Although US markets reacted positively to anticipated tax cuts and deregulation by US President-elect Donald Trump, his immigration and tariff policies could pose a risk to global growth.
This is according to Mahmood Pradhan (main picture), head of global macroeconomics at the Amundi Investment Institute.
“I think the risk here is if we are going to enter a world where the US imposes tariffs globally, one would expect retaliation by many other countries, starting with China,” he told FSA in an interview.
“The big risk is we don’t know where that ends and it’s not a good recipe for a stable global environment,” he said. “Protectionism is not going to promote a healthy growth environment.”
Investors and public companies have already started to brace for the impact of Trump fulfilling his campaign promises of raising tariffs, but it remains to be seen how other countries will respond.
Some countries more affected than others
Amundi has been modelling how the biggest US exporters globally will be affected, and how much domestic policy space they have to offset some of the shocks tariffs would create.
Pradhan flagged that a 60% tariff on China would be a large hit to China’s economy, potentially reducing its economic growth by 2%.
“But that’s not our forecast for China’s growth,” he added. “We would imagine that China would respond with some domestic policies to offset some of that shock on their economy.”
He said there are other countries however that are more vulnerable to tariffs measures, such as Mexico, Malaysia and Taiwan.
“They look to us to be more vulnerable because of their exposure to the US, not because they are vulnerable in any domestic weakness sense, but they just happen to be paradoxically successful exporters.”
Pradhan said that the countries that will be most vulnerable are those with less fiscal space to increase government spending or less space to ease monetary policy due to their own inflation objectives.
“China will be vulnerable, but they have space. Mexico not so much. But this is such a big global event, one should not single out a country and label it as the most vulnerable. There are a lot of innocent bystanders,” he said.
However Pradhan, who used to serve as a director at the International Monetary Fund (IMF), is optimistic about how countries will respond to maintain a stable global economic backdrop.
He pointed to how China did not let its currency weaken during the Asean financial crisis of the late 1990s. “You can be optimistic that other countries will act to avoid second and third round effects of this type of risk,” he said.
Inflation will be data and policy dependent
When it comes to inflation, although the US central bank has explicitly expressed it will be data dependent first and foremost, Pradhan expects that the Fed will also be closely watching what policies are enacted under the new administration.
Fed chairman Powell has not yet explicitly commented on the potential impact of policies under Trump, but Pradhan believes the US central bank is likely conducting their own assessment internally on what impact policies will have.
“I think the Fed will be data dependent, but will also now be policy dependent,” he said.
“Strict immigration control would in my view, lead to higher wage pressures, tariffs will lead to higher inflation, corporate tax cuts will raise the fiscal deficit, so it will be a fiscal loosening – all of those three ultimately should add pressure on inflation.”
“We’re seeing some of this now reflected in the market prices,” he added. “We’re seeing higher bond yields. We’re seeing the market now expecting less rate cuts than it did before the election result.”
