US President-elect Donald Trump should have a relatively clear road ahead at home for the implementation of his economic program: with Republicans holding majorities in both houses of Congress, he seems likely to benefit from a break in the political gridlock that has paralyzed the body for the last six years. But the United States economy does not exist in a vacuum. If Trump is to succeed in delivering the high growth and genuine financial stability that he has promised, he will need some help from abroad.
Trump has established infrastructure investment, tax reform, and deregulation as central components of his strategy to boost the US economy's actual and potential growth. Confident that his plan can unfold as intended, he has set ambitious targets, including gross domestic product (GDP) growth approaching 4.0 per cent per year.
For now, investors seem to be pretty much sold. Under the assumption that the incoming Trump administration will ultimately refrain from triggering a trade war, they moved fast to price in optimistic prospects for higher real growth, higher inflation, and more money entering the financial markets. This has enabled the US Federal Reserve to begin to normalize its monetary-policy stance; in addition to a 25-basis-point interest-rate hike on December 14, the Fed has indicated that the pace of such hikes will accelerate in 2017.
As a result, markets seem convinced that the US will gradually exit its prolonged period of excessive reliance on unconventional monetary policy, replacing it with a mix of looser fiscal policy and pro-growth structural reforms - an approach much like that pursued by former US President Ronald Reagan. President Barack Obama sought to purse a similar approach, but was frustrated by a highly polarized Congress.
The expectation that Trump will have better luck on this front has produced a textbook asset-price response. Stock prices have climbed, led by financials and industrials; interest rates on US government bonds have risen, both on a standalone basis and relative to those in other advanced economies; and the dollar has surged to levels not seen since 2003.
Here is where the rest of the world comes in. Other major economies - namely, in Europe and Asia - may have a much harder time than the US rebalancing their policy mix (which continues to be characterized by excessively loose monetary policy, inadequate structural reforms, and, in some cases, excessively tight fiscal policy). But if they do not, the Fed's continued interest-rate hikes would stimulate investors to trade their German and Japanese bonds, in particular - which are now bringing low and even negative returns - for higher-yielding US varieties. The resultant wave of capital flows into the US would push up the value of the dollar even further.
Though the US economy is doing much better than most of the other advanced economies, it is not yet on sound enough footing to withstand a prolonged period of a substantially stronger dollar, which would undermine its international competitiveness - and thus its broader economic prospects. Augmenting the risk is the prospect that such a development could spur the Trump administration to follow through on protectionist rhetoric, potentially undermining market and business confidence and, if things went far enough, even triggering a response from major trade partners.
If Trumponomics is to deliver on its promise, key countries - in particular, Germany (the largest and most influential European economy) and China and Japan (the world's second- and third-largest economies, respectively) - must promote their own pro-growth policy adjustments. They should implement quickly growth-enhancing structural reforms to support monetary stimulus. Germany, in particular, would also need to pursue a looser fiscal policy, while adopting a more conciliatory attitude toward outright debt reduction for beleaguered Greece.
Unfortunately for Trump, the rest of the world does not seem prepared at this stage to pursue such a comprehensive policy shift. That is why, beyond advancing Trump's pro-growth economic agenda at home, the newly appointed members of his economic team should be establishing direct contact with their German, Chinese, and Japanese counterparts, with a view to improving international policy coordination.
Germany, China, and Japan have good reasons to embrace such an approach. They are not getting enough out of monetary expansion at this point; the risk of collateral damage and unintended consequences is rising; and pro-growth structural reforms are overdue. Furthermore, helping the US to achieve healthy and sustainable growth would bring about an indirect boost to their own economies. And it would help to avoid a scenario in which a Trump administration, under political pressure, would threaten protectionist measures, increasing the risk of a trade war that would hurt nearly everyone.
Despite the uncertainty surrounding Trump's impending presidency, one thing is certain, at least on paper: he is in a strong position to boost US economic growth. He and his team must, however, take the time to dismantle potential international barriers to success.
Mohamed A. El-Erian, Chief Economic Adviser at Allianz, is Chairman of US President Barack Obama's Global Development Council and author of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.
Project Syndicate, 2016.
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