Is A Global Economic Downturn Likely After Renewed US/China Hostilities?

This comes following Google's announcement last week that it will restrict Chinese tech giant Huawei from accessing its software, following an executive order issued by US President Donald Trump.

However, last Tuesday (21 May) US President Donald Trump's administration issued a licence that will temporarily allow US companies to keep doing business with Huawei for the next three months. Since then, the firm has hit back at Washington, warning that its "illegal actions" will negatively impact billions of customers.

Investing amid ongoing global economic concerns

These tenuous sanctions on Huawei, which is the world's largest telecommunications chipmaker, are the latest blow to US-China trade relations, which worsened earlier this month when the US hiked tariffs from 10% to 25% on $200bn worth of Chinese goods, as renewed talks between President Trump and Chinese President Xi Jinping failed to reach a resolution.

Chinese officials have since confirmed new tariffs on $60bn of American goods in retaliation.

Chetan Sehgal, lead portfolio manager on the Templeton Emerging Markets investment trust (TEMIT) said market reactions were already "unexpectedly negative" following Trump's renewed tariffs, but warned the US's decision to include Huawei in its 'Entity list' of harmful firms has "only exacerbated the situation".

"Undoubtedly, the tit-for-tat tariffs will have a disproportionate impact, particularly on Chinese producers, and eventually may cause global companies to shift their supply chains away from China. Some companies have already shifted manufacturing to other countries," he said.

"Therefore, the Chinese economy will see a slowdown in the medium term as manufacturers diversify away from production bases in China."

International investment strategist at deVere Group Tom Elliot agreed the escalating trade wars between the US and China threaten to cut Chinese exports, therefore accelerating the country's lurch towards a current account deficit - at a time of ballooning US budget deficits.

Three reasons to be bearish in 2019

He warned: "China has spent the last two decades turning its trade surplus into purchases of overseas assets, from US Treasuries to London property.

"But China is changing. Its current account is about to turn negative, meaning its economy will be increasingly dependent on foreign capital to continue growing.

"This has potentially far-reaching implications, not just for China, but for the US and the rest of the world. The 25% tariff imposed by the US will accelerate this trend." 

He continued: "As China stops being a large buyer of US Treasuries, America's budget deficit is ballooning and will be just short of $1trn this fiscal year. The combination is negative for US Treasuries, and may help drive up US and global bond yields.

"Investors around the world may see higher global borrowing rates, from car loans to mortgages, because of the end of the Chinese savings glut. This could trigger a global economic downturn."