Daily Memo: Economic Malaise, Soldiers in Germany, Italian Politicking

All the news worth knowing today.


Trade war update. The White House has delayed a final decision on licenses to be granted to U.S. firms seeking to resume sales to Chinese telecommunications giant Huawei, Bloomberg reported, citing unnamed officials in the Trump administration. Huawei was placed on an export blacklist in May over U.S. national security concerns. This may appear to be retaliation for China’s apparent refusal to ramp up purchases of U.S. agriculture products, but the U.S. has other reasons to slow-play the process of pressuring Huawei. The threat of an export ban is a powerful source of leverage for the U.S, yet it’s not a bargaining chip the U.S. can really trade for a more favorable trade deal, given the wide-ranging national security implications of China’s tech sector. The U.S. would rather hold off on making a decision — in hopes of getting at least some leverage from the threat — until the trade war is either resolved or until it becomes clear that a deal is impossible. But eventually, the U.S. is going to move forward with at least a partial ban. It’s unlikely China is under any illusions otherwise.

U.S.-Germany: a matter of trust. U.S. Ambassador to Germany Richard Grenell said Friday that the U.S. is considering withdrawing thousands of U.S. troops stationed in Germany. Grenell made it seem as though the issue was a consequence of Germany’s disinterest in boosting domestic military spending to 2 percent in line with NATO requirements. Whether the U.S. follows through will depend on several factors. For one, moving soldiers out of country is expensive. For another, it may tempt the Russians to respond for a little strategic gain. The U.S. still needs Germany as an ally; it can’t forgo bilateral cooperation. And then there is the matter of trust. From Nord Stream 2 to trade barriers to eurozone interest rates to German resistance to U.S. efforts to pressure Iran to Germany’s receptiveness to Huawei, the list of Trump administration grievances with Germany is long. Berlin has little reason to believe that the U.S. would simply drop the relocation threat for good if the German government took on the political and economic costs of dramatically boosting military spending. The U.S. Ambassador to Poland, meanwhile, said Poland would welcome the troops with open arms.

No confidence in Italy. Now that it has surged in popularity polls, the League, the right-wing political party led by Matteo Salvini and junior partner in Italy’s governing coalition, has filed a no-confidence motion that could force new elections. The decision itself is significant – in Italy, any party that wins more than 40 percent of the vote can rule without a coalition, and the League is polling at around 38 percent – but amid budget deadlines and increasingly damaging scandals, so is the timing. More on this to come.

Brexit blip, probably. The British economy contracted by 0.2 percent in the second quarter compared to the first quarter, the first quarterly contraction in the U.K. since 2012. Most of the damage was done in April, following a flurry of stockpiling ahead of the original Brexit date of March 29 and then a collapse as carmakers shut down in anticipation of post-Brexit supply disruptions that obviously never came. Yet, the economy was also stagnant in June after slight growth of 0.2 percent in May, and recent surveys suggest the stagnation continued into July. The independent U.K.-based National Institute of Economic and Social Research said it still expects 0.2 percent growth in the third quarter, while acknowledging a “significant risk” of further contraction and thus a technical recession. Preliminary estimates for third-quarter output will be released Nov. 11, a week and a half after the U.K. is scheduled to leave the European Union.

Jitters far and wide. Japanese growth slowed in the second quarter to 1.8 percent, compared to 2.8 percent in the first quarter. German exports fell 0.1 percent from May to June and around 8 percent year-over-year. French industrial production dropped by 2.3 percent from May to June, while manufacturing in the second quarter dropped 0.3 percent over the first. The International Energy Agency reported that oil demand growth through the first five months of the year was the slowest since 2008, and it again cut its demand growth forecast by 100,000 barrels per day in 2019 to 1.1 million bpd and by 50,000 bpd for 2020. A majority of economists surveyed by Reuters, meanwhile, said the U.S. trade war with China is pushing the U.S. toward a recession.

China’s struggling local banks. A Chinese sovereign wealth fund is reportedly planning to take a major stake in Shandong province’s embattled Henfeng bank. This would be the second rescue of a small or midsized bank in the past couple weeks. The bailout trend started abruptly with the state’s takeover of Baoshang bank in May — the first such move in more than 20 years. This is, of course, evidence of deep structural problems in the Chinese financial system that is sounding major alarm bells across China, as troubled local banks have continued to struggle to shed toxic assets and get the liquidity they need amid a broader credit crunch. While the Baoshang and Jinzhou rescues have sparked a jump in interbank lending rates, they didn’t immediately spark a cascading crisis, suggesting Beijing may have stumbled upon a blueprint for managing the crisis. Still, watch this space closely.

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