Key risks ahead for the global economy

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The upcoming presidential election in the United States in November 2024 is in sharp focus after recent political developments in the United States.

Former President Donald Trump’s poll numbers are strong after the recent Republican National Convention which came days after he survived an assassination attempt.

And the Democrats need to quickly coalesce around a new candidate after President Joe Biden stopped his re-election bid and endorsed Vice President Kamala Harris.

There is the risk of elevated policy uncertainty should Mr Trump win a second term as US President.

The prospect of a Trump victory - and its impact on the US economy - is the biggest risk facing the global economy for the rest of the year and into 2025.

The other two key risks – sticky inflation and China’s uneven economic recovery – are closely connected with the situation in the US. These other risks would be worsened if the world witnesses a second Trump presidency.

A second Trump term

Mr Trump’s proposed changes to tax policies, trade policies and immigration policies are expansionary, which means they have the potential to boost the economy. However, this also means that they will likely have inflationary consequences – a huge worry given the stickiness of inflation in the US.

From a tax policy front, the personal income tax and corporate tax cuts enacted during Mr Trump’s first term are due for renewal in 2025. If he wins office again, Mr Trump will likely renew the tax cuts – an inflationary move because it is supportive of more consumer and business spending and demand.

With immigration being a major sticking point for American voters, Mr Trump has proposed various measures to restrict immigration into the US and also went further to suggest repatriation of unauthorised immigrants. This may well lead to a tighter work force and is inflationary as well.

A major signature of Mr Trump’s first term was the trade war with China. If he regains power, he has made it very clear that he will increase trade tariffs against China to as high as 60 per cent. In fact, all of America’s trading partners are at risk as Mr Trump has also mooted a universal 10 per cent trade tariff on all imports into the US.

He has also suggested replacing income tax with trade tariffs – meaning that the US government would rely on taxing imports as a major source of revenues, rather than taxing the income of Americans. Regardless of which policy he chooses, the effect would be inflationary as it would substantially increase the cost of imported goods and services into the US.

A group of Nobel Prize winning economists led by former World Bank Chief Economist Joseph Stiglitz have warned precisely of this inflationary risk from Mr Trump’s proposed policies. Former US Treasury Secretary Larry Summers went even further to suggest that Mr Trump’s proposal to replace income tax with tariffs is a very bad idea and warned that his policies risk igniting inflation and slowing down growth at the same time, potentially triggering stagflation.

Persistent sticky inflation

Persistent sticky inflation remains a concern not just in the US, but potentially other countries too. Crude oil prices have been grinding back up above US$85 per barrel as the Middle East’s geopolitical risks continue, while shipping rates have climbed anew as shipping lanes across the Suez Canal remain disrupted.

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Prices of copper and other industrial metals have risen back up towards the high of 2021. Further rises in commodities prices risk exacerbating the on-going stickiness in global inflation. In the US and Australia, higher shelter and home rental costs have also contributed to sticky inflation.

Closer to home, there are some nascent signs of stickiness in services and travel related inflation in Singapore. Across other Southeast Asian countries such as Malaysia, Thailand, Indonesia and Vietnam, their respective central banks are expected to adopt a wait-and-see attitude with no rate cuts projected for this year.

The concern is that this sticky inflation may prolong the risk of interest rates staying “higher for longer” and further delay the anticipated rate cuts from the US Federal Reserve.

Uneven recovery in China

Mr Trump’s laser-focused targeting of Chinese imports will also throw a spanner into the uneven and patchy recovery in China’s economy.

Already, the Chinese property sector is going through painful debt restructuring as both home sales and prices continue to fall. Key manufacturing indicators like the Purchasing Manager’s Index (PMI) and industrial production have yet to show strong recovery. As a result, China’s second quarter GDP growth turned out to be much weaker than expected at 4.7 per cent. Consequently, we have downgraded our China GDP forecast for this year to 4.9 per cent from the previous forecast of 5.1 per cent.

Unlike many other countries grappling with rising prices, China faces the opposite problem of inflation remaining near zero. That presents a whole new set of problems because it indicates soft demand for credit and weak consumer confidence.

Having said that, the Chinese authorities have instituted various stimulus measures to strengthen the economy. Specific to the property sector, there were a series of stimulus measures in the second quarter to tackle both weak demand and alleviate the issue of excessive supply. Various downpayment restrictions have been relaxed across key cities and relending programs were introduced to soak up unsold units. The recently-concluded Third Plenum reiterated the authorities’ commitment to pursue “further deepening of economic reforms”.

Fed still seen starting rate cuts later this year

Despite the potential risks, there are still silver linings on the horizon. We believe that China’s strong economic measures will finally stabilise the economy and help it to achieve its five per cent growth target this year.

For the US, the recent softening of job market and the on-going gradual pull-back in inflation will likely provide the Fed with enough confidence to start its gradual rate cuts towards the end of the year and into 2025, supporting the country’s growth momentum. At the time of writing, we maintain our forecast for the start of rate cuts in September 2024.

The global supply chain and trade flows had proven resilient to the tariffs from Mr Trump’s first term in office, while the global economy has adjusted well to the strong rise in interest rates over the past three years.

These have given the International Monetary Fund (IMF) the confidence to project a “broadly unchanged” growth trajectory for the global economy and it has kept its baseline forecast of 3.2 per cent in economic growth for the world for this year and 3.3 per cent for next year.

Nonetheless, investors need to be aware of the potential policy risks of a second Trump term, the continued stickiness of global inflation and the uneven recovery in China’s economy. Gold will be a good safe haven hedge in such times of increasing geopolitical risk and elevated policy uncertainty. It is more important than ever to maintain strong discipline in risk management, good prudence in investment decisions and adequate portfolio diversification of risks.