Towards a monetary regime change? [ABO]

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This week again, the financial markets were shaken by many events. The reactions have sometimes been excessive or premature. For example, less than a week ago, the investment bank Goldman Sachs anticipated a severe recession in the United States because of the rise of protectionism. Then, after the announcement of a moratorium by the White House, the discourse quickly evolved: we no longer talked about recession, but a simple economic slowdown. Let us try to sort between the facts and the hasty interpretations.

1/ Since the “Liberation Day”, the customs duties imposed by the United States have been multiplied by ten compared to their level before the Trump administration. If this level remains in place – for lack of concrete and rapid negotiations – this will weigh directly on the purchasing power of households, on business margins, and therefore on investment.

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The American economy could then experience zero growth in the second half of the year. The Federal Reserve (Fed) will play a key role. Once clear signs of weakness appear on the job market, it should intervene. However, due to the inflationary tensions caused by the trade war and the real estate market, it will probably not get up to lower its rates. To think that the Fed will intervene urgently to support the Trump administration is in our opinion an error: it must preserve its credibility and avoid any excessive reaction as long as no crisis of liquidity occurs in the markets.

2/ Europe, for its part, will also be affected, even if the impact will be slightly stronger than in the United States. The euro area was already fragile before these events. A new shock, through exports and the confidence of economic agents, could be enough to bring down growth close to zero in the coming months. However, the European Central Bank (ECB) has a greater room for maneuver than the Fed: inflation slows it down, and even if punctual tensions may appear, the general trend is disinflation.

3/ The American decision to massively note the customs duties recalls disturbing historical episodeslike those of 1930 with the Smoot-Hawley law, which had aggravated the great depression and slowed down world trade. But today, governments are no longer constrained by the ordeal and have more economic tools. If they show composure, it remains possible to preserve free trade and avoid a recessionist spiral or a prolonged stagflation situation.

4/ The trade conflict between the United States and China is far from over. Initially focused on customs duties and certain strategic commercial routes such as the Panama Canal, it now extends to exchange rates. Beijing was the first to consider action on the Yuan, the rate of which is administered. Last week, the Chinese government asked public banks to temporarily suspend their dollar purchases. The main short -term attention is now the USD/CNY pair.

Washington does not spread the idea of ​​devaluing the dollar, which would have consequences on all markets. Beijing, for its part, envisages a controlled devaluation of the Yuan if necessary.