Need for fiscal, monetary policy reset as US tariffs throw global economy off course: MAS economist

[SINGAPORE] With US tariffs disrupting the global economy’s path to equilibrium, fiscal and monetary policies are due for a reset, said Monetary Authority of Singapore (MAS) chief economist Edward Robinson on Friday (May 23).

In 2024, the global economy was showing signs of recovery, with inflation easing, growth holding steady at potential and central banks starting to cut rates, he noted. Yet, this path has been disrupted by US unpredictability.

Speaking at the 12th Asian Monetary Policy Forum at Conrad Singapore Orchard, Robinson noted that a tariff war can deliver both demand and supply shocks.

For export-oriented economies such as Singapore, “demand shocks probably dominate”. But countries that impose retaliatory tariffs – and perhaps others too – will suffer negative supply shocks.

This will worsen the trade-off between growth and inflation, making it difficult to set monetary policy. The challenge is greater for countries with higher public-sector debt from the Covid period.

Even as central banks aim to secure the “optimal path of adjustment for global imbalances”, they must use the right instruments, underpinned by a commitment to multilateralism, he stressed.

He warned against hasty, expedient action that might fragment the global monetary system, risking “severe financial ruptures and a deep global recession”.

The potential damage from trade wars is amplified by supply chain integration, he noted, with two-thirds of international trade now happening within cross-border value chains.

Investments in production networks made during an era of free trade – with components crossing borders before final assembly – might face “an abrupt repricing” of Tobin’s q, which reflects an asset’s market value.

This could create a wave of “stranded assets”, Robinson said.

A better future

However, the chief economist raised a more optimistic possibility if countries work together and refrain from retaliation.

Trade can adapt to become more regional and services intensive. The global economy will converge towards stable inflation, with interest rates easing slowly, while growth will slow to slightly below trend for a while.

But this requires coordinated action, he said. Nations with large current account surpluses must spend more and accept some currency appreciation. Countries with deficits would adjust in the opposite direction. 

This rebalancing of surpluses and deficits should be funded by stable capital flows, he added. International financial institutions should continue to provide oversight, while geopolitical tensions dissipate.

Speaking after Robinson at the event, Peterson Institute for International Economics president Adam Posen agreed that plurilateralism is needed to set standards and create networks. 

The US dollar’s centrality in the global economy is being reduced for economic and foreign policy reasons, as the currency becomes a source of risk rather than security, he said.

The greenback has traditionally dominated due to a lack of viable alternatives and the country’s security relationships, said Posen.

But now, security or financial relationships with the US no longer provide the same quality of “insurance”. This is prompting countries to seek alternatives, including “self-insurance”.

The European Union is spending more on defence, and there is discussion about how having a digital euro is an important step to avoid the risk of arbitrary sanctions. 

In Asia, terms “that we thought were gone 15 or 20 years ago” such as the Asian Monetary Fund and Chiang Mai Initiative – a regional currency swap agreement – are seeing a revival.  

“These are all forms of self insurance in the absence of a good insurer from the US.”