Tuesday 20 November 2018 4:47 pmSchroders Talk

Should other countries take a leaf out of Trump's economic playbook?

What is city talk? Info Info. Latest
I am group chief economist at Schroders.

Global growth in 2017 was characterised by synchronised expansion by the world’s major economies. This was largely because robust global trade growth created a rising tide that lifted all boats.

Since global trade has waned in 2018, economic growth has become less coordinated. While China, Europe and Japan have all seen their growth rates cool, the US economy continues to power ahead.

Prospects for re-convergence?

One of the key differences between the US and the other economies mentioned has been the US’s ability to maintain strong domestic growth at a time when external demand has been slowing. China, Europe and Japan benefited from the revival in global trade that happened in 2017 but since this has reversed, they have lost a key engine of growth and have not been able to offset this with domestic growth.

In the US, government tax and spending policies designed to boost growth have supported robust domestic demand by lifting consumption and government spending. In this respect President Trump's fiscal largesse could be seen as coming at just the right time; switching on the boosters just as the economy was beginning to fade.

Read more:

The outlook for global trade looks challenging as forward-looking indicators, such as the global purchasing managers’ index (PMI) of export orders, point to a further deceleration in the coming months. New export orders are an indicator of future trade activity. It therefore seems unlikely that a resurgence in global trade will be responsible for any re-convergence in global growth.

Chart showing manufacturing sector performance

Taking a leaf from the Trump playbook

What may prove more effective this time around is if governments follow Trump’s lead on the fiscal (tax and spending) policy front, something we are already seeing happening.

China recently announced tax cuts and there is talk of more to come in terms of auto sales, VAT and corporation tax reductions. In Europe, German fiscal policy is set to be more expansionary next year, Italy has revealed fiscal policy aimed at enhancing growth and the UK is relaxing its budget too. Meanwhile, Japan has announced a supplementary budget and there are discussions on how to offset the impact of the higher consumption tax in 2019 such as spending more on pre-school education and other measures.

Going forward we think we will see more governments stepping in to support growth with tax and spending measures, particularly as central banks are now focused on normalising monetary policy. For investors, this would mark a profound shift from the traditional support offered by the central bank to something less flexible and more dependent on the complexities of politics.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.