Measuring the effect of a US spree on SA

NOW that we are over the shock of Donald Trump’s victory, we are faced with understanding the implications of the policies promoted during his election campaign.

“Make America Great Again”, a slogan first used in Ronald Reagan’s presidential campaign and adopted by the president-elect, summarises the policy direction that will be taken by Trump — spending more to grow the economy and adopting protectionist trade policies.

US markets have received the prospect of increased spending with open arms, while the possibility of protectionist measures has left emerging markets in dismay.

The fiscal stimulus and tax cuts proposed by Trump are expected to propel GDP growth. Predications by the Organisation for Economic Cooperation and Development suggest US GDP should accelerate by 3% in 2018.

To fund his spending splurge, Trump plans to increase the fiscal deficit by at least $10-trillion (about R140-trillion). These policy measures are expected to yield higher inflation. There has been an increase in US bond yields as a result.

It appears that the global economy also stands to benefit from increased spending in the US — although not immediately, and the caveat being that trade agreements are not significantly adjusted.

An absence of protectionist measures would mean that increased demand from US businesses and households would translate to higher import demand. Increased spending on infrastructure should boost commodity prices, which will support risk appetite and sentiment towards emerging markets and commodity-producing countries.

But should protectionist trade policies be implemented, emerging markets would bear the brunt. This would be accompanied by more episodes of risk aversion, weaker emerging-market currencies and tightening of monetary policy.

As it stands, emergingmarket monetary policy remains easy, save for Mexico’s — Banco de Mexico hiked rates 50 basis points following the large depreciation of the peso.

China and India are expected to cut rates between now and the second quarter of next year.

Domestically, the path of monetary policy hinges on international developments. Inflation is expected to ease notably in the year ahead, supported by weak domestic demand that remains constrained by subdued economic growth, poor confidence and feeble household credit demand.

Food inflation — with the exception of meat prices — is easing. It is safe to say that domestic factors do not warrant further rate hikes.

However, in the event that global growth and commodity prices increase in response to fiscal stimulus from developed economies, the domestic economy will benefit via increased export volumes and prices. In this scenario the domestic economy, along with employment and wages, should pick up.

The positive growth effects would result in increased domestic demand although a rise in imports would offset increased exports.

While the improved global backdrop should bode well for emerging-market currencies, it also results in higher inflation and higher global policy rates. In response to rising price pressures, the Reserve Bank would have to gradually increase rates.

Should protectionist trade policies be adopted, the improvement in commodity prices would be limited by increased risk aversion, which would result in increased capital outflows, higher bond yields and a weaker rand.

In this scenario the Reserve Bank would have to tighten monetary policy more to stem rising inflation.

Nxedlana is FNB chief economist