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A new age of uncertainty

By David Smith. Published on 12 December 2016

Eton Bridge Partners recently hosted an evening of intimate, open conversation with fellow CFOs to discuss the UK and global economic outlook, chaired by David Smith.

David has been Economics Editor of The Sunday Times since 1989, where he writes a weekly column, and is assistant editor and policy adviser. He is a regular contributor to other publications and has won numerous awards. He is the author of a number of books including ‘The Age of Instability’, ‘Free Lunch’ and, most recently, ‘Something Will Turn Up: Britain’s Economy, Past, Present and Future’.

David has kindly written a guest blog for Eton Bridge Partners to summarise the points of discussion over dinner at The Langham hotel, London.

A New Age of Uncertainty

Donald Trump’s unexpected victory in the US presidential election, hard on the heels of Britain’s vote for Brexit in June means that there are two huge elements of uncertainty for business. How should we think about these uncertainties? Is there an optimistic path through it?

As with Brexit, the adverse reaction in the stock market to Trump’s victory was short-lived and soon reversed. Markets are assuming that we will get the upside of the Trump manifesto, without much of the downside.  So the president-elect’s ambitious plan to “rebuild” America, an infrastructure programme worth up to $1 trillion, combined with across-the board tax cuts, will boost growth, while also pushing up inflation. It will create business opportunities.

The downside of Trump, a highly protectionist agenda which could include huge tariffs on imports from China and Mexico, a renegotiation at minimum of the North American Free Trade Agreement (NAFTA) and a withdrawal by America from other treaties is, on the optimistic view, likely to be more muted in practice than they were in the campaign. His advisers have begun to talk of “fair” trade rather than outright protectionism.

A US growth boost, even if it falls well short of Trump’s ambition to double the growth rate, will have implications beyond America. It may signal the beginning of the end of the prolonged period of ultra-low interest rates and more active fiscal policy elsewhere, We should not, of course, ignore the downside of Trump’s trade agenda. If it is restricted to clamping down on dumping and other unfair trade practices, no great harm will be done.

If, however, the new president is stymied by even a Republican Congress in his fiscal ambitions but has a freer rein to impose punitive trade measures such as the 45% tariff on Chinese imports and 35% on those from Mexico he talked about during the campaign, the consequences would be seriously worrying. This would be the Trump who would have the scope to do real damage, setting back the cause of free trade for years and encouraging other countries to follow suit. This is the Trump who would make an already weak world trade environment even weaker. Watch closely; we do not know which one will win out.

What about Brexit? It is useful to think of the three stages of Brexit: the initial impact of the vote, the invoking of Article 50 and the formal  two-year exit process, and Britain’s longer-term trading and other arrangements with the EU and the rest of the world.

Stage One has so far been more benign than feared. Sterling and business confidence have weakened but consumer spending has held up well, driving a 0.5% rise in gross domestic product in the third quarter. Business investment is likely to be weak for some time, though the decision by Nissan to commit to new investment at its Sunderland plant was positive. The bigger test will come during the Article 50 process, targeted to begin by the end of March, where the priority for business will be that the government has and shares a clear vision of where it expects Britain to end up. Given the government’s approach so far, that may be optimictic.

David Smith
Sunday Times Economics Editor & Award Winning Author