Could the world be taxed into recession?

Posted by: Paul Donovan

31 May 2019
  • US President Trump announced an intention to increase taxes on American consumers, again. The proposed tax of 5% rising to 25% on imports from Mexico is a double hit. Mexico had been taking market share from China by selling products from the September 2018 trade tax list. If Mexican goods are taxed, US consumers will find it harder to evade the China trade taxes.
  • The bigger economic risk is uncertainty. The US economy, and the world economy, has spent a quarter of a century building growth on long, complex supply chains. If those supply chains are at risk, companies will need to rethink their business models.
  • Reshaping supply chains is an additional and economically unnecessary cost. If investment is cancelled and employment reduced, then the risk of a recession increases significantly. The Mexican peso weakened on the news. Asian equities fell overnight.
  • Economic data now has a nostalgic feel, as it relates to a period before trade uncertainty increased. This is a world of "what might have been." South Korea and Japan saw stronger industrial production figures, but for April. Various German, Italian and US inflation data are due, as is US consumer income and spending.

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