With the US now just more than 18 months away from the next presidential election in November next year, President Donald Trump and his Republican Party have their backs against the wall as the odds are stacked against them – writes Ryk de Klerk, independent analyst. Trump will be forced to take drastic measures to ensure strong economic growth leading up to the election for him and his party to remain in office, but it will be a blessing for the global economy. In previous presidential elections since 1964, the ruling party lost the elections when unemployment increased in the 18 months leading up to the elections, and the same happened when industrial production decreased. Growing the economy at all costs, specifically through protectionism and a trade war with China, effectively landed the US economy in a full
employment position with scant spare capacity. Meanwhile, the bond market is already pricing in a significant slowdown in the US economy. The slowdown in the fourth quarter last year can be attributed to the boost in economic growth in the previous quarter by Chinese exporters frontloading shipments to the US to get ahead of the expected tariff increases on Chinese goods. The slowdown caused Trump to panic and he has already called on the Federal Reserve to begin with quantitative easing a few days ago. This is because the likelihood of resulting job losses are likely to count against him and the Republicans. Trump now has no other choice but to go soft on China and do a trade deal. Due to slow economic growth in the US’s traditional partners, China is the ideal economic partner for Trump in the run-up to the election.
The macro-economic policy measures instituted by the Chinese authorities to stimulate economic growth are paying off as consumer sentiment has turned around and is approaching previous highs, while the economy has gained traction again. Trump is also likely to take a harder line on some of the volatile oilproducing countries in the Middle East, in order to up the oil price to enhance the profitability of oil shale producers. The withdrawal of troops from Libya and further threats against Iran are probably designed to increase instability and curtail oil supply. Faster economic growth in China and the US is likely to offset some of the negatives of Brexit and may see global economic growth accelerating as the two countries collectively comprise more than one-third of the global economy. Meanwhile, international trade flows
are likely to normalise after the slump over the past few quarters caused by the threat of an allout Sino/US trade war and Brexit, which saw global business confidence plunging. Shipping rates as measured by the Baltic Dry Index have plunged by more than 50% from the end of December to mid-February but have rebounded by more than 20% since then. The behaviour of global financial markets indicates that global business confidence has bottomed and is on the up. The normalisation of trade flows as a result of improved global business confidence on the back of a trade deal between China and the US could see shipping rates sharply higher sooner than later. The oil price is already rebounding while the prices of some industrial metals such as copper have turned for the better and others appear to be bottoming.
