Three reasons why Donald Trump would do well to listen to Bill Clinton....
...and who will be the main beneficiaries of a more US-centric trade policy, and of the enduring uncertainties in Europe since the Brexit vote...?
The words are now almost clichéd: it’s “the economy stupid.” But this mantra from Bill Clinton’s 1992 presidential election campaign still rings true nearly 25 years later. Disaffected Americans, whose average real earnings growth has remained relatively static since 2006, voted against the orthodoxy of the post-financial crisis era: that loose monetary policy by itself could create economic growth. President Elect Trump has, however, already made a seismic, if still rhetorical, shift in policy focus. There was not much scrutiny of his economic policy during the campaign; but if this is more than rhetoric, then there are substantial risks that banks will have to manage carefully over the coming years.
On the face of it, a focus on growth, tighter monetary policy, a rise in US protectionism and looser regulation may not in themselves be bad for banks. But the crisis prevention structures in the macroprudential and financial systems globally have been led by the US. These structures are fragile still and anything that causes them to shift too fast, too soon could destabilise, not just in terms of monetary stability, but also in terms of the global trade system.
There are three areas where banks need to keep a watchful eye on events as they unfold. The first is the obvious contradiction of a substantial fiscal stimulus to fuel growth and tighten monetary policy. Janet Yellen is unlikely to resign before 2018 and will want to keep the steady approach to raising rates that the Fed has so far exhibited. While this may frustrate banks because it is slow and affects profitability, it is a safe way of ensuring that there is as little shock as possible to the financial system in the US and the world as it moves to return to “normal” interest rates.
By pushing for a substantial fiscal stimulus, President Elect Trump could be adding as much as $10 trillion to US government debt. In Gillian Tett’s words, this could be an "inflection point" for the US and global economy. Combined with tighter import controls, that much money injected into a fragile system will create inflationary pressures and, ironically, have the potential to dampen growth if real wages do not increase in the same way. It points to a faster and more hawkish tightening of monetary policy through higher interest rates. While the Fed might hold off on putting up rates in December as is currently priced in, it will be watching the impact on inflation of new measures very closely.
Second, if the campaign rhetoric is to be believed, the US’s position as the driver of globalisation is likely to be thrown into reverse. It is unlikely that the Trans Pacific Partnership (TPP) will be fully ratified soon, if at all. The Transatlantic Trade and Investment Partnership (TTIP) is unlikely to develop further for the foreseeable future because of challenges on both sides and the threat to withdraw from the North America Free Trade Area (NATFA) will disrupt the strong trade relationships between Mexico, Canada and the US in particular. Altogether the countries within these agreements plus China represents some 88% of US trade with the rest of the world.
China has moved swiftly to tighten trade relationships with ASEAN countries and against the backdrop of slowing global trade growth, this poses serious questions for banks, both about their location globally and about their trade finance functions. China, and Asia more generally, are likely to be the main beneficiaries of a more US-centric trade policy and of the enduring uncertainties in Europe since the Brexit vote.
Finally - the Trump campaign voiced the opinion that all the post-financial crisis regulations, including the Dodd-Frank Act, had stymied US growth without ensuring that banks were not “too big to fail.” Were these regulatory and macroprudential structures to be unravelled, there would ensue a long period of uncertainty. In the current climate, any additional uncertainty is unhelpful, not least because compliance costs are already high and further changes have the potential to drive them higher.
For the UK, the immediate aftermath of the US election result was to strengthen sterling last week. This, if sustained, has the potential to affect monetary policy and growth here, as the projected impact on inflation through higher import prices fails to materialise. In the age-old words of every economics tutor, “If America sneezes, the rest of the world catches a cold.”
Rebecca Harding, Liveryman
Co-Founder and CEO
Tel: +44 (0)7803 710711
Email: rh@equant-analytics.com
Twitter: @RebeccaAHarding
Skype: rh.equantanalytics