The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and Gramercy
Imagine trying to make important business decisions in the US with long-term consequences amid the fire hose of news and policy changes coming out of Washington right now. Understandably some corporate leaders might be cautious. How much so is an uncertainty that comes on top of a global economic and financial outlook that is, already, far from normal.
Many in the US business community were originally very enthusiastic about the new Trump administration but the current situation is starting to fuel worries that companies may take more of a wait-and-see attitude on investment and spending more generally.
Should that happen and persist, the world would face not just the threat of a slowdown in US growth. It would put at risk the American “economic exceptionalism” that has played such a critical role in shielding the global economy and markets from many disruptive forces.
The Trump administration has hit the ground running, including in the five policy areas the president emphasised during his campaign: tariffs, deregulation, energy, immigration, and public sector reform. Daily announcements, sometimes several of them, have been effective in signalling that this is an action-oriented administration with a determined policy agenda. But they have resulted in questions about the ability of the government apparatus to implement so many changes and the internal consistency of some of them. There have also have been concerns about the reactions of trade partners, companies and households.
The associated uncertainties for business touch both income and expenditures, sometimes at the same time. Tariff announcements can lead to increased costs for US companies and affect access to other markets. The repatriation of illegal immigrants can impact the functioning of the labour market. Public sector reforms offer the hope of making room for tax cuts but can also undermine the financial security of some consumers and the grants that support research and development.
Companies stand to benefit from deregulation and the Trump administration is seeking to lower energy costs. The resulting mix of opportunities and risks comes on top of an already complicated operating environment.
The release this week of hotter-than-expected US inflation data for January is a reminder that it is far from automatic that the Federal Reserve will achieve its inflation objectives. Outside of the US, both the Eurozone and the UK are on the cusp of recession while, uncharacteristically, China continues to dither on important policy decisions. All this as the geopolitical context remains fluid.
Business is also having to navigate a U-turn in what were multi-decade efforts to harmonise regulations and standards across major economic jurisdictions. Such harmonisation efforts helped reduce the cost of doing business globally. Now, firms are having to navigate divergent trends on regulation, sustainability and issues like diversity and inclusion, especially between Europe and the US.
Should they persist, such increased uncertainties risk pulling the rug from under America’s growth momentum at a time when massive spending is required on future engines of prosperity such as artificial general intelligence. They might also diminish confidence in both price and financial market stability.
The resulting danger is that global convergence happens the wrong way. Rather than exceptional America pulling up the sluggish Chinese and European economies, the weight of uncertainties risks pushing the US down to the other two.
In the 2010s, some high-profile hedge funds returned money to their external investors, stating that they no longer understood their operating environment. The heavy involvement of central banks to artificially suppress interest rates had upended the traditional drivers of return, volatility and asset class correlations. Failing to navigate the uncertainties of their new operating environment, they preferred to refund investors rather than risk damaging their hard-earned reputations.
Business is not likely to react to uncertainty in the same way, but some retrenchment is, uncomfortably, starting to rise as a possibility, even if it is not a baseline scenario for corporate investment and consumer spending. It needs to be addressed through greater policy clarity and consistent implementation before it fuels its own damaging dynamics. The US and the world cannot afford the loss of American economic exceptionalism.