The July update of IMF was revealing in more ways than one. Firstly, the IMF expects that neither the US nor the UK is likely to drive global growth in the next couple of years. In fact, the US economy is likely to grow at just about 2.3% in the current year while the world economy will grow at around 3.5%. Secondly, the growth is going to be driven by Western Europe, Japan and China. Interestingly, Western Europe could emerge as a beneficiary of BREXIT and a strong dollar. Thirdly, India will continue to be the fastest growing large economy in the world with real GDP growth rate of 7.5%. So, why exactly is the US going to be less of an influence on global growth?
Getting on without the US…
In the last 9 months since Trump was voted to power, the US has gradually weaned itself away from world affairs. It has walked out of the Trans-Pacific trade deal and is now threatening to walk out of the NAFTA. The US has also expressed serious reservations about the Paris Climate Accord. All these actions have indirectly opened the door for China to exert a much greater influence on world growth. The inward-looking “America First” policy is forcing nations to look for alternatives platforms to cooperate. Mexico cooperating with Russia and OPEC on oil supply is one such instance. The bottom-line is that the US is becoming a less influential force in global decision making.
What about the Trump Trade?
The big news in the world markets was the Trump trade post November last year. His announcements on plans to cut corporate tax rates and give a push to infrastructure were received with enthusiasm by the markets. However, the flip-flops on the alternate Obamacare proposal have raised serious question marks. Analysts and fund managers are now beginning to doubt if Trump will have the numbers and support in the senate to push the tax reforms and infrastructure spending proposals through. Both these measures were expected to give a big boost to the US economy and the world was waiting for its downstream benefits. That looks unlikely to happen any time soon!
Trump’s dollar dilemma…
This could actually be the Catch-22 situation for Donald Trump. To prop up growth he needs to cut taxes and invest in infrastructure. But, that will add strength to the dollar. When the dollar strengthens, global US companies tend to lose out and Europe and Japan are the clear beneficiaries. The irony is that neither can Trump keep the dollar weak for too long. A large chunk of the US influence and exorbitant privilege comes from a strong dollar. The US policy makers are caught between a rock and a hard place. The IMF has a point. The US may be actually less of a global influence in the coming years! ©