trade disputes cast a global shadow

From SPRatings: Trade tensions—in particular the tariff dispute between the U.S. and China—are casting a shadow on the global economy and financing conditions in all regions. On the bright side, central banks in the world’s biggest economies stand ready to goose growth with interest-rate cuts, and borrowers
around the globe are still enjoying a historic run of benign credit conditions.

In the U.S., escalating trade strife has heightened fears that economic conditions have worsened,
with signs that businesses are curbing spending and financial market volatility increasing. While
most indicators of financing conditions remain largely supportive, the lending backdrop has
become cloudier, hinting at a slight turn in the credit cycle. The dimming outlook for world’s biggest
economy has prompted the Federal Reserve to halt its string of interest-rate increases, and we
could now see a rate cut as soon as September of this year. Still, the U.S. economic expansion is set
to reach record length, and we see little chance of recession in the next 12 months.

In Asia-Pacific, too, uncertainty has returned. The year started optimistically, given the Fed’s pause
and Chinese authorities’ willingness to loosen credit supply to avoid an economic slump. However,
the recent tariff increases by the U.S. and then China have shaken investors’ confidence.

On the surface, credit conditions in Europe, the Middle East, and Africa have stabilized and have
even shown some improvement, for instance in funding costs, since the European Central Bank
(ECB) and the Fed adopted more-dovish stances. But growth in the region remains subdued, and we
see underlying fragility amid mounting risks and vulnerabilities. While these risks have had only
limited economic or financial market consequences so far, we remain concerned that the
cumulative effect could reach a tipping point for markets, and then spread to the real economy.

In general, Latin American countries are facing a more complex environment, as well, with political
risks materializing in the largest economies. Investor confidence has wavered, and external
conditions are becoming more adverse as the U.S-China trade spat escalates. U.S. President
Donald Trump has also found a powerful tool in tariff threats, which prompted Mexico to agree to
stem migration from Central America to the U.S. Still, the threat of new tariffs remains if Mexico
fails to reach Washington’s objectives.

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