World Economy

Growth policies are less effective without a US-China 'phase one' trade deal, says Morgan Stanley

Key Points
  • Monetary and fiscal policies will be less effective in boosting growth if the U.S. and China don't reach a "phase one" trade deal, said Gokul Laroia, co-chief executive of Asia Pacific for Morgan Stanley.
  • Laroia said the likelihood of reaching a "phase one" deal has gone up because "the bar for what constitutes a deal has actually come down."
  • Robert Daly, director of the Wilson Center's Kissinger Institute on China and the United States, said any deal reached between the two countries will be largely based on Beijing's terms.
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Global growth may now be 'inflecting,' says Morgan Stanley

An increasing number of governments and central banks are taking steps to boost economic growth — but those policies will be less effective if the U.S. and China don't reach a "phase one" trade deal, a Morgan Stanley executive said on Wednesday.

The absence of that deal will prolong economic uncertainty globally, said Gokul Laroia, co-chief executive of Asia Pacific for Morgan Stanley. That uncertainty has caused businesses to hold back plans to invest and expand — a major reason behind slowing growth in many countries.

"A deal coupled with policy is much more impactful than just policy. And the effectiveness of whether it's monetary or fiscal (policy) is a lot lower when you don't have a trade deal done, and when you have an inherent amount of uncertainty hanging over the corporate world not just in Asia, but globally," Laroia told CNBC's Sri Jegarajah at the Morgan Stanley Asia Pacific Summit in Singapore.

The U.S. and China agreed to work towards a "phase one" deal. But Washington and Beijing have since sent mixed signals about whether or not the partial deal would be done.

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In one instance, China's Commerce Ministry said both sides had agreed to cancel existing tariffs in phases. But U.S. President Donald Trump later said he had not agreed to roll back those tariffs. On Tuesday, Trump threatened to raise tariffs on Chinese goods if a deal isn't done.

Robert Daly, director of the Wilson Center's Kissinger Institute on China and the United States, said any deal reached between the two countries will be largely based on Beijing's terms.

"We may get a phase one trade deal, a deal on China's terms because President Trump thinks he needs it for the 2020 re-election," he told CNBC's Jegarajah on Wednesday at the same Morgan Stanley event.

"China will give purchases and promises. Some of the purchases will actually go through, some won't ... This is exactly what previous presidents have achieved," he added.

'Phase one' deal will get done

The U.S.-China trade war, now in its second year, is often cited as one of the biggest threats to a global economy that's already slowing down.

As a result, central banks including the U.S. Federal Reserve, the European Central Bank and many across Asia have slashed interest rates to prop up growth. A number of governments, such as China and India, have cut taxes to stimulate their economies.

Laroia said he's optimistic that a "phase one" deal will be reached, which will benefit the economy and financial markets.

"We're optimistic the phase one deal does get done. The most important thing is that the bar for what constitutes a deal has actually come down, so the likelihood of a deal getting done is a lot higher than if we were trying to solve everything," he said.

"So, if a deal gets done, we're pretty positive on the near-term prospects for both the macro and the markets."