People carry shopping bags in New York, New York, USA, 27 April 2018. The United States Commerce Department's Bureau of Economic Analysis reported today that the US economy grew at an annual rate of 2.3 percent in the first quarter, which is slightly above the average yearly growth rate.US Economic Growth, New York, USA - 27 Apr 2018

As the trade war between the U.S. and China gathers pace, consumers in the two superpowers are reacting differently, though that could soon change.

Americans seemingly brushed off any concerns in the third quarter, still opening their wallets at a rapid speed. That’s the official word from the latest set of economic data.

Fresh figures out Friday showed that consumer spending was much better than expected, jumping 4 percent, up from 3.8 percent in the previous quarter and helping GDP grow by 3.5 percent between July and September.

While the GDP rate wasn’t as strong as the 4.2 percent growth witnessed in the second quarter, it’s still impressive by historical standards.

“The consumer juggernaut remains in place, as Q3 was the best quarter for consumption since 2014,” Stephen Stanley, chief economist at Amherst Pierpont Securities said in a note to clients.

Further confirming the consumer spending resilience, the University of Michigan’s closely watched consumer sentiment index remained close to record high levels in October, although slightly below a previous forecast.

According to Richard Curtin, the survey’s chief economist, the trade war, stock price declines, rising inflation and interest rates, and the negative midterm election campaigns, have not acted to undermine consumer confidence.

“This resilience was primarily due to the prevailing belief that the economy would produce robust job growth during the year ahead, even if overall wage growth remained dismal,” he added.

In contrast, in China, there are signs that consumer spending is starting to falter as a combination of the trade war, the slide in the country’s stock markets and a sluggish economy casts a shadow, even though the full force of the trade war is yet to be felt. At 6.5 percent, the economy expanded at its weakest pace since 2009 in the first three quarters of 2018.

Within that, retail sales were up 9.3 percent, below the 10.4 percent increase seen a year earlier. Julian Evans-Pritchard, senior China economist, also pointed out that much of the pick-up in headline retail sales was driven by higher inflation and that real consumption growth is still slowing.

In a bid to fuel spending, Beijing has unveiled personal income tax cuts, with analysts at Nomura calculating that this would push up national disposable income by 166 billion yuan.

However, Chinese consumers may not be the only ones tightening their belts as higher tariffs on imports from China are expected to show up in U.S. stores soon.

After already targeting $50 billion worth of imports, President Donald Trump slapped 10 percent tariffs on another $200 billion last month and this will rise to 25 percent at yearend. China followed suit and implemented levies on $60 billion of American imports and the situation could get worse as Trump has threatened to place tariffs on every single Chinese import entering the U.S. if further provoked by China.

A raft of major retailers including Walmart Inc. told the government that if it went ahead with the levies on $200 billion worth of Chinese imports, they would be forced to raise prices and economists believe the effects of that will be seen early next year as many stores had already put in their holiday orders and were left with little wriggle room on prices.

“Recent strength in employment and income, solid gains in household net worth, and elevated consumer sentiment have generated considerable momentum just as tariffs on some $200 billion of imports from China have gone into effect,” IHS Markit chief economist Nariman Behravesh said.

“We expect higher post-tariff import prices to pass through to domestic prices and weigh on real income and wealth, reducing domestic demand. In our forecast, real GDP growth rises from 2.2 percent in 2017 to 2.9 percent in 2018 before slowing to 2.8 percent in 2019, 2 percent in 2020, and 1.6 percent in 2021.”

The trade war’s effect also comes on top of other factors that will likely weigh on consumer spending, including the Federal Reserve planning more rate hikes, which will push up consumer borrowing costs.

 

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