Macroeconomy Amid Trade War II

Clashes of the titans in trade May prolong the struggling state.

In the previous piece ,I depicted a rough sketch on the macroeconomic situation amid a trade war between the US and China. Let's add few other factors to make the sketch a bit clearer. Here I start with adding the crude oil price. The previous piece is based on the assumption that crude oil price is $70/barrel. Now let's see what the scenarios will look like when the crude oil price is more than $70/barrel and when it is less than $70/barrel.

Crude oil price: More than $70/barrel

Fed funds rate:5.33%
Chinese policy rate: 3.45%

It will put pressure on existing import. It has the potential to worsen inflationary pressure. Continuation of policy rate hike for a long period. But tax revenue from oil import will rise. Depreciation is needed to make contend exporters. But depreciation of taka will also raise the revenue. Remittances from the Middle Eastern countries may rise.

Fed funds rate: More than 5.33%
Chinese policy rate: Less than 3.45%
It will worsen the strain of import expenditure. As foreign credits will be hard to get, financing existing import expenditure will see an uphill task. Exporters' cost of manufacturing goods will also rise. More depreciation is needed than the previous case. Inflationary pressure will be higher than the previous scenario. Interest rate hike will be higher and continuation of this policy will be longer than the previous scenario. Revenue earnings from depreciation will be higher but import bill of oil and food grain and other necessary items will cast shadow over it. Remittances may be lower than the previous scenario. Part of the oil revenue may be invested abroad and the the rest will be invested in local domestic infrastructure project. Chinese credit/FDI bound to US may enter Middle East amid trade war. China financed infrastructure project in the Middle East may see less participation of South Asian work force.

Fed funds rate: Less than 5.33%
Chinese policy rate: Less than 3.45%
Less stress on import spending. No depreciation is needed. It will put pressure on revenue earning if NBR fails to meet its target. Remittances will rise. Most of the oil revenue from high oil prices will be invested back in the Middle East. More Bangladeshi workers may find jobs in these countries. Part of the money may be invested in Bangladesh, giving a sigh of relief to Bangladeshi private sector that heavily depends on Dubai and Singapore based banks for foreign credit.

Crude oil price: Less than $70/barrel

Fed funds rate:5.33%
Chinese policy rate: 3.45%
Less pressure on import spending on oil. It will help easing the inflationary pressure. Economic recovery will be early. However, less Bangladeshi workers may find jobs in the Middle East. No bigger depreciation is needed. Chinese investment in Bangladesh may rise.

Fed funds rate: More than 5.33%
Chinese policy rate: Less than 3.45%
Depreciation is needed but less than the default scenario ($70/barrel). Inflationary situation will be better than the default scenario. China will be in a much more comfortable position to grab large share of EU market with weakened Yuan and low oil price. More Chinese credit and FDI for the Middle Eastern infrastructure projects may shrink the opportunity of Bangladesh workers. Less remittance flow than other scenarios. Money supplying measures by Bangladesh Bank will be less than the $70/barrel scenario. Chinese investment in Bangladesh will rise.

Fed funds rate: Less than 5.33%
Chinese policy rate: Less than 3.45%
More foreign credit and FDI will come to Bangladesh. Inflationary situation will be better than all scenarios described so far.Ongoing contractionary monetary policy will not last long. Economic recovery will be earlier than any other scenarios.