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Goldman Just Killed The “Reflation Euphoria” – Concludes Global Growth Will Suffer Under Trump No Matter What

Monday, November 14, 2016 11:42
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Earlier today, we presented an analysis by Goldman Sachs which emerged with a lukewarm take on Trump’s policies as to how they stand to impact US domestic growth, with only Goldman’s “adverse” scenario resulting in a “stagflationary”, i.e., recessionary outcome. However, in a follow up report by another set of Goldman economists Nicholas Fawcett and Sven Jari Stehn, one which looks at the broader global set of Trump policy consequences for the entire world – because after all, the US is still a part of it –  it finds that virtually every scenario leads to a global contraction, something we previewed yesterday in our post titled “What’s Good For The US In This Case, Is Not Good For Emerging Markets.”

Here is the summary from Goldman:

  • Following Donald Trump’s victory in the US presidential election, the focus now turns to the potential economic implications of his proposed policies. The November 12 US Economics Analyst used the Fed staff’s FRB/US model to analyse the consequences for the US economy. In today’s companion piece, we assess the potential global economic spillovers from the Trump agenda using our global macro model.
  • Following the US simulations, we analyse four of Mr. Trump’s policy proposals, including fiscal stimulus, trade tariffs, restrictive immigration policies and a hawkish tilt in Fed policy. We first analyse the policies individually and then combine them into possible packages, including our own assumed policy outcomes.
  • Fiscal stimulus has positive global spillovers, as stronger US demand boosts imports for foreign goods and services. Dollar strength reinforces the positive spillovers to DM economies with floating exchange rates, but limits the gains in EM economies. The spillovers to China, for example, depend on the extent to which the Renminbi appreciates with the dollar and the net effects are less positive for EM economies that rely heavily on dollar-denominated debt.
  • The other components of Mr. Trump’s agenda (trade policies, immigration and Fed) have negative global spillovers as US inflation is higher and US growth slows. The growth drag is generally muted for DM economies with floating exchange rates but significantly negative for some EM economies (including China).
  • Taken together, our analysis suggests that Mr. Trump’s policies might act as a modest drag on global growth. DM growth receives a brief boost from the fiscal stimulus but then weakens and spillovers into EM economies are negative throughout. Moreover, the risks around this base case appear asymmetric. A larger fiscal package could boost global growth moderately more in the near term, but a more adverse policy mix would likely act as a significant drag on world growth in subsequent years.

The assumptions that Goldman uses to rerun its global impact scenario are largely the same as those listed previously, in the US-focused model.

Here is what Goldman finds when running three distinct scenarios on a global scene:

Following the US Economics Analyst, we consider three scenarios of the Trump Agenda:

  • a “full” implementation case that combines the fiscal, trade, immigration, and Fed proposals above;
  • a “benign” scenario that includes only the fiscal proposals;
  • and an “adverse” scenario that includes tariffs, more restrictive immigration policy and a more hawkish Fed (but no fiscal stimulus).

Exhibit 4 shows the simulated impact of the “full” and “adverse” scenarios (as the “benign” package is identical to the fiscal stimulus simulation in Exhibit 1). We find that the “full” package boosts US growth slightly in 2017H2 and 2018H1, but then turns into a drag as the growth-unfriendly policies of the full package start to dominate. Spillovers into the Euro area and Japan are negligible initially but then turn negative. The net growth effect on China is negative throughout. The “adverse” policies, however, lead to sharply negative spillovers around the world. Real GDP in the Euro area and Japan is about 0.4% lower after two years, and Chinese activity is 0.9% lower.


Exhibit 5 summarizes the implications of the three Trump packages for world, DM and EM GDP. The full Trump policies slow global growth by about 0.2pp per year out to 2020. The effects are initially more benign for DM than EM countries, though the reverse is true towards the end of the simulation (when the US slows significantly). The benign Trump scenario boosts world GDP by about 0.4% but turns negative for EM after about two years. The adverse policy package lowers world growth significantly. Global real GDP is nearly 0.8% lower after 2-3 years.

Goldman then simulates a scenario with the policies that it regards most likely to be implemented. Like before, the bank expects scaled-down versions of the tax reform and infrastructure policies to be enacted. It does not anticipate significant changes on immigration policy, but incremental restrictions seem likely. While Trump’s monetary policy views are still unclear, slightly more hawkish appointments appear likely at this stage. Trade policy is the greatest unknown, but Goldman expects that Trump would follow through on at least some of the trade policies he has outlined. Exhibit 6 summarizes Goldman’s expectations and how these compare with the full Trump proposals.

Exhibit 7 shows the simulated effects of Goldman’s expected package in the model. The left-hand panel shows the real GDP effects for the major four economies and the right-hand panel summarizes the effects for the main global aggregates.

And the punchline:

Our simulations suggest that Mr. Trump’s policies might act as a modest drag on global growth. DM growth receives a brief boost from the fiscal stimulus but then weakens and spillovers into EM economies are negative throughout. Our analysis of the alternative policy packages suggests that the risks around this base case are asymmetric. A larger fiscal package could boost global growth moderately more in the near term, but a more adverse policy mix would likely act as a significant drag on world growth in subsequent years.

What should one make of this quite dire assessment by the most influential bank on Trump’s policies? 

While most Goldman forecasts tend to be dead wrong, that’s irrelevant for now: after all one won’t see the full impact of Trump’s policies for many months, if not years, meanwhile the debt and massive deficits will accumulate. The far bigger issue is that Goldman is still the one bank the Fed listens to when determining monetary policy. It is also the bank that the sellside parrots and buysiders heed when it makes prominent (reflation) calls.

As it has just done. We now expect every other flip-flopping sellside penguin to jump on board this “thesis” in the coming days.

What it confirms to us is that the scenario we predicted on November 9, moments after Trump was declared winner, is starting to play out namely that the true state of the global economy – which had been propped up for years with trillions in liquidity – is about to be revealed, and a major global recession, if not depression is in store.

More importantly, it also means that this latest, incipient spark of global inflation observed over the past 4 days is about to be drowned in yet another tidal wave of the deflationary tsunami, which in turn will bring back central banks to the fore, as global debt rises to new, unprecedented records, which will make rising interests rates a non-starter and demand more deficit monetization.

In short, enjoy the reflationary impulse while you it’s still there; Goldman just called time.


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