Trump: Trade policies could cause stagflation, analysts say

President
Donald Trump dons a red “Make America Great Again”
hat
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• President Donald Trump is aggressively pursuing
  protectionist policies.
• Tariffs cause prices to rise and can stall
  growth.
• Analysts are warning that 1970s-like stagflation could
  be ahead.

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In a broad effort to rearrange global trade relationships,
President Donald Trump has slapped tariffs on some of the US’s
biggest business partners. And as effects of protectionism kick
in, analysts caution against heading toward a
repeat of
the 1970s when rising inflation, high unemployment levels,
and stalling growth plagued the economy. 

Washington and Beijing have followed through with
$34 billion worth of tariffs on one another, and Trump has
threatened to impose additional duties on nearly all Chinese
imports to the US. Trump has also started trade fights with
Canada, the European Union, and Mexico.

Protectionism “could start influencing inflationary expectations,
including a potential for stagflation, as wholesale prices rise,”
Macquarie analysts wrote in a recent note.

Tariffs are already putting upward pressure on input costs, which
can work their way through the supply chain and lead to firms
passing costs onto customers. In July, prices charged for goods
and services rose at a record pace on the Markit purchasing
manufacturers index. 

Analysts also caution that fiscal stimulus is poised to slow down
around the world relative to the US, which could magnify this
effect. Trump signed into law a sweeping
$1.5 trillion in tax overhaul last year and a
$1.3 trillion spending bill in March. 

“That obviously could continue to pressure US inflation higher
compared with elsewhere, not least if we add into the equation
aforementioned issues concerning protectionism, oil prices and
latecycle wage pressures,” analysts at Nomura said in a recent
note. 

Stagflation is also characterized by high unemployment, which is
currently far from the case in the US. In fact, the unemployment
rate has fallen to near
multidecade lows this year. 

But in the face of a global trade war, that could quickly change.
As tariffs raise costs, it can begin to weigh on company profit
margins. For example,
the Washington Post reports one Indiana lawn-care
company, Brinly-Hardy, recently had to cut nearly 40% of its
workforce because of the trade war. 

Analysts expect protectionist policies will begin to chip away at
economic growth in the US and around the globe, if they haven’t
already. Financial reports out in recent weeks show some
companies have
dimmed their earnings outlooks for coming quarters, citing
uncertainty around tariffs. 

“No one wins in a trade war: global growth would suffer despite
local inflation,” Bank of America Merrill Lynch analysts wrote in
a note last month. “Tariffs plus higher oil prices equal ‘bad’
inflation that could offset the consumption boost from higher
wages/tax reform. We see stagflation as the biggest risk to
equities.”