SLOWER GROWTH & HIGHER INFLATION

Trump's tariff policies are causing consternation, not least for central bankers

We live in weird and uncertain times as we wait anxiously for the next pronouncement or action from President Trump or his de-facto Vice-President Elon Musk. The world is in a state of confusion and few understand what is really happening or more importantly what might be coming down the tracks. Tariffs are the immediate focus of attention and Trump is sending a clear message that he wants to change the global trading order in dramatic fashion. This is consistent with his anti-free trade views that he has espoused for four decades. There should be no surprises, yet most of us are surprised. The reality is that we are just not accustomed to politicians doing what they promised.

Given his stated aims, the logic behind his actions on tariffs make no sense whatsoever. Tariffs will damage global growth, drive consumer prices higher, will not bring many jobs back to the US, and will just fuel global geo-political tensions. However, Trump would not be one to let facts get in the way of a good story.

Official forecasting agencies and central bankers are really struggling with the threat of tariffs. Last week the Paris-based OECD revised down global growth forecasts and pushed inflation projections higher. The Central Bank of Ireland revised down its growth forecasts for Ireland and pushed inflation projections higher.

The real conundrum is for central bankers who have the task of setting interest rate policy.

On Wednesday last the US Federal Reserve left interest rates unchanged, while at the same time revising its global growth projections down and its inflation projections upwards. The monetary authority is concerned about the impact of tariffs on growth and inflation.

Likewise on Thursday, the Bank of England left rates on hold. It pointed out that global trade policy has intensified, and other geopolitical uncertainties have increased. However, it is concerned about the persistence of inflation, and tariffs will only intensify this. However, the reality is that the UK economy is in a bad place with GDP growth contracting again in January. On Wednesday, the Chancellor will face a significant dilemma as she presents the Spring Statement, which is just another name for the budget. The fiscal deficit needs to reduce, but cutting spending and increasing taxes is not what the economy needs now, but the fiscal situation warrants a combination of both. Lower interest rates will have to be used to counter these forces.

The ECB is facing a similar dilemma. It warned in recent days that 25 per cent US tariffs would knock 0.3 per cent off growth in the first year, and if the EU retaliated in kind, the drop would be around 0.5 per cent. However, it also points out that tariffs would damage the inflation outlook.

The refrains are all remarkably similar – tariffs are threatening growth on the downside and inflation on the upside. My sense for what it is worth is that while tariffs will drive measured inflation higher in the near-term, the impact on growth from higher prices should be a more important consideration. The ECB and the Bank of England cannot back away from cutting interest rates significantly further. It may delay cuts, but they must come given the economic backdrop in the Euro Area and UK.

For Ireland, the risks are palpable. Globalisation and free trade have driven the global economy since the second world war, with the formation of the GATT (General Agreement on Tariffs and Trade) in 1947; its replacement by the WTO; and the formation of what we now call the EU in 1958, all initiatives to push the freedom of movement of goods and services. Ireland has been a major beneficiary of this trend, but we are now encountering a dramatic shift in the global trading order that will have negative consequences for Ireland.

Rather than arguing about speaking rights in the Dáil, it is imperative on our so far sleepy and ineffectual government to engage in longer-term strategy for sustained investment in renewable energy, water infrastructure, education, health, and most importantly housing. These are the areas we need to invest in as a matter of priority.

The Central Bank last week suggested that 35,000 residential units would be delivered this year and 40,000 next year. Both outcomes look realistic but are inadequate. It identified the impediments to housing delivery, including low productivity in the construction sector; delays in utility connection; delays in planning; and a shortage of zoned and serviced land. We know the reasons, now let us do something about it.