business

Will Trump's Economy Overheat as Tax Cuts Kick In?: Eco Week

  • A weekly take on events in the world economy and their meaning
  • Strengthening U.S., a new central banker in China, trade fears

Schwarzman Says Kudlow Is Very Competent, Basic Economy Doing Well

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.

Whoever takes over will also do so at a time when the central bank boasts growing sway on the global stage and as the second-biggest economy faces risks after a strong start to the year.

Here’s a rundown of some of the candidates to run the PBOC and here’s an insight into President Xi Jinping’s effort to transform his country.

TRADE WAR?

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.

Bilateral Tariffs

A Trump trade war may cost $470 billion by 2020

Source: Bloomberg Economics

Note: Y-axis shows deviation from baseline in percent

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.

Central Banks

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.

Weekend Reads

Chart of the Week

Communication Policy

Central banks with the most Twitter followers

— With assistance by Rich Miller, Katia Dmitrieva, Matthew Boesler, Enda Curran, Yinan Zhao, Miao Han, Xiaoqing Pi, Kevin Hamlin, Piotr Skolimowski, and Jeanna Smialek

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE