Interview: A candid discussion with Eric Robertsen, Chief Strategist of Standard Chartered
"Europe is especially vulnerable in a trade war scenario"
Tackling the influence of the US presidency on leading central banks, Eric Robertsen, the shrewd Chief Strategist at Standard Chartered, believes there's a brewing storm at the Federal Reserve (Fed) and the European Central Bank (ECB) due to the four-year reign of President Trump commencing once again on January 20. Let's dive into his insights.
Q: Much of what Donald Trump plans could ignite inflation in the U.S. What do you anticipate the Fed will do in the coming year?
A: It's highly unlikely that the Fed will slash interest rates drastically. With escalating tariffs, deregulation, and Trump's aggressive tax policy, the pounding influx of dollars into the economy would lead to inflation. As the US economy is fairly robust and far from a recession, I envision the Fed will gently lower interest rates, maintaining a neutral perspective, and observe Trump's impact on inflation, growth, and labor market trends.
Q: What would you pinpoint as the approximate neutral interest rate range at the end of the cycle?
A: I would approximate the Fed Funds interest rate range to rest at around 3.5 to 3.75% at the end of the cycle.
Q: Trump has pledged a restrictive immigration policy. What repercussions do you foresee for the US labor market, particularly given the Fed's focus on the dual-mandate?
A: The Trump administration may deport undesired immigrants. However, mass deportations on the scale announced are unlikely. Despite these potential changes, the labor market impact may not be as damaging as initially expected.
Q: Do you think Trump will enforce imposed tariffs as promised, or could they be scaled down?
A: Trump will indeed impose tariffs, although the magnitude might be lower than initially anticipated.
Q: ECB President Christine Lagarde also sees Trump as a negotiator on tariffs. How do you concur with this notion?
A: Absolutely. History tells us that Trump's high demands or threats often mask a quest for concessions. By implementing tariffs against Mexico, he's likely trying to pressure them into strengthening border controls. Similarly, from Europe, he seeks increased military spending and increased American gas purchase.
Q: In a trade war scenario, if China or the EU strikes back with counter-tariffs on US tariffs, what would be the outcomes?
A: Escalating this conflict won't benefit anyone, especially the US. Europe would be particularly affected as China could retaliate with a substantial fiscal stimulus. Europe, however, may lack the ability to match this response. Additionally, China might flood Europe with products in retaliation to decreased exports to the US, leading to negative consequences for the automotive sector and unintentionally driving down inflation in the Eurozone.
Q: If the US implements stronger trade policies, what would be the implications for the US dollar vis-a-vis the euro?
A: The exchange rate debate is intriguing. Market analysis predicts the ECB will drop the key interest rate to around 1.65% next year, and the Fed to 3.75%. If this comes to fruition, the euro could dip to 1.03–1.05. However, if the Fed needs to act more aggressively due to Trump pressures and the ECB loosens its purse strings more excessively, making the interest rate differential larger, the euro could weaken further. The question then is whether the ECB would tolerate this turbulence or counteract it. If the depreciation happens gradually, the ECB might accept it.
Q: With political instability in France and Germany heading for new elections, how concerned are you about the political uncertainty, especially considering the grim growth prospects for Europe?
A: Countries like Germany and France are, ordinarily, the economic and political backbone of the EU. Currently, they are not, but other Eurozone countries like Spain seem to maintain stability. The question remains whether this will continue if the situation in Germany remains precarious and the country plunges into a recession.
Q: What economic reforms would you advocate to breathe new life into the aging German economy?
A: A surge in infrastructure investment is critical for Germany's revitalization. The country needs an atmosphere conducive to corporate investment and private consumption growth. To achieve this, Germany must significantly reduce its bureaucracy. With political will, Germany can be transformed again, as it did in the 1990s with the Hartz reforms.
Q: Looking at geopolitics, as global conflicts intensify, BRICS gains new members in 2024. What role will BRICS play in shaping global dynamics?
A: BRICS mobilizes states disgruntled by the dominance of the U.S. and Europe. However, a BRICS currency remains utopian. For instance, India will never relinquish its stable currency to embrace an unproven, volatile one. Instead, BRICS should be viewed as a platform for countries intent on garnering a greater geopolitical weight.
Q: Should institutions like the WTO, World Bank, or UN undergo reforms to ensure greater representation for the so-called global South?
A: These organizations are vital for multilateralism but are currently hampered by gridlock. Reforms are necessary to extend influence to the global South.
Q: One of the nations gaining prominence in international politics is India. How do you size up the country's economic prospects for the coming years?
A: India stands as a beacon of hope for the global economy for several reasons. Unlike China, it enjoys favorable demographic benefits that support its growth. The government has also struck the right notes in economic policy by heavily investing in infrastructure. India additionally maintains a relatively insulated economy, making it less vulnerable to struggles in global trade.
Q: China recently face governance challenges. What is your outlook on the economic prospects there?
A: [No translation needed as the text is already in English] The government recognizes the need for larger stimulus packages to hit its growth targets. Next year might bring a stronger fiscal boost due to Trump. However, the downward trend in China suggests slow growth in the coming years. The ailing real estate market, which comprises over 20% of GDP, hinders China's economic momentum.
Q: Will China manage to escape its deflationary pressures?
A: Persistent deflation threats remain apparent within Chinese industries such as automobiles, where consolidation could drive prices down further. To counteract this, the Chinese government must accelerate consumer spending and credit demand growth. Improving consumer and business sentiment significantly will be crucial.
- The Federal Reserve (Fed) may not drastically lower interest rates due to the inflationary impact of President Trump's policies, maintaining a neutral perspective and observing his impact on the economy.
- In 2024, the Fed Funds interest rate is anticipated to rest at around 3.5 to 3.75% at the end of the cycle.
- The outcome of a trade war scenario could have negative consequences for the automotive sector in Europe if China retaliates with increased product exports.
- BRICS, a group of economically disgruntled countries, is viewed as a platform for member nations to increase their geopolitical weight, but a BRICS currency remains impractical.
- Institutions like the WTO, World Bank, or UN could require reforms for greater representation of the global South to ensure multilateralism.
