UBS On-Air: Paul Donovan Daily Audio 'Trade taxes and the US Treasury'
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Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 17th of January. As an economist, watching the confirmation hearings for US Treasury Secretary nominee Besant was interesting. Besant is one of the more orthodox nominations for a cabinet position and gave a generally articulate set of answers on a range of issues. On the economic consequences of trade taxes, however, the answers were more troubling.

Certainly, Besant does appear to favour trade taxes purely as a bargaining tool, not as being a good thing in themselves. But some of the answers on the inflation implications are troubling. The idea that currency appreciation can limit the effects of a trade tax is not really supported by the recent evidence.

And the idea that workers will not pay higher prices as both a direct and an indirect result of what amounts to a sales tax is questionable. Presumably, Besant is aware of how sales taxes work. And so the concern is that the disregard for the economics of trade taxes is reflecting the approach of the incoming administration overall.

overruling the presumed understanding of the Treasury Secretary nominee. According to the official government data, China's economy grew at 5% in 2024. 5% was the official government target for growth. Economists are perhaps not entirely surprised that the official government data has met the official government growth target.

Academics in the past have suggested that China's economy, and by extension its growth, is about two-thirds the size of the official figure. But even a growth rate of around 3% would still mean rising living standards in China because the population continues to fall, implying a lower trend rate of growth over time, incidentally.

Does an abstract concept like GDP actually matter very much to the financial markets? Not really. Investors are interested in the reality of what China is doing and how it interacts with the rest of the world. A smaller China, which actively consumes foreign goods, is more globally important than a larger China that is a relatively closed economy.

UK December retail sales data saw very weak food store sales, but general strength elsewhere. That pattern is not really consistent with the idea of consumers cowering at home out of fear of the recent budget. A rather serious seasonal flu may have weakened some spending behaviour, but the seasonal adjustment process does take into account the flexible timing of the Black Friday shopping hype.

After a week of excitement in the fixed income markets in the UK, with bond yields having dropped 0.2% or so, Bank of England Governor Bailey is set to speak today. The UK economic outlook hasn't really altered very much in the last three months. There's a lot more grouching from businesses, but that seems to be spin with no substance behind it. Final euro area December consumer price inflation is due and is a non-event, as the data's almost never revised.

There are still some ECB speakers on the agenda, and while an economist should be excited about that, it's a little hard to muster up much enthusiasm on a Friday in a week which has had 14 ECB speakers and the account of the last policy meeting. That's all for today. Have a good day.

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