29 MAY


Anton Brender , Macro , Asset Class

United States : the dangers of managing by chaos

By his own admission, Donald Trump has always been adept in a highly particular management technique, namely the dynamics of chaos. Rather than reflecting the president’s inability to govern, the rapid turnover among his key staff, as well as the apparently strained atmosphere in the White House, is simply the result of his way of managing people and situations.

Eighteen months after his election, certain observers are asking whether the president’s methods may not ultimately be more efficient than his critics claim. After all, he has already almost succeeded, through the sheer power of his incendiary tweets and outlandish declarations, in bringing North Korea to the negotiating table. More time is required to find out what will be achieved on this particular issue. On other topics, however, his actions may prove incoherent much sooner. The seeds of chaos that he has been sowing in the field of international relations could rapidly jeopardise the primary objective of his economic policy, which is to re-boost the US economy.

The tax reform approved in December explicitly aimed to stimulate growth. By cutting tax rates, while allowing companies to fully amortise their investments during the year and inciting them to repatriate their profits, the fiscal reform was seeking to push US firms to invest more, as its instigators readily explained. To add further weight to this policy, the federal budget that was voted a few weeks later paved the way for the federal government to raise spending this year and next by several hundred billion. This increase in public expenditure will add further fuel to an economy already close to its potential activity level. Loosening the constraints weighing on production capacity will then provide companies with another reason to step up their capex. A greater level of investments is indeed vital to enable the economy to grow more rapidly, as President Trump promised, than the lacklustre rate of 2% .

The president’s foreign policy, however, is beginning to wreak havoc in international relations and this may rapidly dissuade companies from investing sufficiently. Growth in the global economy, which has only just got back on track after 10 years of crisis, could indeed be rapidly derailed by the tensions that keep rising. The protracted renegotiation of the North American Free Trade Agreement, the threat of a trade war with Europe, the economic and financial sanctions brandished almost daily, the power struggle with the Chinese authorities as well as the fuel poured onto the fire in the Middle East could end up seriously eroding business confidence. Incertitude over future export and import conditions and heightened volatility in the equity and forex markets, along with geopolitical tensions, could, if they persist, hinder employment and capex decisions in the US and the rest of the world and therefore weigh on economic growth.

Such a slowdown, which would enable the Federal Reserve to avoid hiking interest rates much further, would not necessarily be unwelcome, according to some observers, as it would help drive bond yields lower. Regardless, it would nonetheless also dash all hopes of US corporate capex finally reaching the level needed to generate the higher gains in productivity required to secure stronger US growth. Furthermore, curbing US growth in this way would be highly risky. While the Federal Reserve has learned to, more or less smoothly, engineer a slowdown in activity by progressively raising interest rates, the picture may be very different should the slowdown be provoked by uncertainties over the future of international economic relations spiralling out of control. Slamming on the brakes and simultaneously accelerating hard is a sure way of fishtailing.