Doubts regarding US economic growth are increasing

The Chinese government is warning its citizens against the risks of traveling to America with a view to, “frequent shootings, hold-ups, and robberies.” This is the next step in the trade war between Washington and Beijing, which has escalated into far more than a conflict about market access. It goes without saying that the Chinese travel advice is a PR stunt. However, it remains to be seen if the U.S. will continue to be a safe haven for investors now that it is a source of uncertainty and unpredictability.

The doubts regarding U.S. economic growth are increasing, so much is clear. Not surprisingly, the main investment banks have substantially upped the odds of a recession hitting the U.S. late this year or early next year.

How Washington handles four important issues coming up in the next months could either cheer up the markets to some degree, or plunge them into gloom on concerns over the U.S.:

1. Politicians have been squabbling for a long time over a badly-needed act that is meant to boost the U.S. infrastructure.

2. Both parties have to agree on a budget that should prevent the third government shutdown under Trump.

3. The debt ceiling needs to be raised again in the autumn (or has to be temporarily suspended).

4. Trump is threatening to impose more import tariffs and is now linking these levies to other-than-economic motives. Congress is grumbling but has not been able to change his course of action (so far).

Since taking office as president, Trump has often appeared to view the stock market as a success benchmark. And yet he is now focusing on two campaign issues — immigration and trade — and is combining them regardless of the fact that the markets are protesting. Most of the Republican voters by far fully support him so the Republican members of Congress fear to be seen to slam on the brakes. Therefore, Trump is unlikely to throttle back to any great extent.

Some experts are saying that Trump heralds a new era as they refer to the past two centuries. Global exports increased fiftyfold in real terms between 1815 and 1913. Everything changed, however, in the aftermath of the First World War and during the Great Depression. The U.S. came up with the protectionist Smoot-Hawley Act, the British no longer did everything to promote free trade and concluded bilateral agreements with the Commonwealth countries. As Germany set up the Reichsmark Block with the surrounding countries, the world broke up into blocks.

We are seeing a similar fragmentation right now with a paralyzed World Trade Organization, Trump’s aversion to multilateral agreements, and China’s eternal preference for bilateral negotiations. These developments create more uncertainty for businesses as enterprises lose their appetite for investment. Another outcome could be increasingly local production methods to pre-empt the risks of disrupted production chains. Furthermore, a domino effect could ensue once mounting tensions between countries start to affect other areas, such as security and climate policy.

All of this implies that significant political risks are attached to the U.S. (which could have a strong impact on the rest of the global economy). A new government shutdown looms after the summer; not long afterwards the politicians will have to take action to stop America from officially becoming a defaulter.

Meanwhile, trade tensions are on the rise while Trump is convinced that he can score at the upcoming elections with hard-line standpoints on immigration and trade. We do not think an infrastructural package will bring substantial relief. Also, geopolitical tensions are mounting with Washington taking a hardline versus Iran among others while at the same time alienating allies.

So would it be safer to invest in Europe? Not necessarily. See, for example, the continuing worries about Italy and the fact that the ECB has less room to apply stimulus than the Fed. Yet, it’s Washington that is deliberately undermining globalization and free trade whereas its budget procedures threaten to go off the rails. Therefore, it very much remains to be seen (from a political perspective) whether EUR/USD has a lot of downside potential and if the European stock markets will really do significantly less well than their counterparts in the U.S.

Andy Langenkamp is a senior political analyst and editor at ICC Consultants and ECR Research specialized in geopolitics and international political economy.