- 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.
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 $US34 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 $US1.5 trillion in tax overhaul last year and a $US1.3 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 characterised 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.”
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.