Australia Markets close in 48 mins

Trump could cause the next global recession: here's how

The Trump trade wars threaten the global economy. This is not an exaggeration or headline grabbing claim, but an economic slump based on a US inspired global trade war is a distinct and growing possibility as it would dislocate global trade flows, production chains and bottom line economic growth.

Up until a few weeks ago, there was a strong enthusiasm for the economic policies of US President Donald Trump. Tax cuts and planned infrastructure spending were seen to be good for the US and world economies.

Also read: Trump’s tough trade talks threaten Aussie economy

US stocks and many around the rest of the world rose strongly, to a series of record highs. At the same time, bond yields (market interest rates) surged as the market priced in interest rate hikes and inflation risks from the ‘pro-growth’ policies. It was seen to be good news.

Very few, it seems, were worried about the consequences for US government debt and the budget deficit from this cash splash, especially when the US Federal Reserve was already on a well publicised path to hiking interest rates.

Also read: AU stock market poised to race higher

About a month or two ago, a few of the more enlightened and inquisitive analysts started to focus on the fact that the annual budget deficit under Trump was poised to explode above US$1 trillion with US government set to exceed 100 per cent of annual GDP.

A debt binge fuelled by tax cuts was a threat to the economy after the temporary sugar hit.

As this realisation spread and data confirmed some upside inflation risks, markets buckled with a surge in volatility. This prompted further analysis from some of those previously enthused by President Trump’s economic policy agenda.

To be sure, this is still playing out with the tax cuts only just implemented and the infrastructure program yet to be formalised.

But little did the market realise that the Trump policy Kool aid was only just starting to flow. With minimal consultation with advisors and no substance to frame how it would work, last week Trump announced the imposition of tariffs on steel and aluminium imports into the US.

Markets were jolted and the incredulity quickly intensified when in the wake of the steel and aluminium announcement, Trump tweeted, “trade wars are good, and easy to win”.

Australia’s Trade Minister, Steve Ciobo, was at the forefront of the comments when he said that, “over time, if it [the trade war] got bad enough, we could see, for example, a recession – and we know the consequent impact of that.”

Over the weekend, Trump who was clearly energised by the prospect of a trade war and presumably having considered the number of European badged cars driving on the roads in the US tweeted, “If the EU wants to further increase their already massive tariffs and barriers on US companies doing business there, we will simply apply a Tax on their Cars which freely pour into the US They make it impossible for our cars (and more) to sell there. Big trade imbalance!”

The markets have not yet been able to react fully to these threats. Over the next few days, they will be able to react to the potential implications of a broad-based hike in US tariffs and the obvious retaliation from other countries to the impact of those tariffs on their economies.

Should Australia put a tariff computers made in the US? US manufactured aircraft? I’m sure Qantas and Virgin would not be pleased. Pharmaceuticals and medical equipment?

Clearly the answer is no.

But if Trump’s trade war come to pass and as appears possible, if it escalates to a range of other products and to the countries, the fall out will be ugly.

Recession?  Perhaps.

It depends on how wide the tariff barriers turn out to be, the extent of retaliation from other countries and how companies impacted negatively from the tariff increases perform.

Some may be at risk of going bust. If this turns out to be the effect of Trump’s trade war, those who lose their jobs and have their wealth destroyed will have Trump to thank.