Ride the policy noise and shifts

A rewiring of the global economy is forcing investors and policymakers to proceed with caution. Such prudence is justified. There may be superficial parallels with the trade shock delivered by the pandemic, but limited lessons can be drawn from the temporary disruptions that occurred at the start of the decade. Today, the US administration’s  approach to commerce, security and international relations is ushering in structural changes that will outlast its tenure.

Ride the policy noise and shifts

It is all too easy to focus on the negative aspects of such shifts. It is true that unpredictable policymaking is an unfavourable backdrop for investment and consumption, and it increases the difficulty of forecasting how economies will perform. Even the International Monetary Fund is now producing “reference trajectories” rather than projections. Uncertainty about the economic outlook, or even the rules of engagement when it comes to international trade and diplomacy, is also triggering elevated levels of market volatility. 

But there are some positives that will influence asset prices. Most major economies have so far proved relatively resilient despite the flux. For example, US growth may slow to 1.6% this year, below its potential, but the Federal Reserve will probably manage the delicate balancing act that is required to avert recession while keeping inflation in check. Also, while the US administration has made tariffs and security its priority, planned tax cuts and deregulation are likely to mitigate the toll that trade levies may take on US economic activity in the coming year. As a result, a corporate profit recession is unlikely. 

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