Surfing the Trump Tsunami

The recent magnitude 8.8 earthquake off the far eastern Kamchatka Peninsula in Russia was one of the most powerful on record and immediately triggered tsunami warnings across the Pacific Ocean as far as Hawaii. However, when the waves arrived, the damage was much less than feared.

Are we seeing something similar with Trump’s tariff tsunami? In other words, is the economic impact of US President Trump’s steep trade tariffs smaller than expected? The short answer is that it is too soon to tell, but so far economic activity inside and outside the US has held up surprisingly well. A timely example being the Global Purchasing Manager’s Index that remained comfortably above the 50-point neutral level in July (Chart 1). The economic resilience has in turn supported equity markets and, despite the considerable uncertainty, we’re on track for a decent year in terms of equity returns (Chart 2).

Chart 1: Global Purchasing Managers’ Index

Source: LSEG Datastream

This is good news of course, but a downside is that Trump might be emboldened to move the goalposts again and raise tariffs further. He has, for instance, applied steep tariffs on India and Brazil for political, rather than economic reasons. None of the “deals” agreed to in the past few weeks should necessarily be seen as permanent – one of his first actions in office this year was to renege on the USMCA trade agreement he himself negotiated with Canada and Mexico in his first term – though they are important steps in de-escalating the trade war. It is notable that the tariffs in place today are not too dissimilar from what was announced in April when markets fell sharply, but there is no sign of panic this time. This points to the fact that all kinds of extreme scenarios were possible back then, while now we face a narrower set of outcomes. There is also simply the fact that the shock factor can only apply once.

Click here to read more...