Will the trade war end with a loud fizzle?

The Americans and the Chinese have reached a trade agreement along the lines of what they discussed in Geneva a few weeks ago. Many details are still unknown. Perhaps that is because there are few details. It normally takes years for countries to agree on trade agreements. Not a few months. The fact that an agreement has been announced probably indicates the pressure on both countries to de-escalate. The Chinese economy is under pressure. The real estate crisis is not getting any deeper, but is also not close to being resolved. Domestic demand is weak and deflation is looming. The last thing China needs is a sharp drop in exports to the US.

The Americans are also keen to de-escalate. Finance Minister Bessent has convinced Trump that very high import duties are a bad idea, and the midterm congressional elections next November cast their shadows ahead. Moreover, Trump likes to claim successes.

The Americans are reportedly going to sign agreements with ten other countries in the near future. The reciprocal tariffs that were supposed to start on April 9 have been postponed for three months, so the deadline is now July 9. We will see if the EU is among the group of ten countries. Trump does not like the EU very much, but on the other hand he has 'bullied' the EU-NATO members into what I consider to be an absurd increase in defense spending. Perhaps that will make him a bit more lenient towards the EU.

I’ve written it before, the trade war is going to fizzle out, albeit a loud one, with the necessary afterburners. And eventually there will be US tariffs that are higher than in the recent past, but it won’t have disastrous effects on an aggregate level. In individual cases it could all be very painful.

Jay Powell has goak on his head
Jay Powell is 72 years old, has worked at the Fed since 2012, since 2018 as chairman. He was an 'investment banker' before and has made a considerable fortune from that. A lovable man of 72, who is more than financially independent, probably does not want 'any hassle in his head'. But that is exactly what he has, a lot of hassle.

President Trump is constantly negative about him. This week Powell was a guest in Congress for his biannual 'testimony'. One of his illustrious predecessors, Alan Greenspan, could often count on a few hours of pats on the back. Once a member of Congress said that if Greenspan unexpectedly died, which had to be kept secret, his body should be prepared to be 'stuffed'. They would then simply put that corpse on a chair. Confidence in the economy was strong and also depended on Greenspan. Due to the financial crisis of 2008/2009 he would later lose his mythical status.

For Powell, a two-day visit to Capitol Hill is two days of running the gauntlet. I did not see his questioning in the House of Representatives, but I did see his questioning in the Senate. Of course, there were senators who treated him with due respect, but I still sat there watching it with my toes curled. There is sharp criticism from the Democrats about the relaxation of banking regulations. 'Ranking member' Elizabeth Warren is always very critical of Powell, and this time too. Powell is criticized by the Republicans for not understanding inflation and the effects of import duties on inflation. He is blocking interest rate cuts, which is damaging to government finances and the economy in general. It is not all pretty.

Now Trump has also announced that he wants to nominate a successor later this year. Powell's term as chairman runs until May 23, 2026. If that successor then starts to make statements about monetary policy before he or she takes office, Powell will be put under further pressure. Strictly speaking, Powell can remain on the board until the end of January 2028. But if I were him, I would know…

Significant revisions to GDP growth in the Netherlands
Our economy did not grow by 0,1% in the first quarter (quarter-on-quarter) as previously reported by Statistics Netherlands, but by 0,4%, according to revised figures. That is a considerable adjustment, although it is not unusual for the first quarter. The interpretation changes due to such a major revision. The original figure implied a more or less stagnant economy, which is not nice. 0,4% growth is in line with our potential growth, so that is fine. More private consumption and a larger contribution to growth from international trade were responsible for the upward revision of growth.

The figures for three previous years have also been revised. This also results in significant shifts. Up until now, the books stated that our economy had grown by 2023% in 0,1. This now appears to be a contraction of 0,6%. That makes a difference. The growth in 2024 has actually been revised slightly upwards: from 1,0% to 1,1%.

Despite the upward revision of the growth figure for the first quarter, industrial entrepreneurs are not getting any happier. The index that measures producer confidence in the industry fell for the fourth month in a row in June: from -3,9 in May to -5,0. The average over the past twenty years is -1,3. Producers became more negative about expected production and their order portfolio in particular. It is to be hoped that reduced geopolitical uncertainty, respectively the prospect of de-escalation in the trade war and lower oil prices (especially in euros) can give the economy a boost in the short term.

In contrast to Dutch industrial entrepreneurs, German entrepreneurs actually became more optimistic in June according to the Ifo index. That index improved from 87,5 in May to 88,4. The important expectations component improved remarkably strongly: from 89,0 to 90,7. It should be said that entrepreneurs in the service sector and construction in particular became more optimistic. The sub-index for industry improved only marginally. The divergent pattern between confidence in the Netherlands and Germany can perhaps be explained by the earlier lagging of the German confidence index and the policy of the new Merz government.

The picture for the US economy remains 'mixed'. On the positive side, it should be noted that business investment appears to be picking up. This can be seen in the following picture of growth in orders for capital goods (excluding defence and aircraft).

On the other hand, the labor market seems to be weakening. It is not that there are many layoffs, but unemployed people are finding it more difficult to find a new job. Fed chief Powell already made a comment about this in his last press conference last week. This week it turned out that the number of ongoing unemployment benefits has continued to rise. In the week of June 9, a total of 1,974 million was reached, the highest level since November 2021. Since achieving maximum employment is a core task of the Fed, this brings rate cuts closer.

The US housing market is also weakening somewhat. The pace of price increases is slowing. On the so-called Case-Shiller measure, houses were 3,4% more expensive in April than a year earlier, compared to 4,1% in March. This is by no means a drama, but the direction is clear here and this development also argues for a rate cut.

If I am right that the trade war fizzles out and the economy weakens, then we can expect some rate cuts from the Fed. That could happen as early as the July 29/30 meeting, but otherwise it will happen on September 16/17.

Closing
The US and China have agreed on a new trade deal. There are not many details, but both parties have an interest in de-escalation. Agreements with other countries will follow soon. This ends with a fizzle.

Fed boss Powell is getting a lot of criticism from Trump and not everyone in Congress is friendly to him either. In the end, Trump will get his way and the Fed will lower interest rates due to the de-escalation of the trade war, lower-than-expected inflation and a weakening of the (American) economy. In the end, interest rate cuts may be faster than expected.

Dutch entrepreneurs in industry became more pessimistic again in June. In Germany, the confidence of entrepreneurs actually improved in June, although mainly in the service sector and construction. Perhaps the mood here could improve soon, following Germany's example, helped by the de-escalation of the trade war and lower oil prices (especially in euros). The possible abolition of the national CO₂-levy (hurray, hurray!) will help too.

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

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