The strong economy that helped Donald Trump scrape through the midterm elections looks like it might make itself absent when he runs for re-election in 2020. In recent months, strains have started to appear that belie America’s vigorous headline growth rate and its buoyant jobs market.
Last week the International Monetary Fund (IMF) warned that Trump’s escalating trade war with China was beginning to hurt global trade.
In a blog before this weekend’s G20 meeting in Buenos Aires, the IMF boss, Christine Lagarde, explained that the prospects for growth next year were looking weaker and, worse than that, storm clouds were gathering that could cause a recession. She called for a truce between the world’s two largest economies to allow for greater cooperation.
Within a few hours of her message appearing, the US central bank chief, Jerome Powell, made a speech that showed his bullish forecasts at the beginning of the year were being revised to take account of an economy that was starting to struggle.
He said the Federal Reserve would pause its schedule of interest rate rises to assess the impact of the eight it had levied since 2015.
Only in June, Powell was arguing confidently that the economy was on course for many years of above-average growth, such that it was likely to overheat. To counter inflationary pressures, he said, the US would need at least three more quarter-point rate rises next year (following one in December) to push the base rate to 3.25%.
Powell’s other worry was rising corporate debt, which has risen dramatically in the era of cheap borrowing, much more than consumer debt. After his recent statement, the markets no longer expect more than two rate rises next year.
Trump’s economic advisers are concerned about the impact of a slowdown on their candidate’s re-election chances in 2020. But their concern is not the same as Powell’s.
He has shown himself to be a responsible policymaker who considers the long-term consequences of a central bank pumping out cheap money just for homebuyers to use it to outbid each other in the housing market. That way a housing crash lies.
The White House, on the other hand, looks at the growing numbers of struggling households – those whose wage rises, decent though they might be compared with previous years, cannot keep pace with rising mortgage payments – and declares the problem to be high interest rates.
It means that Trump’s answer to new home sales slowing in October to a two-and-a-half-year low is to cut interest rates and pump up the economy with even more cheap money.
It’s the economic equivalent of drug addiction. And as a developer, Trump knows all about being addicted to cheap borrowing to fund property speculation.
In tweet after tweet, he says everything in the US is going great and the only blot on the landscape is the Fed’s refusal to keep interest rates low. For instance, on 25 November Trump tweeted: “So great that oil prices are falling (thank you President T). Add that, which is like a big Tax Cut, to our other good Economic news. Inflation down (are you listening Fed)!”
However, while voters are distracted by attacks on the Fed, Trump is mending fences elsewhere. He has signed a new North American free trade agreement (Nafta) with Mexico and Canada that is similar to the old Nafta. And talks with China’s president, Xi Jinping, at the G20 are likely to herald a long march back from a trade war. Trump’s re-election campaign is already under way.
Saudi’s hard choice on oil
Little more than a month ago, experts warned about the prospect of oil prices reaching $100 a barrel. But the last few weeks have shown the folly of trying to predict crude prices. From $86 at the start of October, prices have collapsed to less than $59 now. November saw the biggest monthly fall in Brent, the international benchmark, for more than 10 years.
The cause of the dramatic decrease is simple: supply and demand. The market priced in the impact of US sanctions on Iran at the start of November, but the US issued waivers for eight countries importing Iran’s oil. Meanwhile, the US shale industry has been pumping more and more.
Together, these developments have stoked concerns about oversupply, just as fears have been raised over faltering national economies hitting demand – creating two sources of downward pressure on the oil price.
The result is good news for consumers, who will have noticed cheaper fuel prices on forecourts. Donald Trump went as far as thanking Saudi Arabia – which has been pumping record amounts – for bringing down prices. The US president tweeted that he wanted them to go even lower.
But this Thursday the Saudis, as the de facto leaders of Opec, will have to make a key decision on whether to cut or maintain output at the oil cartel’s meeting in Vienna.
Will the kingdom impose curbs deep enough to see prices bounce back up? Saudi needs a higher oil price to bolster its weakened fiscal situation. On the other hand, it also needs to bring prices down to hurt US shale producers and keep Trump onside, because he has stood by the country after it became internationally isolated by the murder of journalist Jamal Khashoggi.
As Bassam Fattouh of the Oxford Institute for Energy Studies observed last week, Saudi Arabia “faces very hard choices”.
Above-inflation rail fare increases should hit the buffers
Fairness has become a dangerous word in British politics, given that failure to address it has contributed to Brexit and deep disenchantment with Westminster. So it is a surprise that last week the government allowed an above-inflation fare increase to be imposed on rail travellers once again. The argument for holding down fares via greater government subsidy is strong: it benefits the environment by discouraging car use; it helps make employment hubs like London, Birmingham and Manchester more accessible; and it would be consistent with government policies on fuel and energy bills.
Fuel duty has been frozen for a ninth year in a row and a cap on power costs will be introduced in January. If the justification for those measures is helping people cope with the volatile, often expensive cost of basic needs, then rail fares should qualify, too. Adding £136 to the cost of a £4,300 season ticket from Brighton to London on the Southern rail franchise, or £88 to a £2,800 annual ticket between Manchester and Preston on Northern, is unfair in the context of more benign treatment for drivers and bill payers. It will also grate particularly for commuters on the aforementioned routes, which have been blighted by delays owing to a botched timetable change.
The multibillion-pound annual investment in the railways, which places a heavy burden on fare payers who must offset much of the cost and have seen their contribution rise by nearly 20% over five years, is not representing value for money for passengers. Not only should fare growth be curbed, but industry performance must improve, too.
If ignoring rail users’ concerns will jar with millions of passengers, so will the inconsistency of the government’s attempts to address concerns over inequality and pressure on living standards. Tackling rising rail fares – by introducing a lower cap on season tickets, for instance – would be good politics and good policy.
