Global econ­omy un­der Trump

Kuwait Times - - BUSINESS - By Hay­der Tawfik

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.

The dol­lar

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

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