Trump could cause the next global recession: here's how

Wed, 07 Mar 2018  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/trump-cause-next-global-recession-heres-233953884.html 

 ----------------------------------------------------

Trump could cause the next global recession: here's how

The Trump trade wars threaten the global economy. This is not an exaggeration or headline grabbing claim, but an economic slump based on a US inspired global trade war is a distinct and growing possibility as it would dislocate global trade flows, production chains and bottom line economic growth.

Up until a few weeks ago, there was a strong enthusiasm for the economic policies of US President Donald Trump. Tax cuts and planned infrastructure spending were seen to be good for the US and world economies. US stocks and many around the rest of the world rose strongly, to a series of record highs. At the same time, bond yields (market interest rates) surged as the market priced in interest rate hikes and inflation risks from the ‘pro-growth’ policies. It was seen to be good news.

Very few, it seems, were worried about the consequences for US government debt and the budget deficit from this cash splash, especially when the US Federal Reserve was already on a well publicised path to hiking interest rates.

About a month or two ago, a few of the more enlightened and inquisitive analysts started to focus on the fact that the annual budget deficit under Trump was poised to explode above US$1 trillion with US government set to exceed 100 per cent of annual GDP.

A debt binge fuelled by tax cuts was a threat to the economy after the temporary sugar hit.

As this realisation spread and data confirmed some upside inflation risks, markets buckled with a surge in volatility. This prompted further analysis from some of those previously enthused by President Trump’s economic policy agenda.
To be sure, this is still playing out with the tax cuts only just implemented and the infrastructure program yet to be formalised. But little did the market realise that the Trump policy Kool aid was only just starting to flow. With minimal consultation with advisors and no substance to frame how it would work, last week Trump announced the imposition of tariffs on steel and aluminium imports into the US.Markets were jolted and the incredulity quickly intensified when in the wake of the steel and aluminium announcement, Trump tweeted, “trade wars are good, and easy to win”.

Australia’s Trade Minister, Steve Ciobo, was at the forefront of the comments when he said that, “over time, if it [the trade war] got bad enough, we could see, for example, a recession – and we know the consequent impact of that.”

Over the weekend, Trump who was clearly energised by the prospect of a trade war and presumably having considered the number of European badged cars driving on the roads in the US tweeted, “If the EU wants to further increase their already massive tariffs and barriers on US companies doing business there, we will simply apply a Tax on their Cars which freely pour into the US They make it impossible for our cars (and more) to sell there. Big trade imbalance!” The markets have not yet been able to react fully to these threats. Over the next few days, they will be able to react to the potential implications of a broad-based hike in US tariffs and the obvious retaliation from other countries to the impact of those tariffs on their economies.

Should Australia put a tariff computers made in the US? US manufactured aircraft? I’m sure Qantas and Virgin would not be pleased. Pharmaceuticals and medical equipment?

Clearly the answer is no.

But if Trump’s trade war come to pass and as appears possible, if it escalates to a range of other products and to the countries, the fall out will be ugly.

Recession? Perhaps.

It depends on how wide the tariff barriers turn out to be, the extent of retaliation from other countries and how companies impacted negatively from the tariff increases perform. Some may be at risk of going bust. If this turns out to be the effect of Trump’s trade war, those who lose their jobs and have their wealth destroyed will have Trump to thank.

comments powered by Disqus

THE LATEST FROM THE KOUK

Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Thu, 06 Dec 2018

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/dont-fall-spin-scott-morrisons-budget-surplus-no-certainty-224422761.html 

--------------------------------------------------------

Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Prime Minister Scott Morrison could yet be guilty of prematurely declaring that his government will deliver a budget surplus in 2018-19.

Sure, tax revenue is growing at a rapid pace and the government is underspending on a range of government services, but there are still seven long months to go between now and the end of the financial year that might yet blow up the surplus commitment.

PM Morrison’s ‘return to surplus’ boast is based, it appears, on hard data for the first four months of the 2018-19 financial year on revenue and spending information from the Department of Finance. These numbers do look strong, at least in terms of the budget numbers and if the trends on revenue and spending continue, the budget will probably be in surplus. Treasury will be factoring in ongoing economic growth, no increase in the unemployment rate and buoyant iron ore and coal prices over the remainder of the financial year. These forecasts and hence the budget bottom line are subject to a good deal of uncertainty, as they are every year.

If, as is distinctly possible, the economy stalls in the March and June quarters 2019, commodity prices continue to weaken and if there are some unexpected increases in government spending, the current erroneous forecasts for revenue and spending could leave the budget in deficit.

Change of view on monetary policy

Wed, 05 Dec 2018

In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates.

For some time, I have been expecting the RBA to cut the official cash rate to 1.0 per cent, a forecast that has been wrong (clearly) given its decision to leave rates steady right through 2018.

That said, it has been a highly profitable call with the market pricing interest rate hikes when the call was made which has yielded a decent return as time has passed.

My updated profile for RBA rates is:

May 2019 – 25bp cut to 1.25%
August 2019 – 25bp cut to 1.00%
November 2019 – 25bp cut to 0.75%

The risk is for rates to 0.5% in very late 2019 or in 2020

It will be driven by:

  • Underlying inflation remaining below 2%
  • GDP growth around 0.25 to 0.5% per quarter in 2019
  • Annual wages growth stuck at 2.5% or less
  • Global growth slowing towards 3%
  • Labour market under-utilisation around 13 to 13.5%

There are likely to be other influences, but these are the main ones.

AUD, as a result, looks set to drop to 0.6000 – 0.6500 range.