A President Trump would not be good for the world economy, according to Citi.
Willem Buiter, the chief economist at Citi, said in a note to clients on Thursday that a Trump win would weigh heavily on financial markets and his policies would deter global trade and economic growth.
“Assuming, somewhat conservatively, that a Trump victory would lead to a 1 [standard deviation] increase in global policy uncertainty and a 1 [standard deviation] tightening in US financial conditions (and that the two shocks affect global growth additively), a Trump victory could lower global GDP growth by around 0.7-0.8pp,” wrote Buiter.
“According to our estimates, pushing GDP growth easily below our benchmark for a global recession of 2% global growth at market exchange rates in 2016/17.”
Buiter’s thinking comes on two fronts. The first is that financial markets are not pricing in a Trump victory, so the immediate aftermath would lead to uncertainty. The markets being caught on the wrong foot would be similar to the shake-up that came after Brexit.
“A Trump victory in particular could prolong and perhaps exacerbate policy uncertainty and deliver a shock (though perhaps short-lived) to financial markets,” said the note. “Tightening financial conditions and further rises in uncertainty could trigger a significant slowdown in US, but also global growth.”
Secondly, concludes Buiter, the policies that Trump would implement would curtail trade and economic growth. This would damage global economic conditions.
“The Presidential candidates of both major parties have also embraced some protectionist ‘America First’ rhetoric and policies, including criticism of existing trade agreements (eg NAFTA and WTO) and have indicated opposing ratifying the Transpacific Partnership Agreement (TPP),” said the Citi economist.
“Countries heavily exposed to the US via exports include the US’s neighbours in Canada and Mexico, but exports to the US account for more than 5% of GDP in a wide range of EMs and some advanced economies.”
While both candidates have expressed some trade scepticism, Trump in particular has gone after America’s trade partners and has said he would alter the trade deals of the US significantly, which would lead to Buiter’s above conclusions.
On the upside, said Buiter, both Trump and Clinton have expressed support for fiscal stimulus. This sort of government spending could help boost GDP a bit.
Buiter does note that even if Trump loses, the undercurrent of dissatisfaction in the US that drove him to the nomination will still be present. The anti-trade, non-stimulative rhetoric will be around, and thus, there are still dangers that another candidate could seize on this platform.
Buiter does project, with a 65% certainty, that Democratic nominee Hillary Clinton will win the election.
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