Economists are worried that all this spending, coupled with a decline in productivity caused by rising trade barriers, could ignite inflation in the US with ripple effects across the world
If the worst expectations of the Trump presidency are realised, SA is likely to be heading for a recession, higher inflation and a weaker rand. Ultimately, it can probably also kiss millions of dollars in US aid and trade preferences goodbye.
In one respect SA is incredibly fortunate: the centrepiece of SA-US trade relations, the African Growth & Opportunities Act (Agoa), was extended by the US congress last year until 2025 after fraught negotiations. This means SA’s R16.6bn annual duty-free exports to the US are safe for the next 10 years.
However, if Trump executes his policy manifesto by retreating into a protectionist stance, tearing up unsigned trade agreements and levying punitive tariffs on America’s trade partners, key pillars of the global trade architecture could be dismantled.
At worst, the world could be tipped into a trade war.
The developed world is ripe with discontent. Everywhere populism is on the rise. Economists blame the lingering effects of the global financial crisis for the fact that an overwhelming majority of households in developed countries have experienced no improvement in their real incomes over the past decade.
This year, jaundiced rich-country voters have expressed their frustration with the economic and political system in two extraordinary events: Brexit in June, when the British public voted to exit the EU and pull up the drawbridge; and last week’s election of the piratical Donald Trump as the 45th US president.
The US has both the highest and the most rapidly rising income inequality of any high-income country.
Peter Brooke, who heads Old Mutual Investment Group’s MacroSolutions boutique, believes the world is entering a new populist-led era, characterised by a retreat into more isolationist policies.
"All around the world, populists are gaining, on both the Left and the Right. We believe this is a lagged effect of the global financial crisis, which has resulted in soggy global growth and rising inequality as central bank stimulus has helped the rich," he says.
Momentum Investment analysts fear this trend away from globalisation and orthodoxy in favour of nonconformist, even revolutionary, views is likely to be played out in a surge in support for populist, nationalistic parties in Europe over the coming electoral season.
The "aloof and sleazy establishment is being punished by voters step by step", says Heinz-Christian Strache of Austria’s far-right Freedom Party on Facebook in welcoming Trump’s victory.
Global trade, and hence growth, is going to be the immediate casualty.
Tutwa Consulting MD Peter Draper explains that in Trump’s view, the US trade deficit is caused by "cheating" trade partners as well as currency manipulators, including China, Mexico, Japan and Germany.
Trump’s intended remedy is to impose hefty import duties on Chinese and Mexican imports, renegotiate the North American Free Trade Agreement and tear up the Trans-Pacific Partnership agreement – President Barack Obama’s seven-year effort to create a Pacific Rim free-trade zone. Trump has even threatened to withdraw from the WTO if he encounters too much resistance.
The danger is that the affected countries will respond with retaliatory trade measures.
"This could set in motion a much more pronounced global trade war, which would be disastrous for SA given that more than 50% of its GDP is either imported or exported," says Stanlib chief economist Kevin Lings.
Though SA would be a bit player in the ensuing "fight of the elephants", Draper fears the country will be unable to stay out of the fray and, given recent anti-West pronouncements by the Jacob Zuma government, is likely to be openly critical of the US.
"[The US] already regards us somewhat suspiciously in light of the ANC and its alliance partners’ foreign policy pronouncements, and this is likely to feed into a negative spiral of US recalibration of its trade relations with us, and vice versa," Draper says.
If this happens, SA’s exit from Agoa post-2025 is almost assured, unless Trump serves only one term. Also at risk is US$269m in US foreign aid that SA receives each year.
Trade Law Centre (Tralac) executive director Trudi Hartzenberg agrees that Agoa is very unlikely to be renewed for the large African economies, including SA, and that all should start doing their homework on what a reciprocal trade governance dispensation could look like with the US.
Emerging markets as a whole are likely to be the main losers if big global trade agreements are replaced with beggar-thy-neighbour policies, since these countries have benefited the most from export demand and globalisation, according to Mohammed Nalla, who heads strategic research and global markets at Nedbank Corporate & Investment Bank.
Most at risk are China and Mexico, but the world as a whole could remain "trapped in limbo with low growth, low rates and low returns," says Brooke.
"Should the darkest scenarios unfold ... this would be likely to tip SA into economic recession, which would undoubtedly worsen our already heated politics, and deepen our social crisis," warns Draper.
Or not. There is huge uncertainty over whether Trump will actually implement his wilder campaign promises, or even be able to get them through congress, though Republicans now control both the senate and the house of representatives.
Also, Trump’s multitrillion-dollar fiscal expansion plans — in the form of both greater infrastructure spending and tax cuts — should stimulate US growth, which could boost both commodity prices and commodity currencies such as the rand.
By some estimates Trump’s tax proposals will equate to about $3trillion or 1.6% of annual GDP in forgone tax revenue.
Lings estimates that if Trump implements all his fiscal proposals, net US debt could rise above 95% of GDP from about 75% now, probably costing the US the last two of its AAA credit ratings.
Economists are worried that all this spending, coupled with a decline in productivity caused by rising trade barriers, could ignite inflation in the US with ripple effects across the world.
Sanlam Investment’s economist Arthur Kamp explains that trade restrictions reduce competition and productivity so if greater protectionism takes root around the globe it should be accompanied by rising inflation.
In the US, where the unemployment rate is approaching historical lows and credit extension has fully recovered from the financial crisis, Trump’s loose fiscal policy, and the prospect of rising inflation, could well force the US Federal Reserve to become more hawkish.
"Over the medium term, the biggest risk to SA and the rand is that if the US fiscal policy becomes notably more expansionary it might lead to a more aggressive pace of rate hikes by the Fed, resulting in a stronger dollar, downward pressure on commodity prices and hence a weaker rand," says Old Mutual Investment Group chief economist Rian le Roux.
In addition, many feel that Trump is unlikely to reappoint dovish Fed chair Janet Yellen when her term ends in January 2018.
Treasury bond yields are up at 2.07%, having leapt a further 33 basis points since the initial flight to safety at Trump’s victory.
"And frankly if you don’t understand the risks involved in appointing a short-tempered narcissist with no experience as the leader of the free world, you’re not paying attention," said The Economist last week.
What it means: The world is entering a populist-led era; SA’s aid and trade preferences at risk.