One Hundred Days of Madness
What next for the global economy?
I took part in a radio discussion yesterday where we were all asked for one word to sum up Donald Trump’s first 100 days back in the White House. My word was “crackpot”, but the one that others kept bringing up was “uncertainty”. It’s clear that no one really knows what is going on or will happen next as regards the US and global economy, almost certainly including the president himself. Meanwhile the markets are all over the place. The US Treasury market is anticipating several interest rate cuts, consistent with a severe downturn, while the stock market and credit markets seem priced for growth. Here’s my attempt to make sense of where the world currently stands:
Now that the immediate risk of a financial crisis has been averted by Donald Trump’s U-turns, attention has turned to the damage that the US president is inflicting on the real economy. Yesterday we got some hard data in the form of news that the US economy contracted at an annualised rate of 0.3 percent in the first quarter, more than the market had expected and the worst quarterly performance since 2022. But it is hard to read too much into this as the numbers were skewed by a 41 percent surge in imports at the start of the year as businesses stockpiled inventory in anticipation of Trump’s tariffs. Besides, one negative quarter doesn’t guarantee a recession. It didn’t in 2022. Trump, of course, blamed Joe Biden: “I didn’t take over until January 20th . . . When the boom begins, it will be like no other. BE PATIENT!!!”
That said, many other indicators are flashing red. The latest survey shows consumer confidence has fallen to its lowest level in almost five years while the share of consumers who expect business conditions to worsen over the next six months is the highest since 2009, during the global financial crisis. Shipping volumes from China are likely to be down 35 percent on last year’s levels next week. That has raised fears of looming empty shelves, although Trump has brushed these aside, saying children may simply get less dolls for Christmas. Meanwhile a string of large companies have been warning about the impact of tariffs and the ensuing uncertainty on their businesses, including Adidas, Starbucks, UPS and car-maker Stellantis. This Friday’s jobs report will be closely watched for any sign that the chaos, including from Elon Musk’s DOGE, is starting to feed into rising unemployment.
Even so, many economists are still reluctant to forecast a recession. Goldman Sachs, for example, puts the chances at 45 percent. Much obviously depends on the extent to which Trump is able to walk back the “reciprocal” tariffs announced on Liberation Day by striking trade deals that draw a line under the uncertainty. The president claims to have personally agreed 200 trade deals already, although he won’t say with whom. But history suggests that once tariffs are raised, it is hard to bring them back down. It wasn’t until 1934 that President Franklin Roosevelt passed the Reciprocal Trade Act which began the process of reversing the damage of the 1930 Smoot Hawley Act - and even then, it took the rest of the century to lower tariffs to the levels where they stood when Trump first entered the White House.
A more recent historical parallel is Brexit, a similarly monumental act of self-sabotage which led to Britain inadvertently erecting trade barriers with its neighbours. In the case of Brexit, those trade barriers were almost entirely of the non-tariff variety, yet this was still enough to wipe an estimated four percentage points off GDP and has left Britain as the only major economy whose export volumes remain below pre-pandemic levels. Meanwhile the damage to Britain’s credibility by the chaos of those years means that it must now pay a premium to persuade investors to hold its bonds. But just as Brexiteer faith was impervious to reality, it is fanciful to assume that even a recession would lead Trump to change course. Indeed, asked in an interview with The Atlantic, whether there is a Trump Put, he replied: “I don’t see how I could possibly change... I’ve been saying this for 35, 40 years.”
Nor is the damage of Trump’s first 100 days limited to tariffs. Again, there are parallels here with Brexit in the new administration’s assault on institutions, the rule of law and evidence-based policymaking. A case in point is the oil and gas sector, which is key to Trump’s domestic growth agenda. It is bad enough that fears of a Trump-induced recession has driven the oil price down to $60 a barrel, below the level at which it makes sense to “drill, baby drill”. But as Wired reports, the administration’s announcement last week that it wants to cut approval times for fossil fuel projects that usually take years to a maximum of a month is so “manifestly illegal” that any approval granted on this process would be ripe for extensive legal challenge. The result is therefore to increase political risk hanging over the sector.
Meanwhile the economic shock of Trump’s tariff onslaught is reverberating around the world, as you would expect since no one wins in a trade war. In China, surveys show a decline in factory activity in April. Stimulus measures so far announced are unlikely to compensate for the hit to growth, which is many economists now expect to be closer to four percent this year, compared to an official target of five percent. Goldman Sachs reckons up to 20 million Chinese jobs may be vulnerable if the current high tariffs persist. But Beijing insists it is up to the US to make the first move. Instead, Chinese foreign minister Wang Yi urged a summit of BRICS countries in Brazil this week to stand firm: “If one chooses to remain silent, compromise and cower, it will only make the bully want to push his luck more.”
Besides, China has been preparing its defences for a trade war with the US for years, not least by reorienting its supply chains so that a growing share of its trade goes via intermediary countries such as Cambodia, Thailand, Vietnam and Singapore in Southeast Asia, Mexico on the US border and Turkey, Hungary, Poland and Belgium in Europe. The Trump administration wants to use negotiations over tariffs to try to limit this circumvention. But attempts to pick off countries one-by-one will be resisted not least because most of these countries do more business with China than the US. New rules to curb Chinese imports would in any case create bureaucracy and simply lead to the trade being diverted elsewhere. Any serious attempt to curb circumvention needs a multilateral agreement, but that’s not Trump’s style. Meanwhile Trump’s leverage is diminished by the Liberation Day debacle.
Europe is in a better position than most to weather the storm, as was evident in the first quarter when the eurozone economy grew by 0.4 percent, ahead of market expectations. Although growth is bound to suffer in a prolonged trade war, the blow will be cushioned by increased fiscal spending, not least by the incoming Merz government in Germany. Ironically the trade wars could even deliver a boost to Europe in the form of increased supply of cheap Chinese goods. As Simon Evenett, professor of geopolitics & strategy at IMD Business School, has shown, this is not the threat to European manufacturing that some fear. Chinese imports to the US have been dominated by a relatively small number of items, so the risk of widespread trade deflection requiring a heavy-handed protectionist response is low. Instead cheaper Chinese imports should lead to lower inflation, which would allow lower interests rates.
No wonder then that capital is starting to flow back to Europe, after years when capital only seemed to flow one way. According to Deutsche Bank, the foreign ETF funds have been selling US bonds and equities in recent weeks. Meanwhile Morgan Stanley analysts report that on a tour of Asian clients this month, the question everyone asked was whether Europe was exciting again. In the near-term, the investment bank now expects Europe to grow faster than America next year. Whether this persists in the longer-term depends to a large extent on whether Europe can lift its long-term growth potential. But that will require more than simply spending public money. A key test is whether the European Union can deliver on its planned savings and investment union to create opportunities to put capital to work.
Either way, almost everyone agrees that the dollar has further to fall, whether as a result of portfolio diversification or capital flight from US assets. That does not mean that the dollar is about to immediately lose its reserve currency status or central role in the global financial system in the absence of viable alternatives. But it does suggest that America may lose some of the “exorbitant privilege” that has allowed it to borrow freely at lower interest rates for decades, reflecting investor concerns over the riskiness of what has long been considered the ultimate “safe asset”. That marks a diminution in American power, introducing new and unfamiliar constraints on America’s freedom of action. This tilting of the world’s geopolitical axis is the real legacy of Trump’s first 100 days - and there are still 1630 to go.
Well, that sums it up rather politely. Well done. And then what happens to America? We have armed fanatics; the constitutional process has collapsed; the opposition is pathetic; and no one seems to understand the chaos we are heading into. It's a scary carnival ride led by a mad, malignant clown. Not to mention, he don't have a functional military and no real alliances. My god. Asia experts are now begging China to avoid a war based on error.
As they say, first slowly and then fast