Who’s afraid of Donald Trump? Not the International Monetary Fund, at least not anymore.
Like many world leaders, Christine Lagarde, the IMF’s managing director, approached the new U.S. president carefully at first. The fund gave the Trump administration an early boost by forecasting that his policies would be good for economic growth in the short term. Lagarde stood back as the U.S. forced the Group of 20 to water down its commitment to fight trade protectionism. She even invited Trump’s treasury secretary, Steve Mnuchin, to join her on stage in Washington for a public talk when the IMF’s members last assembled in April.
But late last month, the IMF turned on Trump. It had raised its outlook for U.S. economic growth because it assumed Republican control of the legislative process guaranteed enactment of the big tax cuts Trump promised during the campaign. But the Republicans can’t even agree on how to replace Obamacare, a policy they say they loathe. With no tax cuts in sight, the IMF decided to reset its outlook for U.S. gross domestic product. What’s more, the fund was a little mean about it.
“All in all, in our judgement, the U.S. economic model is not working as well as it could in generating broadly shared income growth,” Alejandro Werner, director of the IMF’s Western Hemisphere Department, said at a press conference held to mark the release of institution’s annual review of the U.S. economy. Werner’s group removed fiscal stimulus from its forecast, dropping the outlook for this year and next to 2.1 percent from from previous estimates of 2.3 percent and 2.5 percent respectively. The review characterized the numbers on which the White House based its budget proposal as fantasy. Trump and Mnuchin insist they will orchestrate annual economic growth of at least three per cent, although they say they are gunning for four per cent. “Unlikely,” the IMF said, citing “international experience and U.S. history.” The fund reckons U.S. growth will level off at around 1.8 percent after 2018.
READ MORE: Christine Lagarde and the new world disorder
In other words, Trump is leading the U.S. to slower economic growth than he inherited from Barack Obama, not faster. That must sting.
The shift at the IMF is emblematic of the end of the “Trump trade,” the “Trump bump,” the “Trump effect,” or whatever you want to call the excitement with which the money traders greeted the results of the U.S. presidential election. Executives who had been stockpiling profits, as if they were awaiting a famine, said Trump made them feel like investing again. Stock markets jumped, and the value of the dollar soared.
For all the negativity that followed Trump to the White House, even ardent critics (like me) had to admit that his policies likely would juice the economy in the short run. The tax cuts would encourage spending, and the spending would increase economic output. The only question was by how much? Outfits like the IMF and the Organization for Economic Cooperation and Development weren’t as bullish as the White House, but they agreed economic growth would be stronger. By January, even the Bank of Canada was on board. Governor Stephen Poloz initially refused to base anything on stump speeches. But when the central bank issued its first quarterly outlook of 2017, it raised its forecast for U.S. growth, citing “initial assumptions about the anticipated shift in fiscal policy.”
There were many prophecies that the Trump trade would die. Few, if any, foretold it happening quite like this. The standard prediction was that some combination of a trade wars, a stock-market crash, and general chaos would bring everything crashing down. Any or all of those things may yet come. But what appears to be happening is far less dramatic: the world simply is adjusting to life with a president who is guided by the last thing he watched on Fox News. “Life goes on and decisions must be made in the meantime,” Carolyn Wilkins, senior deputy governor at the Bank of Canada, said June 12 on the subject of Trump’s trade rhetoric.
An index that measures the value of the U.S. dollar against other major currencies is about seven percent lower than its post-election peak in January, a sign that international investors have lost confidence in Trump’s ability to fundamentally change the course of the economy. The S&P 500 Index, the main U.S. stock market, fell 0.9 percent on July 6, dropping to a level below its 50-day moving average for the first time in seven weeks. That is what you would expect to happen as traders adjust to the realization that central banks in the U.S., Europe, and Canada are serious about raising interest rates for the first time in years. Central banks have credibility on Wall Street: when they speak, traders listen.
The president of the United States? His credibility has been shot by a disastrous first six months in office. He may yet provide a boost to economic growth, however; just not in his own country. Trump’s unpopularity has emboldened leaders elsewhere to do things Trump would oppose. The European Union and Japan this week announced that they had agreed a free-trade agreement. Trump walked away from trade talks involving both economies.
The response from Europe and Japan: Life goes on.
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