The experts are being proved wrong about the Trump economy

Telegraph

7 days ago

Here is a tale of two economies.
One is the US, which, like some kind of levitational trick performed by an Indian swami, seems to defy gravity, together with almost anything else that is thrown at it.
Hardly anyone thought the US economy could withstand the post-pandemic surge in interest rates from virtually zero all the way up to 5.33pc without inducing a recession, yet here we are nearly two years after the Federal Funds Rate hit its peak, and there is still little sign of a significant downturn.
Similarly with Trump's tariff threats. Most economists thought they would be as damaging to the US as those they targeted, with rising inflation undermining household spending, but thus far apparently not.
It's true that Trump's protectionism is proving less severe than initially threatened, but the tariffs are still substantial by historical standards – slightly bigger, for instance, than the infamous Smoot-Hawley tariffs of the Great Depression.
The same might be said of the crackdown on immigration. Without a constant infusion of migrant labour, crops would be left unharvested and fruit would rot on the tree, it was widely said.
Similarly, the entire low-wage economy, from meatpacking to Uber drivers, would grind to a halt.
No doubt instances of these afflictions can be found, but in aggregate there's little sign of the much anticipated damage in the wider economic data.
It may be that all these matters are on a long fuse. It is still early days, and a slowdown may be just around the corner.
Goldman Sachs, for one, has been steadily reducing its forecast of US growth for this year, and at the last count was down to just 1.1pc, with a high risk of outright recession.
But Goldman's gloom is not reflected in the stock market, which continues to hit new records. To date at least, the economic establishment has been largely wrong-footed, prompting Trump to gleefully declare that 'the Fake News and Experts were wrong again. Tariffs are making our country BOOM'.
The situation is similar in some respects to the economic debate that surrounded Brexit here in the UK. Once the immediate shock of the vote to leave the EU had worn off, the economy carried on much as before; the more gory predictions of serious economic harm turned out to be ill-founded.
The big lesson, perhaps, is that abrupt changes in trade policy are not as significant as imagined in fundamentally shifting the dial in large and diverse advanced economies with high dependence on service-based industries.
The other country in my tale of two economies is the UK, which has indeed slowed markedly, and may even have contracted in the second quarter. As it is, the economy shrunk by 0.3pc in April, and again by 0.1pc in May, according to initial ONS estimates.
Here in Britain, the problem is almost entirely self-inflicted. Despite an autumn Budget which in overall terms was strongly expansionary, the decision to raise employer National Insurance contributions and other forms of business taxation has dealt a hammer-blow to business confidence.
In anticipation of harder times to come, consumer confidence has also sagged.
Meanwhile, rising concern over how the Labour Government might seek to fill a ballooning shortfall in the public finances is causing capital flight and other forms of precautionary behaviour among the asset-rich.
Nobody can say that Rachel Reeves, the Chancellor, wasn't warned about the likely counterproductive effects of her tax raid. More tax threatens to spawn less tax.
Shortly after the last Budget, she told business leaders that she would not be coming back with more tax rises and more borrowing. It is now abundantly clear that she will be.
That she is unlikely to be able to keep that promise has no doubt instructed her more recent refusal to rule out wealth taxes as a way of filling the fiscal hole. She is wary of further tying her hands.
Yet her ambivalence has served only to heighten anxiety among those who might be targeted, further fuelling evasive action. Even if she eventually does nothing, failure to rule out further wealth taxes has already inflicted considerable damage.
All this against a backdrop of still elevated inflation, which at the last count remained stubbornly adrift of target at 3.6pc, slightly up on the month before.
This is unlikely to deter the Bank of England's Monetary Policy Committee from further trimming interest rates at its meeting next week.
Even so, the combination of nil growth with still-higher-than-acceptable inflation is proving particularly awkward for policymakers. The Bank is under no obligation to help the Government through an economic mire which is almost entirely of its own making.
Back in the US, there are two main reasons that the economy is continuing to hold up relatively well.
One is the continuation of massive fiscal stimulus. This is in fact just an extension of the Biden-era stimulus, only done in a different way – via the tax side of the ledger rather than the spending side.
Trump has taken to blaming Biden for any slight hiccup in progress, but in truth it may be the other way around: that the economy is continuing to enjoy the tail-end of the Biden boom.
The other major prop is all the excitement around artificial intelligence (AI). This has prompted record levels of investment by Silicon Valley in data centres, supercomputing and other aspects of the developing technology.
It's a bubble, undoubtedly, which also helps explain continued buoyancy in the stock market, sustained as it is by the surge in AI valuations.
But for now, the music plays on, and as Tim Congdon of the Institute of International Monetary Research points out, the monetary indicators support the idea of continued growth.
This might be further enhanced by plans to ease back on so-called Basel III capital controls, encouraging banks to load up with US Treasuries and further expand credit provision.
Combined with what is already a plainly unsustainable fiscal trajectory, it might be thought an accident waiting to happen, and no doubt it is. But today is not that day.
In any case, the idea that the US economy is careering towards some kind of Trump-induced recession – brought about by a combination of protectionism and policy uncertainty – is proving to be not quite right.
In fact, the economy is showing a remarkable degree of resilience to the president's iconoclasm, and actually might in some ways be benefiting from it.
Thanks in part to the revenue raised from tariffs, the Federal budget actually slipped into surplus in June. Even if something of an anomaly, it nonetheless makes you think.
Sadly, the same cannot be said of the UK, where the economy is becalmed even as government borrowing continues to swell ever higher.