Global economy under Trump
For most Americans and people around the world, Donald Trump winning the US presidential election and becoming the next US president was indeed a big surprise. This surprise win has already had a substantial impact on global financial markets. Financial markets are very good in the game of guessing or let’s say anticipating the next event. What happens next will depend on how campaign-trail rhetoric translates into policy proposals. Donald Trump has already calmed the global financial markets in his first speech after the winning result was announced.
I think one urgent path that he will follow is moderation. This for sure will happen as his advisers weigh in, cabinet picks are revealed, losers from extreme policies make their preferences felt, and, perhaps later on. During his campaign he talked about some critical issues that might affect the global economy. The impact of his aggressive talk will lead to slower trade flows, weaker investment and consumption spending and tighter financial conditions. However, once he is in the Oval office he will moderate his speech and lessen his attacks on the US trading partners.
He has already repeated his promise of stronger growth for the US, the main engine of the global economy, as deregulation and lower taxes boost economic dynamism. However, if he turns toward protectionism, this will lead to a sharp increase in uncertainty that might have the reverse effect. As I said earlier his stance will be more moderate and as he said he promised the best for the USA.
A shift away from open market and easy trade policy and toward protectionism on a global scale would squeeze trade flows. Free trade is good for global economic growth because it exposes firms to those overseas, lifting competition and sharpening the incentive to be efficient. Free and easy trade also helps the exchange of new technologies and international best standards of trade to be practiced throughout the free world. Expanding free global trade is the engine for lifting domestic and global productivity, which should lead to a sustainable source of improving living standards. If during his presidency the world experiences barriers to trade, it would make doing business with those abroad more difficult and more expensive. This would be a big drag on potential growth for the world economy. The impact of new trade policies would be felt over a prolonged time-frame but there are likely to be cyclical impacts associated with the election outcome as well.
Impact on investment and spending
At present Donald Trump’s policies are ill defined and not clear. It is still early for these policies to be implemented and if he can get away with them. The world is still in the dark about what his policies mean and what trade measures will be introduced, how the fiscal stance might be altered and what foreign policy will be put in place. His announcement of capital spending on infrastructure is difficult to assess and monetize. For sure they will be quite costly to the US economy and hence tax payers. The uncertainty about his economic and trade policies create an incentive to delay investment decisions. Although investment spending often makes up only around a tenth of total spending in advanced economies, it is pro-cyclical and accounts for much of the volatility of GDP growth. The bigger the uncertainty shock, the bigger the drag from investment spending and it is likely to be material. To the extent that investment remains weak for an extended spell, it can also affect potential output growth, the capital stock would be smaller than it otherwise might have been, manifesting itself as weaker labor productivity.
Financial conditions may tighten
After a negative reaction, global financial markets bounced back sharply. I know it is still early days to see the true impact of Donald Trump becoming the next US president. If he implements his plan of doubling US economic growth throughout his presidency then the impact will be very positive for global stock markets, the dollar and commodities. However, if he carries out his threat about introducing trade barriers and increase in tariffs on Japan and China then the whole picture will change dramatically. This will affect investment and spending. If stock market falls and consumers are faced with uncertainties to the extent that consumers feel less wealthy as stocks fall, they may adjust their spending plans to reflect that. The impact of wealth effects may vary significantly by country. The US households are likely to monitor their portfolios more closely than people in Europe. Falling share prices will increase the cost of capital for companies, including banks. That can have a second round impact on investment and spending decisions.
It seems that Donald Trump would like to see a more competitive dollar against the US’s trading partners. The dollar has fallen against major currencies and if it lasts, that will represent a modest stimulus to the US economy. However, currencies could be more volatile as the dust settles. The additional volatility could offset the benefit of the weaker dollar for the US and currency movements overall would be indirectly bad for other economies in particular the emerging economies. My biggest worry is to do with the sell-off trend in global bonds that have started few months ago. The selloff has accelerated with the news of Donald Trump winning the US presidency. As I said in my previous articles this selloff could continue for the foreseeable future. How the Federal Reserve will act in the coming months is very important that is worth monitoring for any hint of policy change. — Rasameel