The tariffs introduced as part of the Trump’s administration’s trade policies have created all kinds of oddities in the global data, and UBS has dissected the impact on global confidence and growth.
Looking at the confidence surveys, for roughly the same spike in policy uncertainty, the surveys in the U.S. fell roughly two standard deviations year-to-date, whereas the European surveys barely budged.
Perhaps that is because the U.S. faces not just one tariff change (as the other countries do) but a multitude (the tariffs for all its trade partners change) and there is also uncertainty over fiscal and a range of other domestic policies, analysts at UBS said, in a note dated June 25.
With the de-escalation of tariffs on China, surveys have bounced in the U.S., but remain about 1.5 standard deviations from their starting year level. For businesses, the confidence drop was largely a reversal of the fourth-quarter boost in optimism, whereas for consumers it was a straight drop down.
At a global level, business confidence has deteriorated the most year-to-date, followed by service sector PMIs, consumer surveys and manufacturing PMIs.
Front-running dynamics likely propped up the manufacturing PMIs but the reversal of the front-running may also help explain why the PMI data largely failed to bounce in May (consumer and business confidence, by contrast, improved sharply).
Beneath the headlines it is notable that emerging markets consumer confidence has shown no impact from the tariffs (confidence actually increased year-to-date), in contrast to developed markets, but at the same time its manufacturing PMIs fell much more sharply than those in developed markets.
A very large gap has now opened up between global hard and soft data.
The hard data (available through April) implies 3.6% for median global growth, whereas the soft data implied 1.3%. Even with the improvement in May in the soft data (implied growth of 1.65%), that still leaves the hard-soft gap at a 27 year high, if one excludes the volatility during the pandemic.
As front-running dynamics unwind, the hard data should deteriorate, whereas the soft data has scope to improve further, given that many of the May surveys straddled the China tariffs de-escalation.
The hard-soft gap should thus start to close, but it is unclear if that improves our tracking estimates as the bulk of tariff transmission is still ahead of us, UBS said.
The hard-soft gap is particularly large in the U.S., and while the hard data average has improved nearly one standard deviation year-to-date, the leading indicators have deteriorated half a standard deviation over the same time frame.
“The cracks that are appearing are not yet particularly large but almost all of the tariff-induced price increases are yet to come, and with it likely further consumption and investment weakness,” UBS said.
Source: Investing