People around the world are shocked by Republican Donald Trump’s surprise victory
in the US election.
As he takes the stage as the President of the United States, an avalanche of questions still remain of exactly what “Trumpism” really means and how he plans to enact the sweeping reforms he promises, as well as the impact those reforms will have on the economy.
On the one hand, some of Trump’s proposals, particularly big tax cuts, less regulation, and increased federal spending for defence and infrastructure, “could be positive, a marginal fiscal stimulus for the US economy in the short term,” according to Alan Levenson, chief economist at T. Rowe Price, in an note circulated on Wednesday morning.
In the long term however, reducing income taxes, increasing spending, and cutting repatriation of overseas cash by companies from 35% to 10% would likely increase the US government deficit.
Uncertainty over Trump’s protectionist and isolationist agenda and trade threats could also lead to reduced global growth expectations. Trump’s trade threats, particularly to Mexico and China, “may be no more than opening ploys to secure concessions,” notes Levenson. “But the risks of miscalculation would be high and could lead to very damaging trade wars.”
Another major point of uncertainty is Trump’s promise to deport all illegal immigrants from America, which could be as many as 11 million people, according to a note by HSBC’s chief US economist Kevin Logan. The deportation drive “would be costly and would also lead to a sizable reduction in the country’s labour force,” he said. “That is turn could lead to a reduction in both actual and potential GDP growth.”
Trump has also advocated selectively restricting immigration on the basis of religion and national origin.
“If we slow immigration of working-age adults, there’s not enough growth in the rest of the US workforce or the overall productivity rate to grow the economy very fast,” writes Levenson. “Most of our net population growth comes from immigration.”
HSBC believes Trump’s economic policies “would likely put the economy into a recession after a year or two” if fully enacted.
This would have a negative impact across the entire US economy. “I am not aware of any country in history that ever isolated its way to prosperity,” writes Levenson.
Turning to monetary policy, a December rate hike looks off the table. Analysts expected a rate hike in December after the Federal Reserve decided to hold before the election.
Although Trump has been extremely critical of Federal Reserve Chair Janet Yellen during his campaign, chief economist at PineBridge Investments Markus Schomer doesn’t expect her to resign. Trump could however appoint two board members which could impact monetary policy.
“A Trump win is likely to be viewed negatively across a wide range of assets in the short-term but the range of medium-term outcomes are much wider,” according to Deutsche Bank strategist Jim Reid. “It increases the chance of higher fiscal spending but it will also reinforce the backlash against globalization and associated forces of which migration policy and trade are obviously likely to be heavily scrutinised.
“A shake up is badly needed, but whether Trump is the right version of the shake up is open to debate.”