President-elect Donald Trump ran on a platform of “America-first” economic policy, and according to the economics team at Goldman Sachs, that’s just what he is going to deliver — to the detriment of the global economy.
In his 2017 outlook, Jan Hatzius, chief economist at Goldman, laid out just what he and his team expect the effect of Trump’s policies as president will be on the global economy.
Hatzius examined the key Trump policy proposals — higher tariffs on trade, curbing illegal immigration, increased federal stimulus, tax cuts for corporations and Americans — and found that while the plan would give the US a short-term bump in GDP growth, it would be a drag on global growth.
“This has negative spillover effects on other economies, especially in EM economies with partially fixed exchange rates or dollarized economies,” Hatzius wrote to clients in the outlook on Wednesday. “The reason for the greater impact there is that the Trump agenda is likely to result in higher US interest rates and therefore a stronger dollar.”
Essentially, lower imports to the US and a stronger dollar from Federal Reserve rate hikes, combined with higher servicing costs for debt held in dollars, would curtail economic activity, especially in emerging markets, and drive global GDP lower than it would be otherwise.
According to a chart from Goldman, global growth is expected to be 0.1% lower annually than the baseline projection without Trump’s policies by 2020. While this may not seem like a lot, global growth was at only 3.1% for 2015, and analysts call anything under 2% growth a global recession, so there is little room for negative shocks.
Hatzius did say that the US GDP bump would come from fiscal stimulus, but that it wouldn’t last too long.
“The near-term effects are positive because the fiscal stimulus package boosts US demand and this has positive spillover effects to other economies,” Hatzius wrote in the note. “However, the longer-term effects on US growth are negative because the fiscal boost peters out and the other policies — higher tariffs, reduced immigration, and tighter Fed policy — weigh on growth.”
Hatzius also noted that these projections are made with a watered-down version of Trump’s policies. For example, he expects only a 4 percentage point rise in tariffs on exports from Mexico and China, about one-third lower than Trump’s campaign promises, according to Hatzius.
This is because Congress could block the more extreme versions of Trump’s policies.
As with much in the Trump campaign, however, there is room for debate given the high level of policy uncertainty. According to Hatzius, the risks of this uncertainty are skewed to the downside for growth. From the note (emphasis added):
“Moreover, our analysis suggests that the risks around our base case are asymmetric on the downside. Greater emphasis on fiscal easing could boost growth in the US and around the world moderately more in the near term. But it would also lead to a higher risk of economic overheating, more aggressive Fed tightening, and therefore an ultimate slowdown or recession.
“Greater emphasis on the trade, immigration and/or Fed policy aspects of the agenda would likely lead to more adverse outcomes even in the shorter term. The ‘adverse’ scenario … shows that US growth could be significantly lower in this case, with more meaningful negative spillovers into the rest of the world.”
In sum, according to Hatzius, Trump may make America great for at least a few years, but the rest of the world would suffer because of it.
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