The lonely Wolf

The lonely wolf

As a young economist, I experienced the financial crisis in Asia first-hand in 1997/98. Like the financial crisis of 2008/09 in the Western world, the crisis left people in Asia feeling deeply unsettled. I remember the fate of my colleague particularly well. As an economist, he continued to comment on the disastrous economic consequences of the crisis long after the financial market had moved on. Within the industry, my colleague became a lone wolf whom no one wanted to listen to anymore.

I see parallels with the current situation. President Trump has been in office for six months, introducing tariffs, threatening trading partners, depriving the labour market of workers with his immigration policy and sending the American national budget even further off track with his Big Beautiful Bill. After a brief, sharp slump in April, the financial markets have recovered. The leading American index, the S&P 500, reached a new record high in July, long-term capital market interest rates in the US are back to where they were at the beginning of the year, and even the US dollar, which has been persistently damaged by the turmoil of recent months, has recently recovered slightly.

US economy has coped well with tariffs so far

The reaction of the financial markets may be surprising, but it is not irrational. Contrary to expectations, the tariffs have not led to supply bottlenecks, chaos or economic collapse. The American economy is growing, unemployment remains unchanged and corporate margins have not collapsed.

The first signs of the tariffs are evident in inflation. In June, the inflation rate climbed to 2.7% from 2.4% in May, which is in line with my expectations that the introduction of tariffs would cause additional inflation of around 1 to 1.5 percentage points.

At the moment, the financial markets do not want to hear the warnings from us economists that tariff and migration policies, as well as unsustainable fiscal policies, are likely to damage the American economy. Perhaps this is where the greatest danger lies. President Trump is likely to feel vindicated by the resilience of the economy and the markets and risks overreaching with his protectionist and self-serving agenda.

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This publication is available only in German.