A Forecast For 2017: Trade Skirmishes, Interest Rates and Economic Growth
By Rajeev Dhawan
As the new presidency begins, expect one rate increase from the Federal Reserve this March before the trade ruckus breaks loose. The Fed will stand pat until the storm blows over. Then, they will resume their hikes. Growth numbers support this in 2018.
President Trump has been sending a clear message to our trading partners, especially Mexico, China, and Germany, that running a trade surplus with us will cost you.
I expect the president to use his executive power to impose tariffs. President Trump’s tough talk on trade has contributed to the strengthening of the dollar which makes American goods more expensive and creates larger trade deficits with these countries.
The executive branch can impose tariffs for up to 150 days without congressional approval.
Imposing tariffs will also will have an impact on interest-rate-sensitive sectors of the economy. In a trade skirmish, other entities, especially foreign investors and Asian central banks, may decide to withhold buying treasuries.
As a result, interest-sensitive sectors such as housing starts and auto sales, as well as corporate investment, will experience subpar growth.
We expect President Trump’s trade skirmishes to bite into Georgia’s transportation, trade, manufacturing and hospitality sectors, and Georgia’s large corporations with international ties will also feel the heat.
But it won’t last long – at most, tariffs and trade restrictions will last for six months at most, with no serious reaction from China.
We don’t have a substitute for Chinese-made products in the short run (or even the long run), and Mexico is extremely integrated into automakers’ supply chains. Both sides will huff and puff but back off from a mutually injurious trade war.
These trade skirmishes are expected to be over with by the end of the year. The trade impediment will not only get reversed, but will also come with a Christmas present for the general populace in the form of the long-delayed, promised personal income tax cut.
This will boost overall GDP growth to 2.3 percent in 2018 and a better 2.5 percent in 2019.
In Georgia, going forward, small business growth will remain buoyed in the wake of some of Trump’s administrative initiatives. This will trickle down and buoy employment growth in construction, financial activities and wholesale, into retail trade and hospitality sectors.
And if the Trump administration comes through with its promise to ramp up infrastructure spending, it will boost job growth at state and local levels.