We are not going to see the real negative damage from the tariff war until probably the second half of the next year, Geoff Lewis, Senior Strategist (Asia), Capital Markets & Strategy Team, Manulife AM, tells ET Now.
Edited excerpts:
The Fed has removed the word accommodative from their policy stance. What does that indicate?
I do not think it means the Fed is necessarily close to the end of the interest rate cycle but it is no longer emergency rates. And looking at the US economys 4% growth, with many of the surveys at record highs, high consumer confidence, there is a case for Fed to actually tighten the policy a bit faster than it was thought earlier.
It is striking a balance. There are a lot of risks and uncertainties with trade tariffs. The Fed is sticking to its course and telling us that these rates justify, they are warranted. Looking at the profile of the GDP growth in the Feds forecast, they have got it slowing down consistently from 2.5% to 2% in 2020. It would not surprise me if the Fed actually eases off a little bit in the second half of 2019.
The Fed is indicating that as of now, there is no aggregate impact because of the tariff tensions. How does that really play into the outlook for the future? As a reality of those tariff impositions comes to the fore, will you look at those aggregate growth numbers also being revised?
That is right but there is tremendous uncertainty here. Economic models are not very good to calibrate any impact of tariff wars, or tariff cuts. If there is scope for tariff hopping or moving production chains, moving final assembly the impact on the global economy may not be so great but with the legs involved, we are not going to see the real negative damage from the tariffs until probably the second half of the next year.
Fed being data dependent will be keeping an eye on this but it is unlikely to be a big enough negative shock to derail the global economy in the short term. Fed will just be watching as far as trade tariffs are concerned. I do not think that is the right posture for the central bank to be taking just now.
Do you think the sugar rush which US economy is currently enjoying because of tax cuts, will fade away in two or three quarters? Everyone is excited that dollar strength is permanent and US unemployment rate is going to remain low for an extended period of time. Are they in for a rather deep shock in 2019?
That is a very good question. It is something of a sugar rush and President Trump has used up some of the fiscal space. The worry would be if an unforeseen shock leads to a sharp slowdown. Then the US would have used up a lot of its fiscal ammunition. We are seeing a temporary boost to growth. There are some positive longer term impacts from tax reforms, from improving productivity growth, deregulation etc. But those come through fairly slowly.
The Fed is right, we will see a deceleration in US growth in next few years but still it would be pretty decent around 2.5% but it would not continue at 4%, no way.
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