America is doing great (again) anyway

The US economy is gaining momentum, and inflation is in retreat. This is the Goldilocks scenario-not too hot, not too cold, but just right-that seemed improbable a year ago when investors worried over the strength of an impending recession. Data from the third quarter shows consumer and government spending and exports are powering GDP. These contributory factors will be affected by the change of administration in Washington in January. But the impact of MAGAraja Donald Trump's policies on tariffs, taxes and immigration should not be of an order to derail US economic growth. Tariff hikes have a minor impact on generalised inflation, which ought to sustain household consumption. Tax giveaways will, likewise, prop up consumer spending. But their impact will play out with a lag. Immigration restrictions will work to tighten the US labour market, with second-order effects on consumption. Effects of trade fragmentation and federal cutbacks will play out on a longer timescale, and will have to chip away at a strong base.

The near-term outlook of the US economic momentum has a bearing on offshore policy-making. The headwind from strong US growth will have to be tempered by its rate of disinflation. Emerging economies may be constrained by the US Federal Reserve's pace of interest rate neutralisation, which is calibrating itself for Trump's policies. Inflation globally is in retreat. But it's not expected to return to pre-pandemic levels in the next 12 months. Commodity prices are yet to readjust after a series of disruptions, and this is making last-mile disinflation difficult around the world. Sprightly growth in the world's biggest economy compounds the issue.

The US has escaped recession on the back of record government borrowing. A reset in inflation is awaiting the administration's attention to the fiscal deficit. The bond markets are likely to restrain Trump's adventurism and focus his economic policies towards strategic interests. The world is holding the IOUs that keep the US economy in good health.