Donald Trump will take power in January and will govern a U.S. economy that is in its seventh year of growing tepidly at around 2%. Our Consensus Forecast for the U.S. economy this month sees GDP growing 2.1% in 2017, but this will be subject to revision in the coming weeks and months as the economic priorities of President-elect Trump become clearer. Here we analyze the immediate and possible future implications of Trump’s victory. During his campaign, Trump outlined an extremely controversial policy agenda, including—but not limited to—building a wall on the U.S. southern border with Mexico, renegotiating NAFTA, cancelling or reforming the Affordable Care Act (Obamacare), imposing punitive trade tariffs on China and cutting taxes for the wealthy. The unexpected victory of Trump in November’s election and the resultant uncertainty over future U.S. policy will have serious ramifications for both the domestic and global economies.
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Market tantrum over Trump
Investor sentiment toward riskier assets fell swiftly following Trump’s election, causing widespread alarm across the global economy, given Trump’s loose grasp of economic policy, heavy political populism and tendency towards contradiction. The vote unleashed increased volatility in the bond, stock and currency markets. Financial markets in the U.S. have sold off sharply and the U.S. dollar weakened compared to the Japanese yen and the euro, yet it strengthened against most emerging-market currencies. The safe-haven effect was also noticeable in the U.S. Treasury market, where prices rose, driving down yields. However, assets have recovered the ground lost and rallied on promises of substantial fiscal stimulus via infrastructure spending and tax cuts, and rising inflation expectations in the U.S. economy, which might also be related to the possibility of higher import tariffs.
Further volatility is likely to persist until Trump takes office on 20 January and provides more clarity on his policy agenda and on the composition of his cabinet. Heightened uncertainty has likely taken its toll on the U.S. economy at the end of 2016, as businesses and investors adopt a wait-and-see approach until Trump’s policy agenda becomes clearer. As explained by Lawrence Nelson, Economist at Macroeconomic Advisers:
“Once we get past the immediate post-election period where uncertainty is likely to restrain growth, the tax cuts and spending increases that are likely to be passed would tend to boost near-term growth, inflation, interest rates, and the dollar. This assumes that we avoid large increases in tariffs and any related trade war…a big if.”
Trade implications: priority NAFTA
Trump’s dissatisfaction with some existing free-trade deals includes plans to immediately renegotiate the North American Free Trade Agreement (NAFTA), which would have direct consequences for Canada and Mexico, both of which send over 70% of their exports to the U.S. The Canadian government has already indicated its willingness to negotiate and improve elements of NAFTA. Brian DePratto, Economist at TD Bank, said:
“Although much of the rhetoric was focused on China and Mexico, Canada has benefitted greatly from NAFTA, which is now up for renegotiation. Any thickening of borders is likely to increase the trend away from exports and towards the use of foreign affiliates.”
While Mexico is believed to be more exposed if the U.S. renegotiates NAFTA—given the deep integration of some industries between the two countries—a major shift toward trade protectionism in America could have a significant impact on Asian economies too. Joseph Incalcaterra, Economist at HSBC, says:
“There are many unknowns following the election of Donald Trump. However, one thing is certain: the Trans-Pacific Partnership (TPP) is unlikely to be passed, and the US is likely to become more protectionist. This is significant for Asia. Many regional economies are members of the TPP – Japan, Singapore, Malaysia, Vietnam, Brunei, Australia, New Zealand, and Vietnam – while others expressed a desire to join. Most literature unequivocally attributed significant economic gains to the region from the TPP – above all for Vietnam – and its implementation would precipitate politically difficult, yet economically beneficial reforms. The TPP was a beacon of hope in an environment of subdued trade activity and weak global growth.”
Domestic economic policy outlook: uncertain
In the current uncertain environment, opinions diverge strongly on whether Trump’s election will be good or bad for the U.S. economy. The significant policy changes that Trump promised in his campaign are expected to substantially modify the U.S. economic landscape and some economists predict a potential era of faster growth and prosperity under the new administration. For example, David Kohl, Chief Economist Germany & Head of Currency Research at Julius Baer, sees Trump’s victory as likely to lead to stronger growth and thereby higher inflation, forecasting a bullish outlook for the U.S. dollar:
“The Republican dominance of the next US government increases the likelihood that inflation will be higher in the coming year, and even growth might receive a boost from more government spending and tax cuts. We adjusted our US growth forecast to 2.4% in 2017 from 1.9% previously, and our inflation projection to 2.2% from 1.8%. Interest rate hikes by the Fed are hence more likely to happen, which supports our bullish view for the US dollar. At the same time, US Treasury yields should end the next year higher than previously expected. We expect 10-year Treasury yields at 2% at the end of 2017, up from 1.8% forecast before.”
Some experts, however, are much more negative in their assessments. Daniel Solomon, Economist at Euromonitor International, sees Trump’s victory as significantly worsening the outlook for the U.S. economy:
“We have downgraded our baseline forecast to 0.4% GDP growth in 2017 and 0.7% growth in 2018 (down from 2.1% annually in the August forecast).This comes after an already disappointing economic performance in 2016, with GDP growth likely to be just 1.5% (1 percentage point lower than our forecast from November 2015). The congress and senate are likely to moderate many of Trump’s planned tax cuts and more extreme trade tariff increases. Despite this, the economy will likely be hurt in 2017 by a high level of uncertainty and more pessimistic expectations, related to the fiscal outlook, worsening foreign relations and the rise in trade and immigration barriers. It is worth emphasizing the unusual amount of uncertainty surrounding this baseline forecast, given how little is known about which policies Trump would actually implement and how he would govern. As a result we only assign it a 15-25% probability (compared to the usual 20-30%), with a roughly 50% probability that GDP growth in 2017 is between -0.4% and 1.2%.”
Despite still sluggish growth—which Trump effectively capitalized on to win the election—the U.S. economy is nearing full employment. The percentage of the working age population in employment has returned to levels not seen since the peak of the housing market bubble and wage growth has accelerated after a long period of stagnation. While a strong fiscal boost was ideally needed four or five years ago, the shared view is that it would be better late than never: U.S. infrastructure needs to be repaired and economies around the world would benefit from stronger U.S. import demand. It nevertheless remains unclear by how much and for how long a fiscal stimulus will actually lift the economy.
A clean sweep
Donald Trump’s victory in the presidential election was a huge upset after Democratic candidate Hillary Clinton had been considered the strong favorite by analysts, the markets and opinion polls through the race, including in a survey of international economists produced by FocusEconomics. Trump tapped into the rising dissatisfaction of a large portion of Americans with the direction of the country to win 290 of the 538 Electoral College votes. He performed remarkably well in the key battleground states, winning Florida, Ohio, Iowa, North Carolina, and, most critically for the Clinton camp, Pennsylvania. Winning in Wisconsin, which had voted Democrat since 1988, enabled Trump to surpass the threshold of 270 Electoral College votes.
The Republicans also obtained an important victory in the election for Congress. The Democrats only needed to win five of the 34 seats in the Senate up for reelection to retake a majority, but in the end they only secured one. The House of Representatives also remained in Republican hands, as was widely expected. The clean sweep gives the Republican Party and its president-elect powers that will exceed those of Trump’s predecessor, Barack Obama, and should enable a smoother passage of legislation. The election result also significantly alters the outlook for the Supreme Court, which is currently equally balanced between liberals and conservatives but one judge down, who is set to become a Republican. However, the relationship between Trump and the Republican Party was strained during the campaign and the president-elect continues to face growing tumult in his transition team, which suggests that Trump may not be able to rely on the backing of the Republican Party to the same extent as a regular president-elect would expect.