Cliff Taylor: The success of Trumponomics has confounded sceptics

The election of Donald Trump as US president was greeted with forecasts of the economic dangers his policies would bring. One year after his inauguration, the US economy is flying, and the IMF has upgraded its forecast for world economic growth to 3.9 per cent this year, the highest since 2011. So, did everyone get it wrong?

In the short-term, yes. We entered 2017 amid forecasts that the Trump effect and the move towards Brexit posed a big danger. In the UK growth has slowed a bit, but so far the economy has avoided recession and unemployment remains low. Meanwhile, in the US growth accelerated to 3 per cent plus in the second and third quarters of last year, and figures due on Friday may show this rate of growth was matched in the final three months of 2017.

The US economy is now eight years into a recovery, but so far the Trump era has seen growth well ahead of the 2.1 per cent average since America emerged from the economic crash.

Increasing employment and some increase in incomes – though the latter remains sluggish – have led consumers to spend more, and this has boosted business investment. The unemployment rate, at 4.1 per cent, is at its lowest in more than 17 years.

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Can Trump claim the credit?

The economy clearly had good momentum when he took office, but forecasts that the policy uncertainty his administration would bring would hit economic confidence and growth were well wide of the mark. This was the bit that everyone missed. Indicators such as the Gallup poll of consumer confidence have been rising and stable, and business confidence has risen sharply.

Business has reacted well to his talk of cutting bureaucracy and reforming taxes. All the political chaos – the war of words with North Korea, the inquiry into links with Russia and so on – may have affected the political environment in Washington, but the economy is chugging on regardless.

Kept on going

Nowhere has this been clearer than in financial markets. Stock markets and the dollar fell sharply in the immediate aftermath of the election – leading Nobel economist Paul Krugman to predict that they would never recover. Yet while the dollar rally ran out of steam last year, stock markets have just kept on going.

The Dow Jones index has gained almost 33 per cent since Trump’s inauguration ,while the S&P 500, a wider measure of the market, has jumped by around 25 per cent.

The “Trump bump” has been real. And, remarkably, despite all the noise and fury of the Trump administration, volatility on the market has been at its lowest for years.

Heading into 2018, Trump’s major tax reform bill – centred on big cuts in corporate and personal taxes – is expected to give a short-term boost to growth. Goldman Sachs expects it to add 0.25 per cent to growth both this year and next. Whether growth can reach the president’s 3 per cent goal this year is debatable, but it should not be far off.

Can it all keep going? For the moment, probably yes. But there are two things to watch.

The first is that the US recovery is now eight years old, well above the normal length of an upswing in the economic cycle. This time, until recently, the recovery has been weak. But the jobs market is now close to capacity. US interest rates are now on the rise, and, with unemployment so low, they are likely to continue to do so.

Old age

The death of the recovery due to old age is one threat. And then there is Trumponomics. We have seen the tax-cutting part of the “ American First” agenda, which will likely give a push to growth and may encourage US multinationals to invest more at home in the years ahead.

But this is likely to also push up the budget deficit in later years, and the long-term impact on growth is debatable.

Meanwhile, on Monday Trump moved to impose tariffs on imported washing machines and solar panels from China. It is the first tariffs he has signed off on himself as president.

It is also precisely the policy approach that had worried businesses and investors before his election – a fear that a Trump presidency could escalate trade tensions, push up prices for US consumers and close off markets abroad for US companies as foreign countries retaliate.

With the economy growing steadily and unemployment approaching record lows, you might think that Trump would leave well enough alone. But this does not seem in his nature. The success of Trumponomics has so far confounded the sceptics. But we are, after all, just one year in.