The recent US election is expected to bring about important changes in the global markets. The return of Trump administration is undoubtedly a turning point for America to re-structure its economic policies and to show response to the current events which can greatly affect the economies of all nations, in particular the UK.
Tariffs to destroy British businesses?
Trump has repeatedly claimed that he is going to increase spending. This is not a surprise as excessive consumption and a luxury lifestyle had also been encouraged during his time at office. He also has stated that he will cut taxes to benefit American taxpayers and to enable them to have a greater purchasing power. In addition, the new government has demonstrated its eager to use more of a tariff-based policy to fund its budget. All of this means that there exists a considerable rise in demand and a weak and restricted supply. This clearly indicates that Donald Trump is to take an expansionary fiscal policy to boost GDP and so economic growth. This however can create inflation, causing the US economy to even exceed its targeted inflation rate of 2% that is already surpassed by nearly one percent.
The point is that this inflation will require the Federal Reserve to increase its interest rate to prevent a hugely damaging inflation. The decision to hike up interest rates will attract hot money flows from around the world to receive a big return on their lending. When investment in a country surges – which it roughly did the last couple of days – the need for the currency of that country would also normally increase, in this case dollar. This can partly explain why dollar appreciated extraordinarily during the election period. Indeed, for investors to prepare lending, they had to buy dollars which shifted the demand for dollars to right and caused its price to increase. Pound Sterling is not an exception to this, and so it depreciated due to selling of pounds to buy dollars. Now it related to the UK when it shows that British goods are now cheaper to Americans than they were. Therefore, for example taking cars as a main export to the US from the UK, the real value of a British car is now lower in actual terms. So the demand of Americans for a UK-made car might increase. This is vitally important as the United States under Trump’s presidency will impose heavy tariffs on products from Europe, China and the UK. The point I want to make is that there is not going to be any harm to British businesses as the risen demand will offset the tariffs imposed. In fact, the probable rise in demand due to cheaper pounds will neutralise the impact of tariffs to American consumers. The real price will eventually turn out to be the same and thus the UK economy, at least theoretically, will not experience a harsh decrease in growth.
Immigration shift?
The other argument is that Donald Trump, as it’s already crystal clear, will massively reduce immigration. It may seem quite irrelevant if I propose that this will influence the UK, but it really does. If you are an international student, you most probably know English other than your native language. Now, how many countries in the world are English-speaking and which are the best places to go and study? The UK, US, Australia and Canada. These are only a few so if each one of them exits, the burden will be divided to the other three. The same is true here in our discussion. UK, regardless of all efforts of the Labour government to stump up visa fees and to necessitate an English Language test for its application, is still popular between international students. The decision by President Trump to eliminate entrance of students to US, can give rise and render the UK even a more popular place to study in. This becomes problematic when international students need to come with a humongous amount of money to support their costs. This adds to the money flow in the economy, forcing the Bank of England to increase interest rates and credit regulations for borrowers to control inflation and stay on target of 2%. This consequently might cause the consumer power to diminish in the market, e.g. housing market.
UK budget change?
Another thing this election has brought is the need for the budget to allocate a bigger share of GDP to defence spending as some argue that UK will not be under the US umbrella anymore so has to ameliorate its sovereignty, and that America’s support for Ukraine will be highly unpredictable, perhaps forcing all Europe as well as the UK to give more military support.
Hang in there…
Donald Trump is an exceptional politician and in this regard maybe he is the most unpredictable politician whilst his decisions can change the direction of the whole world. He can fluctuate all the markets like flicking a switch by a word as he did in his time as the president. One of the greatest housing market booms just happened in time when he gave a speech on American democracy and that people had to live a prosperous life by fulfilling their dreams through buying more and more, in this case houses. Therefore, Trump himself is a reason of inflation and can volatile the world and so destroy businesses or cause inefficiencies. Nonetheless, there is still optimism for a good Trump presidency and this analysis is only on paper; the reality may prove it’s better.
