The Telegraph: Trump and Xi both benefit from a trade-off

Last week marked the second anniversary of Trump’s presidential inauguration. So how is the world’s largest economy bearing up under “The Donald”?

Trump’s third year in office begins amid bitter rows about extending the wall on America’s Mexican border, Congressional gridlock and an ongoing federal government shutdown. Beyond the caustic headlines, though, the economy is doing quite well.

Growth last year was no less than 2.9pc, the highest in over a decade. But as the global economy slows and amid frequent spells of turmoil on Wall Street, there is increasing concern stocks could soon head south, with the US economy stagnating.

The centrepiece of Trump’s economy policy so far has been his 2017 Tax Cuts and Jobs Act, a multi-billion-dollar boost, much of which went to shareholders in the form of stock buybacks but which also fuelled business investment.

Lower taxes quickened a gradual US recovery that started in 2010 in the wake of the financial crisis – the revised 2019 growth number could top 3pc. This expansion helped create an additional 312,000 jobs last month, way above expectations, with wages growing 3.2pc, the largest annual gain since 2008.

While most major economies slowed last year, US growth rose significantly, up from 2.3pc in 2017 – something Trump likes to crow about. There’s a broad consensus, though, going way beyond the president’s usual detractors, that the impact of his tax cuts will soon fade. That’s one reason the International Monetary Fund last week forecast US growth will now fall, predicting 2.5pc for 2019.

Jerome Powell says the Federal Reserve will implement more “quantitative tightening” in the coming months, further shrinking the US central bank’s balance sheet following years of post-crisis emergency expansion. But the Fed chairman sees “no near-term risk” of a recession.

Having said that, Powell says he’ll show “patience” when adding to the nine rate rises since late 2015, four since he took over from Janet Yellen last February. The Fed is holding fire, then, as financial markets wobble. US rates could stay on hold at 2.25pc-2.5pc throughout 2019 – an outcome the Fed futures market has priced in, at least for now.

There remains a chance the Fed could raise rates again this year – if, for instance, the government shutdown quickly abates or the US-China trade dispute is solved. But even if Powell holds fire, America’s interest rate cycle has turned, with the Fed’s ultra-loose monetary policy starting to normalise.

That’s something no other major economy has achieved. The Bank of England is still keeping rates ultra-low, at 0.75pc. And the ailing eurozone remains propped up by the European Central Bank’s zero nominal rate and continued quantitative easing.

The US banking system has ample liquidity in the form of decent reserves. And, despite the Dow Jones Industrial Average bellwether share index shedding 7pc during 2018, the six largest US financial institutions last year earned a return on shareholders’ equity of 10pc or more – for the first time since before the financial crisis. Again, the contrast with the eurozone and its debt-laden banking sector is stark – a reality likely to weigh on the single currency’s valuation in the months to come.

Yet with the month-long shutdown now affecting millions of Americans, US growth is under threat too. Trump’s management of the dispute over $5.7bn in public money to build his long-promised wall may be exposing his weaknesses as a dealmaker – which, in turn, is raising fears he’ll fail to settle his trade war with China.

Earlier relief that Trump reached agreement with Canada and Mexico on alterations to the North American Free Trade Agreement has been eclipsed by his threat to ditch Nafta entirely if Congress refuses to ratify the deal. Such fears are dwarfed, though, by the China dispute, with tariffs now applying to nearly $300bn in US imports – a figure that could rise further if Washington and Beijing fail to strike a deal.

Trump’s strategy seems to be helping his blue-collar “political base”. US steel producers have been hiring steadily, adding capacity since the president took office. But American firms using steel and aluminium – or producing any of the thousands of goods subject to retaliatory Chinese tariffs – are suffering.

Tariffs push up consumer prices, of course, not least of cars and other manufactured goods. And while there are about 250,000 steel and aluminium workers in the US, there are more than seven million working in heavy steel-using industries across America – industries made less internationally competitive with Trump’s tariffs jacking up the price of their key raw material.

The big picture is that global growth will fall to 3.5pc in 2019, according to the IMF, down from 3.7pc in 2018. While the “advanced economies” will slow from 2.3pc to 2.0pc growth, the emerging markets and developing countries are set to keep expanding at a pretty fast 4.5pc clip.

UK growth will pick up next year, “despite Brexit”, says the IMF – a fact our mainstream broadcasters largely ignored – while Germany is set to slow. But what really stood out in last week’s IMF forecasts was the impending slowdown in China. The GDP of the People’s Republic increased 6.6pc in 2018, the lowest rate since 1990. It is set to slow further to 6.2pc in 2019.

Many China-watchers question the veracity of official data and believe true Chinese growth is a lot lower – around 2pc-3pc. That amounts to near-stagnation pace in a country where population growth, despite slowing of late, is still a decade away from its projected peak. Beijing has already loosened monetary and fiscal policy. And, amid rising debt levels, the Fitch ratings agency says Chinese corporate bond defaults hit a record high in 2018.

The share of world GDP accounted for by international trade doubled from around 30pc in the early Seventies to just over 60pc in 2005. After taking a hit during the financial crisis, it remains at around 60pc today. This US-China trade spat is not, then, of historic proportions. But it could well escalate.

Perhaps the best hope it won’t is that the world’s two largest economies are now slowing. With Trump up for re-election next year and President Xi facing civic unrest, both want strong growth maintained.

That may ultimately be what could forces them to compromise – allowing Trump to campaign in a baseball cap displaying a new slogan: “Dealmaker-in-Chief”.

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