Making America great again isn’t proving so great for other parts of the world.
With the rise in the dollar and interest rates already squeezing emerging economies just as President Donald Trump’s trade war threatens China, the U.S. is set to be the only Group of Seven nation to see economic growth accelerate this year as Trump’s tax cuts kick in.
The end of the short-lived euphoria of a synchronized global upswing is already evident in financial markets. NatWest Markets notes its basket of so-called growth assets such as the Australian dollar and copper is down about 4.5 percent this year compared with the almost 7 percent gain of the Standard & Poor’s 500 Index.
The gap in performance “certainly captures the imbalanced nature of growth this year,” said Jim McCormick, head of cross-asset strategy at NatWest.
The global backdrop will frame discussions when the Federal Reserve holds its annual policy symposium this week in Jackson Hole, Wyoming, at which Chairman Jerome Powell will speak. The Fed’s two interest-rate hikes of 2018 have helped lift the dollar almost 6 percent on a trade-weighted basis this year, making it costlier for international borrowers to repay loans.
For now, Mark Nash, head of fixed income at Old Mutual Global Investors, bets the domestic economy will keep the Fed raising rates although it could end up creating headwinds for itself.
“Once that pain in emerging markets gets particularly acute, that naturally will spread back to the U.S. and change things in terms of how the Fed needs to manage domestic monetary policy,” he said on Bloomberg Television. “For now, you can’t fault what Powell is doing, but the implications of it might come back to haunt him.”
Evidence of a moderation outside of the U.S. is already visible. Economists at JPMorgan Chase & Co. say although overall global growth is higher than its long-term trend thanks to the U.S., the share of countries performing above potential has fallen to 60 percent from about 80 percent in 2017.
China’s momentum has stalled as policy makers curb risky lending and the trade dispute with the U.S. begins to bite, prompting policy makers to shift gears to signal a willingness to support activity. Economists also see a slowdown in Japan.
Across much of Europe, surveys and confidence indicators have turned lower this year in part because of export concerns. German factory orders -- a gauge of future output in the euro area’s largest economy -- posted their first annual decline in almost two years in June.