Will Trump's Economy Overheat as Tax Cuts Kick In?: Eco WeekBloomberg News
A weekly take on events in the world economy and their meaning
Strengthening U.S., a new central banker in China, trade fears
How hot is too hot?
That’s a question investors are increasingly asking as the U.S. economy readies for a fresh injection of fiscal stimulus thanks to President Donald Trump’s tax cuts. The risk is the stimulus combines with still-easy monetary policy to spark an inflationary outbreak.
The theme leads our weekly analysis of what’s happening in the world economy:
Taking the Temperature
To see what the future may hold for whole of the U.S., Bloomberg reporters hit the road to visit cities where joblessness is already lower than the national average of 4.1 percent.
The good news for the Federal Reserve’s plan to raise interest rates slowly so as to give growth a chance is that employers have found ways to cope with stretched labor markets and still make money. Some have even raised pay.
Goldman Sachs and JPMorgan go as far as to speculate unemployment could fall beneath 3 percent for the first time since the 1950’s.
Inflation also still appears muted. Consumer prices slowed in February and a gauge of inflation that’s typically sensitive to labor market conditions even moderated to the lowest level since December 2015.
Larry Kudlow, Trump’s pick to replace Gary Cohn as director of his National Economic Council, is relaxed. “Growth is not inflationary,” he said. “Just let it rip, for heaven’s sake.” Here’s a collection of Kudlow’s other opinions over the years and why he may criticize the Fed.
Globally, the OECD raised growth forecasts and the weak inflation puzzle is even prompting central banks to consider changing targets. Finance chiefs from the Group of 20 will have more to say about the outlook when they meet next week.
Change in China
The People’s Bank of China is set to get a new governor on Monday for the first time in 15 years. The successor to Zhou Xiaochaun will certainly be busy given the government this week handed the central bank the power to rewrite the rules for the financial sector it’s seeking to restrain.
Trump is listening to overtures from governments around the world keen to be exempted from his tariffs on steel and aluminium.
The risk of recrimination and retaliation is still in the air, however, and an analysis by Bloomberg Economics suggests that could take a toll on the world economy.
A full blown trade war could wipe $470 billion off global gross domestic product, they reckon. That’s under a scenario where the U.S. implements a 10 percent levy on imports and the rest of the world retaliates.
According to economists Jamie Murray and Tom Orlik, that’s an extreme scenario, “but it’s no longer an impossible one.”
As for the U.S., a survey of economies suggests the tariffs will reduce employment and growth slightly.
Canadian Prime Minister Justin Trudeau told us he’s working to save Nafta.
The Fed is poised to raise interest rates next week, but Saudi Arabia beat it to the punch. Reserve Bank of Australia Deputy Governor Guy Debelle reckons global investors are underpricing the uncertainty over the future path of interest rates, warning markets are likely to see higher volatility.
Serbia also shifted unexpectedly -- but the other way -- cutting rates to a record low after inflation slowed and the dinar strengthened.
Norway signaled it will move faster in raising rates rates as it considers the first tightening in seven years. Switzerland maintained its threat to intervene to cap the franc. Policy makers in Argentina warned they’ll continue to intervene in the peso market and kept the benchmark rate on hold.
Meantime, European Central Bank President Mario Draghi made the potentially rash pledge not to surprise investors when exiting stimulus and Bank of Canada Governor Stephen Poloz said his economy has untapped potential to keep growing without spurring inflation.
As for Nigeria, politics forced it to delay setting rates again.
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- Germany Ready to Sacrifice Weidmann as a Pawn in EU Chess Match
- Central Banks Urged to Study Digital Currency Risks and Rewards
- The Rich Aren’t Happy About New Zealand Foreign Bolthole Ban
- Millennial Job-Matching May Help Solve U.S. Labor-Market Puzzle
- The Secret to Australia Avoiding Recession: Mass Immigration
- Japan’s Aso Is Said to Skip G-20 Amid Calls for Resignation
- World Sticks to Cash as Sweden Heads Alone Into Cashless Future
- Putin is Sure of Victory, But Little Else
- Not Bad But Not Good: Japanese Workers Get Another Small Raise
Chart of the Week
— With assistance by Rich Miller, Katia Dmitrieva, Matthew Boesler, Enda Curran, Yinan Zhao, Miao Han, Xiaoqing Pi, Kevin Hamlin, Piotr Skolimowski, and Jeanna Smialek