The Emirates Hana container ship sails near the Yangshan Deepwater Port, operated by Shanghai International Port Group Co. (SIPG), in this aerial photograph taken in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)

The Forever Trade War and the Week’s Other Economic Takeaways

(Bloomberg) --

The trade war between the U.S. and China doesn’t look like it’s heading for a truce anytime soon, casting a shadow over financial markets and the global economic outlook.

Here’s our weekly review of the world economy and the lessons learned.

The Forever Trade War?

The clash between the U.S. and China escalated, much to the dismay of financial markets. As China struck back at last week’s decision by the White House to raise tariffs on more of its goods, the Trump administration began paving the way to targeting almost all of its imports and moved to curb Huawei Technologies Co.’s access to the U.S. market and American suppliers. The U.S. also gave the EU and Japan 180 days to agree to a deal that would “limit or restrict” shipments into the U.S. of automobiles, while steel and aluminum tariffs on Canada and Mexico are poised to be removed.

As Shawn Donnan wrote, Trump may now be embracing tariffs as an end-goal rather than a tool to create leverage and draw Beijing into making concessions. He increasingly claims his tariffs have helped power U.S. economic growth and that it’s China footing the bill for them.

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Rebound Delayed?

The trade war risks upending the world economy’s much-anticipated rebound with a slew of data this week exposing its recent fragility. April readings for Chinese industrial output, retail sales and investment all slowed by more than economists forecast. In the U.S., retail sales unexpectedly declined last month while factory production fell for the third time in four months. Germany, Turkey, Russia, nd Brazil also looked shaky.

The fear is that with the trade war turning nasty, companies will shelve investment, consumers will cut spending and stocks will slide. Morgan Stanley economists reckon an extended impasse between Beijing and Washington could trigger a worldwide recession, while others joined them in mapping out worst-case scenarios for China. A new analysis by Bloomberg Economics concluded China stands to lose more than the U.S.

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Policy Makers Not Ready to Rescue

The renewed weakness reinforces the recent reluctance of the Federal Reserve and fellow central banks to raise interest rates. For the moment, most aren’t though readying to boost stimulus although the Fed faced fresh pressure to do so from Trump and investors. Fed officials stuck with their pledge for patience even though they acknowledge the trade spat could affect inflation and growth. As for China, its main defense is more likely to come from fiscal policy rather that monetary policy and a dumping of Treasuries looks unlikely.

Is Inflation Actually Alive?

A key theme of this year has been the absence of inflation as captured by Bloomberg Businessweek’s Peter Coy’s Businessweek cover story of April. The argument stands, yet there are still pockets of price pressures. As Enda Curran showed, from pork in China to iron ore in Brazil inflation is flickering in some corners of the world economy. Meantime, low inflation in the U.S. may also be obscuring how Americans are paying up for the trade war. The price of items on store shelves in seven tariff-hit categories, including furniture, appliances and auto parts, jumped 1.6% through April since the first round of tariffs in July.

All Change at Central Banks

It’s perhaps worth asking who would want such a job, yet races are underway to become the top monetary policysetter at the European Central Bank, Bank of England and the Bank of Canada. At the ECB, the most qualified runner may not get the chance to replace President Mario Draghi because of politics. The chance of a woman being picked looks low although there may be more female candidates in the future. In London, who heads the government could decide who takes over from Governor Mark Carney. And it may be early, but Theo Argitis took a look at Stephen Poloz’s potential successors at the Bank of Canada next summer.

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The Forever Trade War and the Week’s Other Economic Takeaways

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