A Trump victory would cause a stock market crash and plunge the world into recession


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Compounding these difficulties, growth in middle-income emerging markets is not strong. Slower growth in these countries is reflected in lower projected imports and lower expected commodity prices, which will negatively affect countries that export raw materials and energy resources. The Nigerian economy, just to take one example, is expected to contract by 1.7% this year.

Growth in the US, as reported by the IMF, was 2.6% in 2015, and is forecast to slip to 1.6% this year before rebounding slightly to 2.2% in 2017. There has been a long steady recovery from the 2008 financial crisis, but the effects of that collapse still linger.

Trump promises to boost US growth immediately to 4-5%, but this is pure fantasy. It is far more likely that his anti-trade policies would cause a sharp slowdown, much like the British are experiencing.

In fact, the impact of a Trump victory on the US could well be worse. Whereas British Prime Minister Theresa May’s government wants to close the UK’s borders to immigrants from the EU, it does want trade with the world.

Trump, on the other hand, is determined to curtail imports through a variety of policies, all of which are well within the power of a president. He would not need congressional approval to slam the brakes on the US economy.

Even in the best of times, US policymakers often do not think enough about the impact of their actions on the rest of the world. Trump’s trade-led recession would tip Europe back into full-blown recession, which would likely precipitate a serious banking crisis.

If this risk were not contained – and the probability of a European banking debacle is already disconcertingly high – there would be a further negative spiral. Either way, the effects on emerging markets and all lower-income countries would be dramatic.

Investors in the stock market currently regard a Trump presidency as a relatively low-probability development. But, while the precise consequences of bad policies are always hard to predict, if investors are wrong and Trump wins, we should expect a big markdown in expected future earnings for a wide range of stocks – and a likely crash in the broader market.

By Simon Johnson, former chief economist of the IMF. This article is reproduced from Project Syndicate

 

 

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Charles Rukuni
The Insider is a political and business bulletin about Zimbabwe, edited by Charles Rukuni. Founded in 1990, it was a printed 12-page subscription only newsletter until 2003 when Zimbabwe's hyper-inflation made it impossible to continue printing.

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