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China’s economy risks being washed aside by a Trump tsunami

The president-elect’s brand of political insularity, economic protectionism and policy confrontation could deal a fatal blow to global markets

PUBLISHED : Monday, 14 November, 2016, 9:25am
UPDATED : Monday, 14 November, 2016, 10:32pm

Global markets are heading into the great new unknown. The election of political outsider Donald Trump has thrown the world into a state of deep uncertainty. The US economy may be set for a huge fiscal boost, but there will be a hefty price to pay in terms of toxic fallout for the rest of the world. Risk assets, emerging markets and China could be swamped by a Trump Tsunami.

One thing is very clear. The world knows very little about Donald Trump and what shape his future policy plank will take. No one has any real clue – probably not even Trump right now. Much of it will emerge on the hoof in the next few months, so it is no surprise the global financial market reaction has been confused so far. US stocks might have hit new record highs on hopes of faster growth but the reaction elsewhere raises considerable concerns.

Risk assets remain on shaky ground. Market fear gauges like the Vix stock volatility index are unsettled, emerging market currencies have taken a battering and there has been another rush by investors into safe haven assets like German government bonds and gold. It bears all the hallmarks of another storm brewing.

The global glut of cheap money may be calming nerves but is no guarantee of future security

Deepening doubts about the future are the stock market’s biggest bugbear right now. The threat of global slowdown, the return of inflation, the end of easy money, the risk of a China hard landing and worries about another nightmare credit event recurring continue to haunt confidence. The global glut of cheap money may be calming nerves but is no guarantee of future security.

Trump could throw a massive spanner into the works. All markets have to go on at the moment is his campaign rhetoric. If his brand of political insularity, economic protectionism and policy confrontation become the Washington norm, it could deal a fatal blow. The global economy is still in a fragile state from the 2008 financial crash and it would take very little to tip it back into carnage again.

Trump’s goal to rejuvenate the US economy sounds good in principle. But plans to slash taxes, boost spending on defence and infrastructure, create 25 million jobs and double annual GDP growth to 4 per cent will be costly. His bill for tax cuts alone could cost some $6 trillion over the next 10 years. It will place huge upward strains on the budget deficit, federal debt and US treasury bond yields.

The US Federal Reserve will be watching nervously from the sidelines, worried about potential overheating risks to the economy in terms of higher inflation from such a big fiscal boost. With the election out of the way the odds definitely favour the Fed lifting rates again in December. But if the Fed thinks Trump’s fiscal policies are too expansionary, the future interest rate backlash could be lethal.

The breakout of a dangerous, tit-for-tat trade war could do untold damage, especially if China retaliates by dumping any of its US treasury holdings

The Fed could also find itself under increasing political pressure to unwind its super-easy policy fixes over the last eight years. Many Republicans have been deeply scornful of the Fed’s unprecedented market interventions and now, emboldened by the party’s clean sweep of the presidency and Congress, opponents will be keen to force it back into line again.

This means US interest rates and bond yields will be heading higher at a faster rate, accelerating global borrowing costs for consumers, businesses and investors. It is not just bad news for world economic confidence but raises dire risks for export-dependent, debt-laden emerging markets.

It will take its toll on slower global growth and weaker world trade, causing China’s export-reliant economy to suffer as a result. If Trump carries out his threat to impose higher tariff sanctions on Chinese manufacturing to protect US jobs, the world economy could enter into an even bigger dimension of risk. The breakout of a dangerous, tit-for-tat trade war could do untold damage, especially if China retaliates by dumping any of its US treasury holdings. Global bond yields would surge.

Increased trade protectionism escalates the risk of a messy hard landing for China’s economy, setting in motion another meltdown in world financial markets. Global stock markets are already dangerously over-pumped on easy money and it would take very little in the way of another fundamental shock to bring them plummeting back to earth.

In the coming months, Trump needs to think bigger picture as he holds the whole world in his hands. If he is not careful he could crush the global economy beyond repair.

David Brown is chief executive of New View Economics

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