Predictably unpredictable

On November 8th the American public chose to place their bets on a wildcard candidate. Donald Trump’s campaign rhetoric was often marked by a lack of consistency and clarity with regard to policy. The new president-elect is an outsider, non-adherent to any comprehensive ideology, nor possessing of a prior policy record. Nonetheless, following the election markets were swift to price in their expectations as to the economic effects of a Trump presidency.

 

It is confirmed that as president Donald Trump intends to introduce a fiscal stimulus package mainly in the form of public infrastructure spending and tax cuts. He will undoubtedly have the necessary support in the Republican controlled congress to push through the plan.

 

As the rationale goes, these measures will stimulate growth and increase employment for US workers. Lower taxes ought to provide incentives for American companies to repatriate profits from overseas and invest more domestically. Infrastructure development programs, in turn, should create new jobs in the construction sector, potentially with spillover effects into other industries. The president-elect also intends to annul the Dodd-Frank act, thus reducing compliance related expenses in the financial sector. In an address to the nation he recently proclaimed, ‘for every new regulation, we will get rid of two existing ones’. Such rhetoric may also suggest intent to loosen regulations for energy producers, which threatens existing environmental legislation but may be beneficial for growth in the sector. In addition to this, markets notably saw a likely increase in government spending as benefiting the defence industry.

What are the expectations for the global economy of a Trump presidency?
What are the expectations for the global economy of a Trump presidency?

 

Economists agree that such a program will deliver a short-term boost to the American economy. Markets seem to concur with this view. Hence, following a fall in the S&P 500 index during the election night, we saw an even stronger rebound that has pushed its value to all-time highs. Experts are nonetheless more skeptical with respect to the job creating effects that the stimulus will have. The US economy appears to be close to the lowest unemployment levels attainable, currently standing at 4.9%. The monthly number of new jobs created has been steadily declining, seemingly indicating a gradual exhaustion of labor market potential. Thus, while some type of increase in US employment is to be expected in the short-term, Mr. Trump’s aspirations of becoming the ‘greatest jobs president you have ever seen’ merits doubt. Under such labor market conditions, a prospective fiscal stimulus is also raising inflation expectations for the US economy. In the near future, this change should manifest in tighter monetary policy, promising more interest rate hikes in 2017 and a dollar rally.

 

While the US economy is set to benefit from the policies of the president-elect, the prospects for other countries appear to be gloomier. On the campaign trail, the real-estate mogul advocated protectionism in support of American jobs. He has repeatedly bashed China and Mexico for supposedly profiting at US’ expense under current trade conditions. He has threatened to impose tariffs on China, and vowed to put an end to US involvement in the Trans Pacific Partnership agreement, as well as to renegotiate the NAFTA agreement. Given that presidents have some unilateral authority in trade policy, risks of a trade war with China can be seen as increasing as Trump enters into office. According to WSJ’s monthly economists’ survey, 43% cite a trade war as being the biggest risk to the US economy, following Trump’s win. That being said, this facet of Mr. Trump’s campaign rhetoric is unlikely to materialise, not least because it would infringe upon binding legal commitments within the WTO. The same cannot be said for hopes of ratifying the long-negotiated TPP. Despite controversy surrounding the agreement, it could have been an important strategic counterweight to China’s rising economic influence in the Asia Pacific region. Developed under US initiative it is now almost certainly destined to become null-and-void. And the soon-to-be president’s intent to turn the clock backwards on trade liberalisation does not end there. David Malpass, Trump’s economic advisor has recently reaffirmed his intention to review the NAFTA agreement. Mexico, a party to the agreement and beneficiary of trade with the US, which has the added promise of having a wall erected on their border to worry about, saw its currency fall to record lows.

 

The same was true for most emerging markets. Among those who saw their currency fall the day after Trump’s win were South Africa, Brazil, Chile, China, and Turkey. As future US monetary policy is set to tighten, emerging markets will see their debt burden, which some observers already regard as high, increase. With the buck propped up by rising interest rates, debts denominated in dollars are going to become more expensive in local currency terms. Contrary to this trend, Russia saw the Rouble rise, as news of Trump’s victory was greeted with applause in the Duma. This was largely due to hopes that the new commander-in-chief will eliminate the economic sanctions imposed on the country by the Obama administration following the events in Ukraine.

 

A Trump triumph in the US also amplifies the risks posed by populism in the EU. Populist politicians have gained ground there in recent years and pose a real danger to unity within the currency union. Brexit and election of Trump are worrisome precedents, and with general elections approaching in France, Italy and Germany, uncertainty looms with regard to the direction of the EU in the coming years.

 

For better or for worse, the economic effects of the US election will be significant for its domestic economy. In international terms, the beneficiaries from the outcome are likely to be few. The emerging markets especially are bound to get the short end of the stick as the dollar strengthens.As Mr. Trump’s term in office proceeds, it will become more apparent as to whether the bet of the US electorate paid off.

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