23rd January 2017
The Presidency of Donald Trump could bring herald a return to a pattern of global boom and bust says fund manager Psigma.
Psigma’s Chief Investment Officer Tom Becket says the world faces three potential scenarios with about roughly a one in three chance of each which he categories as heaven, purgatory and hell – borrowing from Dante Alighieri’s Divine Comedy.
Becket still expects global growth to be around trend but he says the path to achieving it will be much more fraught than it would have been under a Hillary Clinton Presidency.
“There is a real chance that stagflation affects the global economy brought about by what Trump is trying to do. Trump is trying to throw a lot of fiscal fuel at an economy which is already back to trend rates of growth, when inflation is coming back into the system and unemployment is quite low. That is mixing fire with fire at a time when it is unnecessary. If Trump was to add 3% of GDP to the economic growth rate, we think that brings forward a lot of the future potential of the economy and makes a boom and bust culture much more likely.
“There has been a lot of excitement about what Trump means for growth. We still expect around trend for the global economy. We think Trump is neutral but is likely to bring back a boom and bust cycle to the economic outcome for the global economy.”
Looking at inflation in particular, he says it could rise to 3% in the US this year, while in the UK RPI may reach 4% in 2018.
He adds: “We think inflation uncertainty has risen. We think there is clear evidence now that we are going to see inflation into 2017 and probably for the UK 2018. Our forecast for UK RPI is 4% and I think we will see 3% in the US before too long. Whether that comes with strong growth or weak growth is something we are going to have to answer. The risk of stagflation is evident.”
Becket suggests that the world is in pretty good shape enjoying an synchronised global expansion for the first time since 2012. Europe, the UK and Japan are outperforming their long term trend, so cyclically things are looking all right but he says cyclical growth will be bumpier.
He is also concerned about the risk of a US trade war with China.
He adds: “But there are such a wide variety of political outcomes, it is very hard to see what happens next. It will be interesting to see what he tweets in the first 100 days. Debt is already very high and demographics are already very poor. Trump believes he is an economic genius and a champion of industry. One would hope that an economic genius and champion of industry would recognise that after three decades of intense globalisation and China’s integration into the world economy, the idea that China and the US would get into a trade war would not be sensible. A lot of what he has been talking about is severely protectionist.”
However, Becket also believes that there is still a reasonable chance of economic purgatory although that outcome would have been much more likely under a Clinton presidency.
“Purgatory is what we would have seen under Clinton, The chances have moved from one in two to one in three. Boom and bust is now much more likely than the dull but not disastrous recovery we have seen for the last seven years.”
He says a lot depends on how much freedom of action a Republican dominated Congress gives Trump.
He adds: “The ability for Trump to really boost the economy will be curtailed by the fact inflation rates are going to go up. The ability to go out and spend lots of money is going to be curtailed. We are seeing that despite business confidence going up, companies are not spending lots of money on infrastructure and higher wages. In this scenario the chances are you don’t make much money.”
However there is a chance Trump will succeed.
“There is a case for paradise. Trump might be the economic messiah having been considered the pariah. In the short term it looks like this is taking place. Consumer confidence is up, business confidence is up animal spirits are rising, equity markets are going through the roof. There is an argument to be made that Trump is bringing the sort of medicine the global economy has been crying out for. The question is what do these animal spirits translate into? We would say that with the current debt unless he embraces China he is likely to fail to will deliver on what he wants to do. There is also a question on what Paul Ryan the Republican congressional leader will allow Trump to do.
“We should see equities, credit and commodities perform well in this scenario and government bonds lose money and we earn enough in financial paradise to move into Trump tower. Our core view in that growth rates will move forward but 2018 might be a difficult year. Unless we see global trade expanding again, it is difficult to see the economy roar away.”