Will US President Trump make America great again?

Forewarnings of economic harm from Trump’s policies in areas such as tariffs and mass deportations were prevalent before he won November’s election but were clearly not priced in by financial markets as US equities and the US dollar rallied in subsequent weeks and even months. Tariffs act like a negative supply shock; they reduce growth below what it would otherwise be, and raise inflation above levels that would be expected to prevail in the absence of tariffs.

Now, of course, tariffs have only just started, with more to come from next month, but already the signs are not good. The slump in the US dollar and equities seems to be just as much about the uncertainty about the on-off nature of their introduction than the actual impact of the tariffs. If that’s still to come the slide in US assets so far could just be a small ddown paymenton what we might expect in the future.

In addition, we’d say that financial markets have lent too far in the direction of the growth-sapping impact of tariffs and not enough towards higher inflation. If that’s right the one market that has done well recently – the treasury market – could be in some danger. But it is not just tariffs that represent ‘bad’ policy. Deportations of migrants at a time of full employment merely represents another supply shock that could sap growth and lift inflation. Key sectors of the economy, such as construction, could be hit hard if deportation plans are carried out to the max.

Of course, there are aspects of the Administration’s policy that do seem to lend themselves towards making America great again, but even here we have our concerns. Take tax cuts, for instance. The point about making the 2017 personal tax cuts permanent, should it happen, is that this merely avoids a pitfall for growth (should the tax cuts expire); it does not lift growth unless consumers had been saving more in anticipation of higher taxes; something that seems very unlikely. Corporate tax cuts might seem more beneficial but here we are only talking about manufacturing firms that produce in the US and any such tax cut may do little more than offset the rise in imported inputs for many that result from higher US tariffs.

Another policy, that of deregulation, perhaps offers the best route for making America great again, however that might be interpreted. But even here we need to be aware of the risk that going too far too quickly, which seems to be the Trump raison d'être at the moment threatens significant disturbances and even mistakes. Hence even if the ultimate aim is justified, such as shrinking the government workforce to reduce the budget deficit, the crash-bang method could create notable casualties along the way.

But while there might be reasons to be concerned that the new Administration’s policies are more likely to harm the economy than help it, does this turn MAGA into MABA? Steven Barrow, Head of Standard Bank G10 Strategy, said it would not be necessarily true. “We could, for instance, make the argument that the US has been ‘exceptional’ in the past despite the government and not because of it and even ‘bad’ policies now won’t shake the US’s dominance. We suspect that this will be the case; that the US will broadly outperform its peers even if the new Administration has caused some early wobbles”, said Steven Barrow.

However, does this also imply that US assets will stage a substantial comeback? Again, not necessarily. This is because Steven Barrow feels that US exceptionalism has driven such a concentration of global investor appetite towards US assets, particularly stocks, that it might be hard to come back from, even if the economy recovers quickly and inflation eases.

In short, the US has already been ‘great’ in terms of economic and asset price outperformance and overseas investors are so wrapped up in it that even if Trump’s policies don’t make the US ‘bad’ the scope for future outperformance in the likes of equities and the dollar seems quite limited.