Your browser does not support JavaScript! Pls enable JavaScript and try again.

Annual & Mid-year Outlook | Economy

Simmering Tensions

Key Takeaways

  • Tensions between US and China are likely to present real risks to the world economy, with recovery largely dependent on the economic rebound of the world’s two largest economies.
  • Geopolitical / political disruptions are key risks and Citi analysts believe that global portfolio diversification remains paramount in managing potential volatilities.


Some political and geopolitical risks that could introduce volatility in global markets faced with fragile growth prospects in 2020 include:



  • After initially presiding over the longest US expansion in history, economic growth stalled as a result of COVID-19. The weak state of the US economy is likely to be problematic for President Trump’s re-electoral chances. So far, his approval rating has held up, but by some metric has lagged that of many other world leaders since the health crisis unfolded, and is not faring well in key swing states. As we enter the US election season with the presidential election scheduled for 3 November, political rhetoric is likely to get more strident.
  • In April, the US completed the final step to bring the United States-Mexico-Canada Agreement (USMCA) into force and the agreement will take effect from 1 July. In other regions, trade tensions between US and EU may rise, as aircraft tariffs are implemented in addition to other potential catalysts such as auto tariffs and digital taxes on the horizon. Separately, trade talks between UK and US have begun after launching UK-US Free Trade Agreement negotiations on 5 May with further rounds expected in coming weeks.


North Korea:

  • Leaders of the US and North Korea have met three times, first in Singapore (June 2018), in Hanoi (February 2019) and at the Korean Demilitarized Zone (June 2019) to negotiate an end to North Korea’s nuclear and missile programs. However, the efforts appear to have made no substantial progress.



  • President Trump said the US could “cut off the whole relationship” between US and China. Showing continued bi-partisan support for any anti-China legislation, the US Senate passed a bill that may in time force Chinese companies to de-list equities from US exchanges and move their listings elsewhere. The US administration also announced new technology restrictions that could result in a permanent ban in US-derived technology sales to certain Chinese technology companies.
  • The Phase One trade deal signed with US in mid-January includes China’s commitment to purchase an additional $200 billion worth of US products over 2017 levels in four sectors over the next 2 years. With the sharp collapse in oil prices earlier this year and economic disruption from COVID-19, it is unlikely for China to be able to meet the import targets for this year. However, Citi analysts expect the Phase One deal to hold – high profile Chinese goods that come with it may prove to be a valuable political tool for President Trump; while China may want to maintain the global trade order after the already significant growth shock from the pandemic that would be further hurt by a resumption of tariff escalations.


Hong Kong:

  • China’s National People’s Congress (NPC) has voted to approve a new National Security Law that is likely to be enacted officially during regular meetings of the NPC Standing Committee between June to August. Potential resurging social unrest are a key risk to watch, with months of protests prior to the spread of COVID-19 already putting a strain on Hong Kong’s economy which is in its fifth quarter of recession.
  • Following on China’s passing of the National Security Law, US President Trump announced to start the process of revoking Hong Kong’s special trading status. Hong Kong’s autonomy was certified on a yearly basis compelled by the Hong Kong Human Rights and Democracy Act signed by President Trump last year. The move may have limited direct impact on trade since only 7% of Hong Kong’s exports go to the US and most are re-exports that are tariffed at source. However, this bigger impact may be on businesses’ confidence in using Hong Kong as a regional hub, particularly the 1,300 US firms operating in Hong Kong.



  • Having left the European Union on 31 January, the UK is due to leave its one-year transition period on 31 December. Trade talks have begun and negotiations are likely to be tough. However as COVID-19 has caused sharp downturns in both the Eurozone and UK economies, Citi analysts think pragmatism may prevail on both sides with a basic trade agreement reached before the end of the transition period.



  • Relations between Italy and the EU were strained when COVID-19 struck Northern Italy and the initial response to Italy’s request for assistance with healthcare supplies were lacking. However, there now appears to be greater collective action in the Eurozone, with movements to assist the countries most impacted by the virus outbreak with mutualized debt obligations. The composition of the EU’s €750 billion Recovery Fund that sees 5 countries (Italy, Spain, Greece, Portugal and Cyprus) receiving more than half of the allocation has gone a long way in repairing relations between Italy and the richer EU states.



  • Effective 19 May, China imposed an 80% tariff on Australian barley imports for five years following an 18-month investigation. This decision followed an import ban on four Australian abattoirs earlier in the month for beef exports to China. Citi analysts expect that the Australian government may pursue the matter with the World Trade Organisation unless China decides to remove the tariff. The timing of the dispute corresponds with Australia calling for an independent investigation into the origins of COVID-19.  


Middle East:

  • Saudi Arabia oil infrastructure were damaged after an attack in September 2019. In January, US-Middle East tensions took a turn towards escalation after a strike by the US on Iran.