Economists at the 47th World Economic Forum at Davos highlighted the Trump factor as the single biggest risk of 2017. Though the US economy is in a position of strength, and is expected to remain that way on expectations of a fiscal stimulus and deregulation, the risk of increased protectionisim and a possible trade war looms large.
The “overhang of a very inexperienced and somewhat erratic US president” and China will be the biggest economic risks of 2017, Kenneth Rogoff, professor of economics at Harvard University, told BloombergQuint’s Menaka Doshi.
So while Trump’s policies are essentially pro-business and pro-growth, “if protectionism and trade wars start to become the order of the day, then that will be a different issue altogether”, said Paul Sheard, chief global economist of S&P Global Ratings.
Central Bank Independence
Rogoff is worried about the independence of the US central bank under a Trump administration. The Federal Reserve is faced with two imminent vacancies – the terms of the chair and the vice-chair expire in 2018. A few other governors may resign as well around the time, leaving Trump to appoint most of the Federal Reserve board, he cautioned.
The Federal Reserve’s independence is a creature of the Congress. It’s not something which is in place in the Constitution. Given all that, maybe the Fed will hold down interest rates longer than people expect. But then the economy could overheat, we could get a lot of inflation. Then they may have to raise rates quickly a couple of years from now.Kenneth Rogoff, Professor of Economics, Harvard University
The other central bank whose independence has been called to question of late is Reserve Bank of India after the government’s decision to demonetise old high-value currency notes. Sheard said he’s not too concerned about that erosion of independence per se as long as it is within a framework where the government and the central bank have a shared understanding of what the objectives are and what the division of labour is.
In some way, the pendulum may be swinging away from the whole framework of inflation targeting and delegating macroeconomic demand management to an independent technocratic central bank. Probably, we need to look at more coordination between the monetary authorities and the fiscal authorities and really ask questions about what is the best way to structure that relationship. Sometimes there is too much separation. Independence has gone too far and perhaps caused a lack of coordination between the two arms of macroeconomic policy.Paul Sheard, Chief Global Economist, S&P Global Ratings
Demonetisation Impact
Both economists agreed that while India’s demonetisation may have been well-intentioned, its implementation has left a lot to be desired. It will take at least a few years to fully understand the impact of the note ban, Rogoff said.
The approach of trying to do a shock therapy is something that I argue against in my book. It should take 5-7 years to do something like this. They haven’t printed the new notes... it didn’t even occur to me to say that in the book but that’s created a lot of problems.Kenneth Rogoff, Professor of Economics, Harvard University
Sheard said the move will “go down in the history books as a very bold, and maybe in the short term, a not-so-edifying monetary experiment”.
Maybe over the course of a year or so, the shock will dissipate. Hopefully, it’ll be transitory. You do have a hysteresis that when you put the economy on a different path, it doesn’t always come back to where it would’ve been, there maybe some long-lasting effects. One thing to think about this is that even though the government has sprung this on the Indian people once, there will be a concern that it could happen again. So even though it maybe done with very good intention, that is one question mark would be that could it undermine the credibility of the whole monetary system, and that would be a longer-term concern.Paul Sheard, Chief Global Economist, S&P Global Ratings
(Published in an arrangement with BloombergQuint)
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