When Trump Erupts, the Economic Damage Will be Huge

With exquisite timing, the World Bank last week asked whether countries were prepared for the next Pompeii. However, it is not a natural volcano that worries people most — despite the car-eating lava from Hawaii’s Kilauea mountain.

It is the volcanic temper of US President Donald Trump that threatens multiple outbreaks of wealth-eating economic crises that threaten to bring world economy’s nine-year recovery after the global financial crisis to an end.

Risk is back after a beguilingly calm 2017 during which economic and political risks appeared to recede by the month and market volatility fell to historically low levels as traders bet that nothing would rock the boat.

Trump’s decision to pull out of the five-nation deal on curbing Iran’s nuclear programme has thrown the geopolitical order into disarray. While it was not wholly unexpected it was a pronounced and public repudiation of efforts by German Chancellor Angela Merkel, French President Emmanuel Macron and British Foreign Secretary Boris Johnson during high-profile visits to the US to urge him to change his mind.

nothing is what will replace that geopolitical order

The message is clear: multilateralism is dead and it is every economy for itself. Up until now a broad consensus between the major liberal democracies of the world enabled them helped coordinate a response to the financial crisis, intervene to help countries hit by problems, and strike a deal on tackling climate change.

Hardly perfectly, as record banking bonuses and continued misery in Greece show. But it is better than nothing, and nothing is what will replace that geopolitical order.

While Iran seems to be mainly a political decision by Trump to fulfil his manifesto pledge, it has profound implications for both the global economy and for international economic management. If Trump imposes harsh sanctions on Iran, this could take between 200,000 and 300,000 barrels a day of the global oil supply.

US would scrap any trade and investment plans — the White House has revoked Boeing’s export licences for $20 billion of planes — and European companies might have to follow suit if they use US finance or source American technology.

By ratcheting up tensions in the Middle East, not just with Iran but also in Israel by relocating the US embassy to Jerusalem, Trump has raised the chances of an open conflict between Iran and Syria. In that situation, both countries could bomb each other’s oil installations and close the Strait of Hormuz.

The resulting shortage of oil would deal a severe shock to the world economy but more importantly would put a bomb under business confidence and financial markets.

On top of this simmering cauldron of risks is the danger of a global trade war. So far it is mostly sabre-rattling, with Trump’s 25% tariffs on $50 billion of steel and aluminium imports, China’s tit-for-tat retaliation, and Trump’s follow up of $100 billion of tariffs. The European Union is trying to gain exemptions for its exports but will retaliate if that avenue is blocked off.

The immediate impact would be limited —  Berenberg Bank estimates that the direct costs in terms of impaired supply and higher prices for the countries concerned might shave 0.2-0.3 percentage points off GDP growth.

The real impact would, again, from the indirect effects in terms of business confidence and financial market volatility. One only has to look at the impact that Brexit has had on growth, confidence and the value of the pound — and that is before we have left the EU.

And all this is without the relatively more minor threats to the global economy such as rising inflation, hikes in interest rate and the mountain of debt, the demographic timebomb, wealth and income inequality, and poor rates of productivity growth.

investors, employees and households have been forewarned

With stock and property markets at record highs, the only way is most likely down. Politicians in Europe are, for once impressively united and are doing their best to persuade Trump to ratchet down his threats and rhetoric.

At least investors, employees and households have been forewarned. The World Bank was talking about lessons from natural disasters from Pompeii through to last year’s earthquake in Mexico City and how to mitigate the impacts of repeat events.

Looking back at the global financial crisis, the imposition of tariffs that led to the Great Depression, the imperial gameplaying that culminated in the First World War, and the rise of extreme governments that led to the global conflict 20 years later, is a reminder of the need to learn from history

The World Bank’s advice on disasters has a chilling echo for those worried about economic crises: “Having a better understanding of historic disasters gives us an opportunity to avoid the mistakes of the past.”



More about the author

About the author

Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.

Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.

He is the author of Brilliant Economics and The Great Economists.

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