RALEIGH – Financial and trade turmoil seems to have lessened a bit today, but is this a calm before the storm? Dr. Mike Walden, an economist at N.C. State, warns that the trade war, looming currency war and stock market are forming a toxic brew that is increasing the chances of a recession.
Dr. Mike Walden
Stock markets are up today in the US, interest rates have climbed a bit and China’s currency – the yuan – seems to have stabilized. But Walden worries about all the issues that threaten to wreak havoc with the US economy.
In an exclusive Q&A with WRAL TechWire, Walden warns about the impact of all these issues on North Carolina and notes that a currency war could be especially destructive even if it means lower prices on imported China goods despite US tariffs with more coming in the near future.
- Is the latest market turmoil making a recession more likely?
Yes, a recession is more likely, but in my view, still not probable.
- When could we expect a downturn? Many firms already are seeing a recession by the end of 2020 according to the recent Duke CFO survey. What do you think?
If a recession occurred, it wouldn’t be immediate. If I were predicting a recession, I’d say late 2020. But I am still in the camp thinking no recession will happen in 2019 or 2020 – the economic fundamentals are still strong.
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- What is a currency war?
A currency war occurs when countries take actions to devalue their currency against other currencies – which in turn sparks other countries to do the same. It can turn out to be a “race to the bottom” because a lower valued national currency makes the country poorer.
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- What do you see as most disruptive – a currency war or tariffs?
I think a currency war can have larger consequences because the movements in values can be large and rapid. I think this is why the stock market reacted so strongly when the yuan fell.
- Why is devaluing of the Chinese currency such an important issue?
The US has said China has specifically devalued its currency (yuan) against the dollar as a way of counteracting the US tariffs and therefore allowing China to maintain their sales in the US. A lower valued yuan makes Chinese products cheaper to sell in the US, and can therefore totally offset US tariffs – which have the impact of increasing the prices of Chinese products.
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- How will consumers benefit from lower-cost goods made in China?
Trade is based on the notion that if another country can make something cheaper than we (the US) can, then US consumers benefit from having access to those lower priced products. Impeding this trade with tariffs can take away this advantage and actually reduce economic benefits to US consumers.
If US consumers have to buy alternative higher cost products, their purchasing power drops. This is a major reason why the stock market drops when international trade isn’t allowed to freely occur.
- President Trump has ordered more tariffs – how soon can consumers expect prices to increase of electronics and other goods made in China?
There’s still time for some agreement – maybe even short term – to postpone the Sept. 1 tariffs. I expect sellers to wait until they must raise prices.
Plus, if the Chinese currency value remains lower, companies buying Chinese imports would effectively be paying less, so there may be no reason to increase prices
- Do you see the standoff ending any time soon? What will be required for a settlement to be reached?
I’m not good at predicting when a settlement will occur. I thought we’d have a deal last year – and apparently we did – but then the “hardliners” in China stepped in at the last minute and squashed the deal. However, I now think a deal will still come – likely before next summer – but it will be a much smaller deal than the Trump Adm. wanted. But – from the Administration’s viewpoint – a small deal will remove the trade tension as an issue in the 2020 campaign.
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