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davidtrump

2019 Risks: Only fear itself

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Domestic Risks
There are several accumulating risks for the US economy. Domestic risks are primarily political and psychological in nature. Global risks are based in politics and trade but their economic effects are more immediate and evident.

In the US the risk is that the soon to escalate fight between the Democratic House and the Trump administration will so paralyze the government that its essential functions are affected and these carry over into the real economy.

Americans are largely inured to the machinations of the inhabitants of what is called the DC Beltway, for the highway that runs in a circle around the capital.  But ignore the government as Americans might prefer, a prolonged government shutdown will have an effect, even if, as is true, only about one-quarter of the Federal  government's operations actually cease temporarily. The psychological effect of unrestrained political warfare in Washington has an insidious but hard to quantify effect on the nation's economic optimism.

Global Risks
The trade dispute with China and the potential slowdown in the world’s second largest economy are the biggest economic risks for the US in the New Year.  A large percentage of American consumer products are made in China, either by domestic Chinese producers or US manufacturers based on the mainland. American farmers sell vast amounts of their production to the Chinese. The trade is more important to the Chinese economy than to the US and the recent slowing in China’s GDP can be largely blamed on the argument with the US. But the impact of a weaker China is a risk for the global economy.

The terms of trade between the US and China were founded in an earlier economic world, when China was truly a developing economy. That is no longer the case. China understandably is reluctant to surrender some of her advantages, and the fact that no US administration in 30 years has tried makes this attempt more difficult.

The importance of the relationship to both sides is such that it is almost certain that a deal will eventually come forth. The dependence of China on US markets provides an incentive for a solution and the recent tariff truce provides a method.

Europe’s problems are more intractable. Slow growth and unemployment is endemic in much though not all of the EU. It is the disparities in economic success since the advent of the euro and the Maastricht Treaty and the disagreements over immigration between the governing elites and large sections of the populace that are creating the political tensions within the EU.  

The British departure, provided that it occurs, will have a negative impact on EU and UK economic growth. If the exit is without a negotiated agreement it will likely precipitate a recession on both sides of the Channel.

Italy’s dispute with the EU Commission has been mollified. Rome will be allowed to spend more than the last government promised and the Commission will point to the reduction of the deficit as its achievement but Italy’s basic problem with the euro and a stagnant economy will not change.

The Organization for Economic Cooperation and Development (OECD) has reduced its projection for 2019 global growth to 3.5% from 3.7% indicating concern in this generally optimistic assessment. 

fxstreet.com

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