President Donald Trump’s biggest success has been the economy. But trade wars, rising interest rates, and the wearing off of fiscal effects is expected to bring Trump’s economic boom down a peg, and not much better than his predecessor’s two years prior. Photographer: Andrew Harrer/Bloomberg
This is really as good as it gets for the U.S. economy. It’s all downhill from here.
Not that downhill means lower incomes and a recession.
It just means that 2019 is going to look more like 2016 in terms of growth rates.
President Trump likes to boast about the U.S. economy growing over 4%. But that is based on quarterly growth rates compared with the previous year. On an annualized basis, the U.S. economy isn’t all that much better than it was in 2014 and 2015, when GDP came in at 2.4% and 2.6%, respectively. This year’s growth rate will hit somewhere between 2.8% and 3%, thanks to tax cuts and other fiscal stimulus. But next year, if BNP Paribas’s calculations are correct, U.S. GDP slows to 1.8%, which is not a heck of a lot better than President Obama’s last year in office, when GDP ended the year up 1.6%.
Most economists have pegged next year’s GDP at more than 2.2%, but trade wars and the wearing-off of fiscal stimulus are toning down Trump’s economic miracle.
“Downside risks are likely to remain a key focus over the months ahead,” says Robert McAdie, global head of strategy research for BNP Paribas in London. Its GDP forecast of Trump barely beating Obama is below market consensus.
“Global economic growth looks more challenging for 2019 than 2018,” McAdie says, citing “fading tailwinds” and the China-U.S. trade war.
BNP lowered its growth forecast for both the U.S. and China by 0.2 percentage points. The close shave on both economic superpowers means global growth of around 3.4% next year, down from 3.6% in this year’s forecast.
But McAdie and others at BNP Paribas wrote in a report to clients on Wednesday that investors should be prepared to get defensive. A growth slowdown will be the theme for 2019, even though the economy will still be in growth mode.
Jerome Powell, chairman of the Federal Reserve. The Fed is the bigger wet blanket in 2019. Photographer: Andrew Harrer/Bloomberg
It’s worth noting that the coming slowdown has more to do with Jerome Powell than trade tariffs. Global monetary tightening is expected to be a larger headwind next year as the Fed raises rates again and winds down more of its balance sheet alongside the Bank of Japan and the European Central Bank.
Those three central banks have been propping up security markets since at least 2009. The Fed was the first to do so.
The strength in the dollar index due to higher Treasury yields could become troublesome in the near-term. A stronger dollar makes U.S. exports less competitive and exacerbates an already enormous trade gap with China. Trump could up the ante by blaming other countries and go after them next.
The Fed may be the wet blanket in 2019, but that is assuming Trump doesn’t slap China with tariffs on everything it sells to the United States. Some of those goods are made for American companies shipping to consumers back home.
Protectionism is often associated with lower employment as job gains in protected industries like steel are offset by losses elsewhere. A 0.2% decline in U.S. GDP equates to about 250,000 jobs, according to Barclays, which estimates that a higher 0.4% GDP drop in China could yield similar losses. Whether growth declines are associated with permanently lower employment in a certain sector depends on the relationship between changes in trade volumes, rates of productivity growth, and labor participation rates.
“Trump needs to change his attitude or the U.S. will become the biggest loser of this trade war,” says Naeem Aslam, chief market strategist for ThinkMarkets and a Forbes contributor. “I think that we are moving fast toward a moment when the U.S. loses control as other countries gain a stronger position from working together (against the U.S.).
Trade war outcomes are just educated guesses at this point. Worst-case prognostications have become a favorite past time of Trump haters on social media.
But for those assuming the worst from trade tariffs, a hawkish Fed and tighter liquidity in Europe and Japan added to the mix make it easy to forecast lower global growth. Whether it slows to Obama levels depends on the Fed, Trump and Xi Jinping.
Happy times. A trader reacts on the floor of the New York Stock Exchange in New York, U.S., on Friday, Aug. 31, 2018. Wall Street still largely likes what this president has done with the economy: deregulate and cut taxes. Photographer: Michael Nagle/Bloomberg
Take one look at the stock market and it is easy to think the U.S. is unstoppable. Trump seems to think so. He recently joked in a jab to Obama that he has found his “magic wand,” a reference to Obama’s comment about Trump needing a magic wand to bring certain manufacturing jobs back to the States.
In financial markets, there has been a disconnect between the performance of the U.S. stock market and other markets. The Nasdaq is up 15% this year, while the MSCI Asia-Pacific is having its longest sell-off in 16 years. The Shanghai Composite index is now at a four-year low, and down some 25% from the January high point. Some European equity markets are experiencing corrections of a lesser degree but are still money losers this year. Germany’s DAX index is down 12%, reflecting trade tensions with the U.S. The FTSE 100 index is down 8% from its high in May.
Trump’s America is doing well based on nearly every business and consumer sentiment index out there.
Despite his low approval numbers, he is rewriting the rules of trade at the only time possible—in the middle of a bull market, the longest bull market in history.
But as BNP Paribas warned this week, there are “hazards ahead.”
The IMF’s Christine Lagarde stepped up her warnings recently about how the escalating U.S.-China trade war could deliver a shock to poorer economies. Trump is set to whack China with another $200 billion in tariffs.
If Trump’s GDP does fall to near-Obama levels, it would be a big blow to his view of his presidency, a presidency which he has graded A+.
For the president, the economy is booming thanks to his policies. Nearly everyone in the market would agree with him. But this economic recovery has been in place long before Trump came to town. While few believe that it was Obama’s economic policies that kept the U.S. growing post Great Recession (Wall Street knows it was the Fed), Trump’s argument that his economy policy has been better for growth than Obama’s starts to look weaker next year. Political commentators won’t care about business cycles. They will use a 1.8% growth rate, if BNP is right, as yet another example of Trump’s exaggerated claims, a year before the 2020 elections.
BNP’s 1.8% GDP is not written in stone.
“The growth risk is a more protracted trade war involving the EU and Japan,” says Neil MacKinnon, an economist for VTB Capital in London. “That would derail the global economy and puncture the performance of U.S. equities, already historically overvalued,” he says.
In other words, if BNP is right, and the trade wars get worse, a bear market in equities goes global rather than spotty if Trump’s economy doesn’t beat Obama’s next year.
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