EDITORIAL: Time for Trump and a turbulent world

It is no small irony that Washington’s freezing weather has forced US president-elect Donald Trump to hold a big chunk of his inauguration ceremony indoors. 

After the fuss he put up at his first inauguration in 2016 about the size of the audience in the national mall, he would surely have wanted a far larger crowd thronging the mall and the streets of the capital.

Whether the crowds will pitch up and freeze after all at today’s ceremony is one question. The larger and scarier question is what executive orders Trump plans to sign immediately after the ceremony.

It is almost certain that an order by “Donald the Deporter” to expel millions of foreign migrants from the US will be top of the list. That will kick off a second Trump administration that many in the market expect could be good for the already bustling US economy, at least in the short term. But it could be bad for the global economy, especially for emerging markets and developing economies.

Even if Trump 2.0 proves less damaging economically than some expect, there is the risk that during the next four years that Trump’s aggressive foreign policies and the dodgy people he is appointing in key positions could break something globally. That might trigger a new round of conflict and disruption that could leave lasting economic scars. That is not even to talk of what the Trump administration might mean for human and reproductive rights, in the US and elsewhere.

Trump takes office as a new poll by the New York Times and Ipsos finds that he is starting out with one of the lowest approval ratings of any US president in recent times, with fewer than half of Americans approving of the man himself. But more like his policies: more than half of the US public is sympathetic to the president-elect’s plans to deport unauthorised migrants and reduce America’s presence overseas, the New York Times reports. They are more evenly split on whether Trump should implement tariffs on countries such as China and Mexico, though there’s plenty of support for higher tariffs in general.

All of that could well come back to bite the US economy, even if Trump’s policies provide a boost in the beginning. Financial markets reflect the tension in their way. The equities market is roaring ahead on expectations that Trump’s administration will be a business friendly one that will cut taxes, slash rules and regulations, and give his tech industry buddies a big boost.

The fast-growing US economy, with its increases in productivity, was already an exception to the sluggishness of Europe and other advanced economies. It could diverge even more if Trump’s policies prove even better than expected for business. The IMF has upped its US growth forecasts and flagged “upside risks” and the S&P index is reflecting that.

But long-term US bond yields are reflecting the downside risks to US inflation, public finances and ultimately growth. They have risen steeply, at a time when US short-term interest rates are coming down. The evidence is that the unprecedented migration into the US during the Biden era was one of the big factors that boosted economic growth and helped keep the labour market in balance.

Losing all those foreign workers can only make a tight US labour market even tighter, and that could drive up inflation again. So too could tariffs on imports from supplier countries such as China and Mexico. At the same time cutting taxes might drive up the US public debt to even more stratospheric levels, which along with the prospect of higher-for-longer inflation is why long bond yields have risen.

All of which is not at all good for emerging markets such as our own. Higher US inflation and fewer-than-expected US interest rate cuts could keep the dollar strong for longer, which means pressure on emerging market currencies. International investors who can get good returns in the US will not have much appetite for risk assets generally and that means private capital for emerging market and developing economies will be in short supply, at a time when their need for development and climate financing is increasing.

It is likely to be an age of high uncertainty and volatile markets. It is also going to be one in which the US is likely to be retreating from being the leader of the “Free World”. While some may welcome that, others might rightly fear for global democracy. Time to batten down the hatches in a potentially unstable world and disrupted markets as we watch (or don’t watch) Donald the Deporter’s indoor celebrations.