Fra Commerzbank:
Donald Trump has created a sensation and is to become the 45th President of the United States.
During the election campaign he frequently advanced radical positions, particularly in relation to foreign trade. Do the economic and key interest rate forecasts for the US need to be massively adjusted following his election victory? A sober analysis reveals upside and downside risks. There is unlikely to be any rapid impact on the economy.
We are therefore sticking to our forecasts for the time being. Making forecasts in a hurry while reacting to current events is not without risks. This was the experience of many analysts after the surprising outcome of the Brexit referendum in June. Some economic forecasts were drastically revised in the wake of the British vote.
Those negative predictions have not so far been borne out and forecasts have been raised again bit by bit.
Short term: Fed still on course for a rate hike in December The short-term impact of Mr. Trump’s election victory on the US economy is likely to be moderate. The short-term market reaction has been fairly modest, so that there is no question of an uncertainty shock. Nor is there any reason, if markets remain relatively calm, for the Fed to give up its plan to implement the next interest rate hike in mid-December.
After all, the economic data are set to give the green light: the labour market is close to full employment, wage pressure is gradually increasing and growth has accelerated. Another rate hike – a full year after lift-off – can hardly be described as an aggressive action which the Fed should abandon in light of the uncertain political situation.
If the Fed decides not to increase interest rates in December on the grounds of increased uncertainty, this could even serve as an irritant to the economy along the lines of “If the Fed has doubts about the economy …”. Therefore we still think it more likely the Fed will raise interest rates in December. Medium term: positive and negative In terms of growth over the next two years, Trump’s victory is likely to have both positive and negative consequences.
Taxes are certain to be cut. This was a key plank of Trump’s election campaign and is something the Republicans in Congress have been demanding for years. The extent of these measures remains an open question, however. In his election campaign, Trump held out the prospect of tax cuts projected to be worth $5,800 billion over the next ten years (chart 5). This corresponds to more than 2% of GDP p.a. The measures should boost private consumption and investment demand.
However, inadequate financing threatens the feasibility of the programme. Only part of the tax reductions are to be financed through spending cuts totalling $1,200 billion. Yet even this figure looks difficult to achieve. Firstly, defence spending is supposed to be increased significantly; secondly, many of the measures will meet with resistance from affected interest groups; and, thirdly, whether he can materially save money on the planned reduction in the misuse of Federal spending programmes is doubtful.
Trump’s fiscal policy programme will therefore dramatically increase the already high and – based on current law – still rising level of public debt (chart 6). We can therefore expect timeconsuming negotiations, leading to significant reductions in the size of the tax cuts. In addition, the potential impact of the tax cuts on the economy will be reduced by the fact that lower income taxes will mainly benefit high earners, who have a high savings rate.
Growth would be negatively impacted by implementation of the protectionist measures which were repeatedly announced during the campaign. Imposing punitive tariffs on imports from China or preventing further business relocation to Mexico were among Trump’s most popular arguments and key planks of his economic strategy. Experience shows that presidents are not quick to retreat from key campaign promises, so that the risk of trade conflicts should certainly not be underestimated. In particular, this risk could put pressure on capital expenditure; the more so as the affected countries would probably take countermeasures.
A variant solution that would allow Trump to keep part of his promises without inflicting too much damage on the global economy would be to bury the free trade agreements with Asia (TPP) and Europe (TTIP), which in any case are not yet in force (TPP) or are still being negotiated (TTIP). This would leave the situation no worse than the status quo; on the other hand there would be no further trade liberalisation, with some limited punitive tariffs being introduced.
All in all, we see no reason at the present time to depart from our forecast that the US economy will grow by 2% in 2017, after 1.5% this year1
We are therefore sticking to our forecast that, after a hike in December 2016, the Fed will increase key interest rates twice next year by 25bp each time. Long term: isolationism curtails growth Looking several years ahead, however, we think Trump’s planned isolation of the US will tend to dampen growth: • Obstruction of imports would also rebound on US exporters. In addition, domestic costs will rise if cheap imports are displaced. • Lower immigration – which is what Donald Trump is ultimately aiming for – would lower the trend growth rate of the US economy. Stronger population growth increases demand and makes more workers available to companies. According to forecasts by the Census Bureau, half the population growth expected over the next ten years is attributable to immigrants.
