Policy makers around the world will be tested by a challenging mix of potential threats to stable credit conditions.
China’s retaliation against American tariffs will likely reduce U.S. GDP growth and as core inflation continues to rise a mature U.S. credit cycle could be nearer to a turning point, if access to credit sours and risker borrowers are squeezed by tighter financing conditions.
In addition to Brexit-related risks Europe is facing, upcoming European parliamentary elections could derail momentum towards an even closer union if support for nationalist parties slows progress, and immigration remains one highly divisive issue that could threaten the free movement of labor within the Schengen area.
China's deleveraging will likely take longer than the official three-year time line as the government manages the debt overhang that threatens stability, fine-tunes its risk reduction measures and accommodates slower earnings growth that is contributing to a pause in corporate deleveraging.
Although political risks have decreased, a number of new governments will be confronted with growth that is less synchronized across Latin America and the potential threat to borrowers facing greater volatility accessing USD-based financing.
In the latest salvo from Washington, the U.S. imposed tariffs on another $200 billion of Chinese imports—with tariffs of 10% rising to 25% in the New Year, unless the two countries come to a compromise.
China’s retaliation and its decision to slap tariffs on a further $60 billion worth of U.S. goods suggests the world’s largest trade partners may not be ready to compromise.
In fact, further escalation could see tariffs applied to all of the goods the U.S. and China import from each other.
Attempts to help those hurt by globalization via higher tariffs or other forms of protectionism, even if well meaning, will raise prices and hurt all consumers, especially poor and middle-class families--not to mention damage the competitiveness of companies that import raw materials or components from other countries and threaten jobs for workers in export industries.
Credit Outlook 09/18: Top Global Risks