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Stagflation a Possibility in US

Trump’s restrictive economic proposals could lead to new restrictions on foreign trade and immigration, which could have negative implications for growth
China warns that if US imposes a trade tariff of 45% on Chinese imports in the US, Beijing would take a tit-for-tat approach and a number of US industries will be impaired.China warns that if US imposes a trade tariff of 45% on Chinese imports in the US, Beijing would take a tit-for-tat approach and a number of US industries will be impaired.

Anyone who lived through the 1970s is likely to shudder when they hear the term "stagflation". That’s the dreadful combination of rising inflation, higher unemployment and a slowing economy that hampered US growth in that decade.

That unappetizing stew of negative trends could return under President-elect Donald Trump’s economic proposals, according to a new report from Goldman Sachs’ economics team. Stagflation is a possibility under what the firm describes as its “adverse” forecast, based on Trump’s restrictive economic proposals, which include limiting free trade, CBSnews reported.

With Trump’s surprise win, economists have been scrambling to assess what his plans will mean for the near- and long-term prospects of the US economy. Many economists, Goldman’s among them, are developing several scenarios because of what’s viewed as a high level of uncertainty about how Trump might translate his proposals—such as a 45% trade tariff on Chinese imports—into political reality.

“The positive fiscal impulse from his tax reform and infrastructure proposals could provide a near-term boost to growth and, depending on the specifics, could have positive longer-run supply side effects,” Goldman economists wrote in their report. “However, other proposals could lead to new restrictions on foreign trade and immigration, which could have negative implications for growth, particularly over the longer term.”

Trade and Immigration Policies

Removing the country’s estimated eight million illegal workers would likely be negative for the US economy.  Recent research from Queens College CUNY economists noted that these workers currently contribute about 3% of private sector GDP, or about $5 trillion over a decade.

Given the uncertainty over how Trump’s campaign promises will translate into economic policy, the Goldman team ran through three scenarios.

The first considers what Goldman calls Trump’s “full” case, assuming that everything he has promised will be enacted, while the “benign projection” assumes only his fiscal policies are carried out, such as tax reform. The last forecast—its “adverse” scenario—includes Trump’s more restrictive trade and immigration policies, as well as a more hawkish Federal Reserve.

Stagflation would be the outcome in the adverse scenario, Goldman noted. Real GDP growth would decline by about 0.8 percentage points in 2018 and 2019, while inflation would rise to 2.3% in 2019. Unemployment would rise to 5.3%, roughly its level during early 2008 at the start of the recession.

Still, that’s a far cry from the stagflation that crushed many American households in the 1970s, when inflation rose as high as 12% and unemployment was above 7%. Yet it would represent a setback from the current economic trends of lower unemployment and a stable inflation rate.

Goldman isn’t alone in assessing different economic scenarios under Trump. Oxford Economics on Monday published a report with a similar approach, providing baseline, upside and downside scenarios. Oxford’s downside view sees the economy shrinking by 5% by 2020 and losing four million jobs.

Warning From China

Sales of iPhones in China could be impacted if Trump initiates a trade war with China, a Chinese state-run publication is warning.

The publication, the Global Times, also warned that the country could start buying Airbus aircraft instead of Boeing, and that in addition to iPhone sales, American car sales in China will “suffer a setback.” It added that “US soybean and maize imports will be halted.”

Donald Trump has said that he will declare China a “currency manipulator,” and Judy Shelton, an economic advisor to Trump, said on Friday to Bloomberg that she thought he’d follow through on the issue. “I think that he’s someone who is going to carry through on what he has said,” she said.

It added that such a move would make the US-Sino trade relationship “more tense” and that in response to a trade tariff of 45% on Chinese imports in the US, China would take a “tit-for-tat approach” that could affect iPhone sales in that country.

 

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