What does the Trump Effect Mean for the Global Finance?
As Donald Trump takes the stage for his inauguration as president of the United States of America, all eyes will be on the global markets. The word on every analyst, economist and investor’s lips is “uncertainty” as they look at the next 12 months.
For every argument that a Trump presidency will be good for economic growth, there’s an equally compelling argument that the world is headed for economic ruin. Some have tried to look at economic trends since election day in November, but those aren’t entirely indicative of what the next year will hold.
The Effects of Trump being President on the Global Economy
Here is what the experts are saying we should expect as Donald Trump takes office, along with the potential impact of his economic policies.
American Growth Doesn’t Mean Global Growth
In the case of the global economy, what’s good for the goose (in this case, Donald Trump and America are the goose) isn’t always good for the gander. America’s economic plan to increase jobs and reduce imports can cripple local economies and multinational businesses.
“For the first time since the 1930s, the US has a president who views trade as a zero-sum game,” Anatole Kaletsky writes at The Guardian. “Trump’s protectionist campaign rhetoric may not have been meant literally, but if he fails to deliver any of the trade curbs that he promised, Republicans will suffer a backlash from what is now their core voter constituency, voters in declining industries and regions. US global leadership is therefore bound to shift away from free trade, globalisation, and open markets.”
America is such a large country that its decision to close its trade doors (or leave them slightly ajar) could push the global economy toward an economic slump. Other countries could also follow suit with similar economic strategies, creating a chain reaction of global trade issues.
“Essentially, lower imports to the US and a stronger dollar from Federal Reserve rate hikes, combined with higher servicing costs for debt held in dollars, would curtail economic activity, especially in emerging markets, and drive global GDP lower than it would be otherwise,” Bob Bryan explains on Business Insider.
American Growth Doesn’t Mean Global Growth
“Global growth is expected to be 0.1% lower annually than the baseline projection without Trump’s policies by 2020. While this may not seem like a lot, global growth was at only 3.1% for 2015, and analysts call anything under 2% growth a global recession, so there is little room for negative shocks.”
In other words, the world isn’t in global recession now, but it wouldn’t be hard to fall into one.
While it’s easy to think about the global economy and American politics as abstract concepts, international changes have very real effects at the national level.
For example, Australia’s JCP Investment Partners worry that a booming United States economy, brought on by domestic job growth, could hurt their country’s own job market and leave its economy vulnerable.
“Whilst the developments in the US […] are unequivocally good for the growth prospects of the US economy, we believe that Australia’s vulnerability is higher in this new world because Australia relies on foreign capital for financing domestic capital accumulation and gains a great deal from open international markets,” Australian Financial Review reporter Jonathan Shapiro quotes from JCP’s 2017 market outlook. “[This will] cause a large shock to the Australian household sector, resulting in less credit availability and higher interest payments.”
Not only would the Australian housing sector come to a grinding halt, JCP says, but construction growth and consumer spending would slow, pushing Australia into a recession — even as America flourishes.
Markets Are Waiting to See What Plays Out
Despite predictions as to how Trump’s presidency would negatively affect the global economy, there is room to be optimistic. The World Bank is actually predicting growth in 2017 and expecting a fiscal stimulus.
“The World Bank says the prospect of a big fiscal stimulus by incoming US president Donald Trump could lead to ‘stronger-than-expected’ global economic growth in 2017 if he avoids erecting trade barriers that risk triggering a trade war ‘retaliation’ from other countries,” John Kehoe writes at the Australian Financial Review.
“In a message seemingly aimed at the incoming Trump administration ahead of the change of political power on January 20, the World Bank said developments in the US economy would have large effects ‘far beyond its shores.’”
However, some experts believe this optimism is based purely on hope, not empirical evidence or even clear plans.
“The strangest thing about the recent burst of economic optimism in the US, and to a lesser extent worldwide, is the near absence of any facts to support it,” Adam Creighton writes at the Australian. “Even the interest rate forecasts in Australia’s mid-year budget update … will be higher: not because anything much has changed in Australia, but because Trump’s promised cocktail of massive tax cuts and infrastructure spending on the other side of the world might jolt global borrowing costs out of their post-crisis torpor.”
Even Russia’s President Vladimir Putin, who believes there is a lot to gain by a Trump presidency, is waiting to see what happens before celebrating. The country’s economy has floundered in the past few years amid sanctions, falling oil prices and heavy military spending. While Putin viewed Trump’s victory as a positive for the country, he’s also uncertain about the future relationship between the two countries.
“Putin knows that he cannot continue to invest so heavily in the armed forces and there are credible reports that their share of the budget could be slashed by a third in next year’s budget,” Nicolae Reutoi writes for Beyondbrics.
“Although the parlous state of the country’s finances is unlikely to bring him down, the Russian president is concerned about its impact on his legacy. For him to be regarded as one of Russia’s great leaders, he must revive the economy. In order to do so, he needs to emerge from his struggle with the west as a victor.”
Last Week’s Press Conference Gave Us a Glimpse Into the Future
Since the election, American stocks have been on the rise. Companies believe Trump will take a pro-business approach to the country, which excites American investors. However, the press conference on January 11 showed exactly what kind of influence Trump has on the global economy — for better or worse.
“Mr. Trump’s first press conference since the November 8 election contained no details on tax cuts and infrastructure spending, two factors that had fuelled the five-week rally in stocks and a selloff in global bond markets,” Jens Meyer writes at the Financial Review. “But over the past few weeks investors have become increasingly reluctant to extend the so-called Trump trades without more facts to back up the policy speculation, and they were hoping that Mr Trump would provide some more details at his press conference.”
Throughout the conference, American markets were jumping back and forth, and then took a dive as cautious investors realized none of their questions had been thoroughly answered and few of their concerns had even been addressed.
“It was enough to send the dollar tumbling back below 114 yen for a time, to a 3-month low against the Canadian dollar, while Wall Street also looked set for a damp start after the Dow fell short of the 20,000 point mark again on Wednesday,” Marc Jones reported for Reuters.
“Trump’s lack of detail about stimulus also put safety plays such as bonds and gold back in favour and the retreating dollar brought relief for Brexit-bruised sterling and Turkey’s lira, [which has been the] most beaten up currency this year.”
Gold and bonds tend to be the choice investment options when the market is bad — or about to get bad. The fact that these investments saw a significant rise after Trump’s press conference proves how cautiously people are approaching the global economy.
Even those who support Trump have reason to be concerned about what their businesses will look like in a year. The new President is known for going off-script and seemingly saying whatever comes to mind to support his argument. Pharmaceutical companies were the first to experience this during the press conference, when Trump said they were “getting away with murder.”
“After Trump mentioned drug prices and pharmaceutical companies’ tax inversions, the nine biggest pharmaceutical companies by market cap on the S&P 500 shed roughly $24.6 billion in 20 minutes,” Lucinda Shen writes at Fortune.
Keep in mind that this multi-billion dollar plunge occurred after the president simply said a few words about the industry as a tangent; he never actually laid out plans to change the industry. This indicates how sensitive markets are to Trump’s whims right now.
US-China Relations Will Have Global Ripple Effects
While many analysts are focusing on Russia and its relations with the United States, there’s another economic elephant called China that demands attention. While the Obama administration tried to improve relations between the two countries politically and economically, Trump has promised to be hard on China and believes he will bring jobs back from Asia to America.
At the end of 2016, China made adjustments to its currency basket in an attempt to devalue the yuan for the sake of its own exports — an act Donald Trump has repeatedly called “currency manipulation,” while accusing China of running a corrupt economy.
“Unlike countries that mostly let markets determine the value of their currencies, Beijing tries to peg the yuan to a basket of other currencies,” John Schoen writes at CNBC. “Starting Jan. 1, the Chinese State Administration of Foreign Exchange will use a new, broader basket of global currencies to benchmark the yuan’s value. The change will have the effect of reducing the impact of the U.S. dollar on the official valuation.”
Analysts believe this makes the yuan more valuable to investors while stabilizing it against market shifts.
These political power struggles will have real effects throughout the world, even catching some countries in the crossfire. For example, many analysts believe a trade war between China and the United States would devastate the Australian economy.
“I can’t recall a time in recent history when there was so much uncertainty,” David Taylor writes at ABC News Australia. “Right now Australia’s export sector is riding on the back of higher-than-expected prices for iron ore, coal and natural gas, but that’s expected to fall back — quite abruptly, it’s thought — sometime between now and the middle of the year. If that coincides with a significant reduction in the volume of exports China is willing to take from Australia, we could see a few sweaty palms down in Canberra.”
There’s Potential for the Pound to Rebound
Despite the global uncertainty, there is some good news for citizens in the UK. Some Britons (though certainly not all) believe the British economy will be positively affected by a Trump presidency.
“Asked about the potential impact of Donald Trump’s presidency on the UK economy in 2017, respondents to the Financial Times survey of  leading economists expressed mixed views,” FT reporters Gemma Tetlow and Chris Giles write. Their numbers:
- 25 percent thought Trump’s presidency would be positive for the UK economy.
- 13 percent thought his presidency would be negative for the UK.
- 21 percent thought there were factors working in both directions.
The rest of the respondents either thought the effects would be minimal or it was too early to tell. Essentially, there is no clear consensus for how the markets should (or would) behave in this scenario, essentially further increasing their volatility.
The US dollar rallied significantly at the end of 2016 because of high investor expectations around a Trump presidency. This is also because of his pro-business approach to government, mainly through economic stimulus and deregulation.
“Mr. Trump’s policies will take months to be put into effect, but in the meantime the markets will need to key off the US data. Given the very high expectations, the possibility of disappointment is high,” Boris Schlossberg tells The Pound Live.
While the country is up for a challenging year as it negotiates the terms of a Brexit, the British economy is predicted to grow, and many analysts believe the period of uncertainty is over.
“A number of analysts have said that while trade-weighted sterling has appreciated during the past month as economic data has come in strong, the pound is expected to appreciate further as there is more certainty on U.K.’s exit from the EU,” Spriha Srivastava writes at CNBC.
Srivastava quotes Stephen Gallo at BMO Financial Group as saying that sterling could to fall to 1.21 USD in the coming months but then climb back up to 1.36 USD by year’s end.
Today’s Political Scene Poses Long-Term Risks
On January 11, the World Economic Forum released its annual assessment of global risks in the coming decade. The top two challenges that face the world are rising inequality and social polarization — topics that certainly affected the world in 2016 and will continue to have an effect on European elections and markets in 2017.
“The WEF said that the share of income going to the top 1 percent of earners has increased in countries including the U.S., Britain, Australia and Canada since the 1980s,” Alex Morales writes at Bloomberg. “The policy of quantitative easing, whereby central banks make large-scale purchases of government bonds, has exacerbated inequality by enriching owners of financial assets.”
No one knows exactly what a Trump presidency will do to the American economy, the global markets and international relations. While there are reasons to be optimistic, even Trump’s biggest political and financial supports are approaching him with caution. No one seems willing to jump onboard until his bounty of words turn into actions.