By Balazs Koranyi and Howard Schneider FRANKFURT (Reuters) - Global economic policymakers had been braced for an economic firestorm from the new U.S. administration but instead got a surprisingly
Global Economy Remains Steady Amid Trump's Unpredictable Policies
By Balazs Koranyi and Howard Schneider
FRANKFURT (Reuters) - Global economic policymakers had been braced for an economic firestorm from the new U.S. administration but instead got a surprisingly restrained start from Donald Trump, who remains big on rhetoric but more cautious on action - for now.
Trump had hinted at sweeping trade barriers from the very beginning of his term. But instead his first week in office focused on his domestic agenda and left the global trade landscape little changed.
The threat of sweeping tariffs, a central plank of his campaign promises, had raised concerns of a resurgence in inflation.
Although Trump has warned he may impose a 25% levy on imports from Canada and Mexico from Feb. 1, the restraint so far has allowed cautious confidence in the global outlook.
The European Central Bank, the Bank of Canada along with the Bank of England could all cut interest rates in coming days and weeks as policymakers bet inflation will keep slowing.
The U.S. Federal Reserve meanwhile is still expected to hold off on further easing on Wednesday, arguing inflation may only come down slowly given a still-hot economy and the continued risk of tariffs. That will likely irk Trump, who is already putting pressure on the bank to lower borrowing costs.
After threatening China with tariffs of up to 60%, Trump even said he could cut a deal with Beijing after a conversation with Chinese President Xi Jinping he described in glowing tones.
"It was a good, friendly conversation," Trump said of the early contact, adding he would "rather not have to use" tariffs against China. A Chinese Commerce Ministry official said Beijing was willing to work with Washington to maintain stable trade ties.
Such comments have bolstered market bets that inflation could keep on easing, giving central banks around the world the room to lower interest rates further and to return to some sense of normalcy after the biggest price surge in generations.
Markets were relieved. Stocks rallied, oil prices dipped, rate cut expectations have been bolstered. Some of the dollar's exceptional gains since November's election were reversed.
The Bank of Japan went ahead with a well telegraphed rate hike on Friday, Singapore eased policy as expected and a rate cut in Sweden on Wednesday remains fully priced in, suggesting Trump's first week for now has left future rate paths largely intact.
"Pronouncements, including the inauguration speech were not taken at face value," Paul Gruenwald, global chief economist at S&P Global Ratings, said.
"Rather, they were interpreted as some combination of policy intent, negotiation tactics and political rhetoric," he said, adding the likely volatility and uncertainty around Trump 2.0 were being "internalised" by investors.
'TOO MANY MOVING PARTS'
While many believe that relief could prove temporary, some leaders pointed to Trump's tone shift on China as substantial.
"It suggested a desire for a new understanding and a desire to avoid a continuous unravelling of a relationship that is still profoundly important for the global world economy," Tharman Shanmugaratnam, Singapore's president told the World Economic Forum in Davos.
Such is the uncertainty, however, that policy-makers will be treading carefully.
Some analysts were expecting the People's Bank of China to cut interest rates or inject liquidity this month. But so far it has held fire, showing signs of concern over the yuan's recent depreciation, which could quicken if trade tensions ratchet up.
While other emerging market central banks are not expected to turn hawkish – with the exception of Brazil which has restarted a rate hike cycle – Trump-induced volatility and ever-present inflation risks limits room for them to pursue rate cuts.
South African Reserve Bank (SARB) Governor Lesetja Kganyago told Reuters in Davos there were "too many moving parts" to have a clear view on price pressures for now.
This week's Fed meeting is the immediate centre of focus.
The irony is that the main reason U.S. inflation is only coming down slowly is that the economy is proving more robust than anybody had thought - which should be a boon for Trump.
"It's basically soft-landed," Dario Perkins at TS Lombard said. "Inflation is back down to the sorts of levels that they want, the labour market is completely rebalanced, there are no sort of underlying macro financial imbalances.
"So really, you just have to not destroy that."
(Additional reporting by Karin Strohecker in London, Marius Zaharia in Beijing, Leika Kihara in Tokyo and Promit Mukherjee in Ottawa; Editing by Mark John and Sharon Singleton)
