Monday 20 August 2018

Don't be alarmed by US political noise: it's still about the economy


US President Donald Trump Photo: Reuters
US President Donald Trump Photo: Reuters

Eoghain Murphy

The need for approval, or even adoration, is nothing new in our leaders. Whether this is even more the case in a world where a reality TV star can become President of the United States (and its nuclear arsenal) is open to debate of course. In any case, with an ever-growing slice of the planet having the capacity to hear every utterance and suffer every tweet, the job of working out what investors should and shouldn't listen to has become tougher.

The continuing slide in his approval ratings perhaps helps explain President Donald Trump's recent return to probably the most popular theme of his campaign trail - Mexico. A $3.6bn wall and a likely much-more costly abandoned trade deal were the solace he offered again in a recent speech. So far so normal - however, his promise to use the threat of a government shutdown as leverage to deliver on his promise sent ripples though markets already nervous about the fast-approaching deadlines on the US annual budget and debt ceiling.

The US government will run out of money on October 1, unless a hyper-partisan Congress finds a way to approve new government spending by then. By inserting $1.6bn of funding for the border wall as a pre-condition of his signature on the wider spending bill, Trump has likely made it easier for Senate Democrats to veto that bill. An unedifying confrontation between the Senate Republicans and Trump awaits. With the political heat rising, there is every chance that markets may be needed to apply their own brand of pressure to force an agreement on both the debt ceiling and the spending bill.

For investors, the question is whether any of this is sufficient to take action in portfolios. Our view remains a firm no. The first point to make is that we would expect any government shutdown to be relatively brief. The direct economic effects are obviously hard to perfectly disentangle from the other influences on the economy at the time - however the hit to output is likely to be best characterized as moderate and more importantly, temporary. In fact, it is precisely the relatively mild nature of the economic effects (providing the shutdown does not extend for more than a couple of weeks) that makes this a relatively painless political game for Congress and the President to play.

The same cannot be said of the debt ceiling, where the consequences of a breach would be profound. An immediate cut in spending would be required. Such a cut, allied to the damage done to private sector confidence, not to mention the US Treasury's reputation as a borrower, would likely push the US, (and perhaps even global) economy into recession if the situation persisted. Capital markets would respond in kind. Nonetheless, the severity and immediacy of the consequences, both political and economic, likely make an agreement much easier to find. Much as with this US administration's many threats on trade, we are reliant on simple economic self-interest to avert a debt ceiling breach.

More broadly, our message remains the same. Global economic growth is broadening and strengthening still. The politicians admittedly look set to continue generating plenty more unnerving headlines near-term, which may make for more volatile markets. However, in our opinion, the health and prospects for the world economy, rather than the various characters presiding over it, remain where investors will be most profitably focused.

Eoghain Murphy is a director at the wealth and investment management division of Barclays Ireland

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