In less than 10 calendar days Goldman Sachs, the bank which has surrounded Donald Trump with its alumni as economic, financial (and political) advisors, has gone for the trifecta, slamming the prospects of Trump's economic policies three times after initially being surprisingly optimistic on the monetary-to-fiscal handoff, and after first warning that the honeymoon is over on February 4, then this past Friday explaining why Trump's policies will be quickly bogged down in Congress, this morning in a note in by Jan Hatzius, the Goldman economist says "the more negative aspects of the Trump agenda—trade and immigration—are coming into clearer view" leading the bank to pare its global growth forecast, concluding that "the improvement in global growth has probably run its course."
Looking at the markets, Goldman observes that they have upgraded their growth outlook significantly since the US election, with the firm's new “sign restrictions” model suggesting an increase in growth expectations in the G4 advanced economies from about 1-1½% during the first half of 2016 to around 2¼% now.
Hatizus states that the recent numbers have validated this improvement, especially in the G4 advanced economies, although we wonder which numbers, considering the bulk of the recent improvement has been in the "soft data", which does not translate into actual economic improvement, but is merely a reflection of sentiment and optimism.
Nonethelsss, Goldman says its G4 current activity indicator (CAI) has picked up from about 1½% in the summer to 2¾% in the last three months. On a global basis, GDP growth in the second half of 2016 climbed to 3½% and the business surveys suggest that the run rate might have risen to more than 4% in early 2017.
The bank then says its analysis suggests that most of this pickup is due to a positive impulse from financial conditions, especially in the advanced economies, and estimates of the DM FCI impulse has swung from about -1 percentage point (pp) in mid-2016 to about +¾pp now.
That's it for the good news, however, as here Goldman writes that "we think that the improvement has now probably run its course. The positive impulse from financial conditions is no longer growing, and, at least in the emerging world, we expect a diminishing impulse as we move through 2017. Consistent with this, the growth data are no longer systematically beating expectations."
As shown in Exhibit 4, the firm's new CAI “innovations” metric—which measures the strength of the data relative to model expectations—has started to level off for the G4 economies after a string of significantly positive readings since September. Although the US data have so far continued to outperform expectations in January, the numbers in the other key advanced economies have been slightly softer than anticipated. Consistent with this, our MAP surprise indices—which focus on the data relative to consensus expectations—have fallen from strongly positive to more neutral readings.
What about the future? It is here that the Trump variables emerged:
Longer term, we still expect a fiscal boost, especially in the US, and this should to some degree compensate for the reduction in the FCI impulse. However, the risks around US policy have also turned somewhat more negative. For one thing, the timeline for passage of a fiscal bill has moved into late 2017 or maybe even early 2018, and the hyper-polarized political climate has reduced whatever slim chance existed for bipartisan cooperation, e.g. with regard to infrastructure spending. Moreover, the more negative aspects of the Trump agenda—trade and immigration—are coming into clearer view.
First, here is Goldman on trade:
On trade, the most likely policies in the near term involve the announcement of a formal process to determine whether China is “manipulating” its currency, and the initiation of trade remedy cases on a number of products. While we are reasonably confident that there will be new restrictions put on some product categories, we are less certain regarding the likelihood of broader tariffs applied to all imports from a given country, or in general. The president has the authority under several laws to impose such tariffs if he chooses, and the Trump transition team was reportedly considering in December as much as a 10% tariff on imports, but our expectation is that near-term activity is likely to be limited to targeted actions with across-the-board tariffs held out as an additional tool that might be used later.
And on immigration:
The other area where the downside risks have grown recently is immigration. President Trump has already announced two executive orders on immigration, and another regarding work-related immigration has been released to the press in draft form but not formally announced. Like many recent executive orders, it is general in nature and lacks detail, but it appears to place an emphasis on enforcement of existing restrictions on such workers, rather than quantitative limits. In the near term, we expect the administration to focus primarily on stricter enforcement of laws related to temporary work visas, but additional actions to limit legal immigration seem likely to be announced over the coming months, in our view.
The potential implications of these restrictions are difficult to estimate. However, as shown in Exhibit 5, net immigration currently contributes an estimated 0.4 percentage points (pp) to US population growth and accounts for most of the projected growth rate of the potential labor force of around ½%. We think that it is plausible that tighter immigration restrictions will reduce this inflow substantially over the next few years.
While the implications of that sentence are quite significant, here is Goldman's forecast of US immigration only an economist could love:
At this point, Goldman reruns its economic scenarios using the Fed's FRB/US macro mode. The chart below shows how these scenarios compare to the “pre-election” baseline that is centered on the FOMC’s September Summary of Economic Projections, and which we profiled back in November.
Goldman's simulations suggest that Trump’s policies could boost growth slightly in 2017 and 2018, but are likely to weigh on growth thereafter if trade and immigration restrictions are enacted. Moreover, the risks around our base case appear asymmetric: a larger fiscal package could boost growth moderately more in the near term, but a more adverse policy mix would likely lead to a significant slowdown, higher inflation, and tighter policy in subsequent years.
What the chart above shows is that there is just one scenario in which US GDP grows from here, even as inflation continues rising, in what, while not explicitly mentioned, is a clear stagflationary forecast.
Taken together, our analysis suggests that the improvement in global growth has probably run its course, with sideways moves around the recent 3½% trend the most likely outcome. We think this is consistent with gradual interest rate increases in the United States, where the cycle is most advanced, but ongoing easy policy in other economies, especially the Euro area where plenty of slack remains.