UBS On-Air: Paul Donovan Daily Audio 'Scripted versus unscripted'
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Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's five o'clock in the morning London time on Tuesday the 21st of January. South Korean export data for the first 20 days of January showed a decline in exports, with fewer working days this year than was the case in 2024. There was some strength in the numbers led by export of chips. Exports to the US, the European Union and China all fell in year-on-year terms.

Trade data is likely to be increasingly in focus as economic nationalism continues to advance around the world. Korea plays an important role in complicated supply chains and it's therefore worth monitoring. UK labour market data is due for December. We know that the Office for National Statistics is at least honest in the absence of reliable labour market data and is doing its best to fill in with some provisional statistics.

There has been a lot of grouching by UK companies, horrified at being asked to pay marginally more tax on employment, and this has tended to focus on the impending apocalyptic consequences for the labour market in their view. The tone is actually rather similar to the US corporate responses to the US Affordable Care Act, or Obamacare, which projected similar dire labour market results, which never in fact transpired.

The UK's December retail sales showed exceptional strength in non-food sales, the strongest since the post-pandemic bounce indeed, and that doesn't really fit with a narrative of fear of unemployment. Retailers' earnings results are also not suggestive of cowering consumers. US President Trump's scripted inauguration remarks initially pushed the dollar weaker, as there was relatively little reference to trade taxes.

The references that were made tended to focus on the misplaced idea that trade taxes will be paid by foreigners rather than by US consumers. However, Trump's position seemed to become more radical as the day wore on. In what is euphemistically described as "wide-ranging" remarks in the Oval Office, Trump committed, in particular, to a series of aggressive US consumer taxes on goods from Mexico and Canada.

This then pushed the dollar up and equity futures down as investors expect the inflation consequences to keep US interest rates higher. Directly speaking, a 25% tax on imports from Canada and Mexico would raise US consumer prices of those goods by about 10 percentage points on average.

However, there is a risk of more inflation from second round effects, the drop in competition leading to US producers to raise prices and retailers engaging in a profit-led inflation episode. Taxes on imports from Canada and Mexico have been thought to be unlikely because these will hit food and fuel prices especially, and food and fuel prices are noticed by the US public and pay a disproportionate impact in forming inflation expectations.

References in the scripted remarks to the territorial ambitions of the US may have raised the odd concern amongst investors, but there's a tendency not to take Trump seriously on these points. The outlier concerns from the scripted remarks lie around the rule of law and prejudice politics.

Rule of law matters a lot to markets, and suggesting that an executive order could overturn the constitutional birthright citizenship, or that an executive order can stop the enforcement of a law enacted and confirmed by the Supreme Court, might be concerning if these points are pursued vigorously. Similarly, prejudiced politics from a culture war undermines economic efficiency and wastes valuable human capital. That's all for today. Have a good day.

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