Beware of Trump’s Victory – Hard Economic Times Loom for SA

Donald Trump will soon be the 45th President of the United States. So far he is still threatening to implement his populist campaign promises (e.g. partially repeal Obamacare, tear up trade agreements and deport 11 million illegal immigrants) and has appointed a hard-line conservative to a senior position in the White House.

The American economy and how South Africa will fare

The most critical issue for us is the economy. So far, it does not look good. Trump has promised the US corporate tax cuts and a massive infrastructure program. Global markets are worried about this, particularly emerging markets, like South Africa. These programs will see the US deficit increase from the current 80% of GDP to well over 100%.

US long term interest rates have sharply spiked upwards since Trump won. The well-known economist Henry Kaufman has predicted that the thirty five year bull market for low long term interest rates is over. This is because Trump’s policies threaten to revive inflation in the United States which will push up interest rates to dampen inflationary expectations. In turn, this will encourage investors to reduce their exposure to higher risk emerging market bonds, resulting in a sell-off of emerging currencies – to date the Rand has lost more than 8% to the US$.

To protect their currencies, emerging markets will raise interest rates which will reduce the potential for economic growth. This is not good news for South Africa as our economy will only grow 0.5% this year and if this is reduced in future years, we face more tax increases, lower employment and social unrest.

What about commodities?

The stimulus package will initially benefit commodities such as iron ore and copper. If the package translates into economic growth, this will help South Africa’s major commodities such as platinum. So far platinum has dropped since Trump’s election, indicating that US economic growth beyond the stimulus package may be low. Gold, our other major commodity export, has also dropped as rising interest rates dampen demand.

Protectionism

Trump has also promised to repeal free trade agreements, heralding a return to the economic nationalism of the 1930’s. Our economy is an open one and has benefited from lower tariffs, whilst growing protectionism will reduce the prospect of economic growth.

So what? And will it actually happen?

Difficult times since the global financial crisis of 2008/9 have undermined the post Second World War economic consensus which has bought prosperity to the world. The problem with rising protectionism is that it does not bring economic prosperity but instead increases the potential for populism, which is already a rising trend globally.

Despite this, there were similar gloomy forecasts when George Bush was elected in 2000. Bush turned out to be positive for the African continent as he launched a successful crusade to fight AIDS and encouraged more open trade with the USA.

Remember also that power is institutionalised in the United States and Trump as President could well be prevented from introducing many of his proposed controversial initiatives.