Implications of Trump’s election win
We are cautious about the impact of a Trump presidency and are not changing our economic forecasts at this time. Uncertainty about how Trump will govern make near-term volatility spikes likely.
A Trump presidency could see major changes in policy on many themes such as fiscal policy, trade policy, immigration, the environment, financial regulation, healthcare, social security, and supervision of the Fed. However, it remains highly uncertain whether Trump will in fact pursue the policies he aired during the campaign.
On fiscal policy, Trump has made proposals that would boost government spending in general, and expenditure on infrastructure in particular. We could see a meaningful fiscal stimulus, equivalent to 0.5 to 1.0 percentage points of GDP over 2017-18. But it remains to be seen whether Trump will pursue these policies, and whether Congress would accept them. It is still far from certain that Congress will accept policies that raised the federal debt substantially.
Trump has promised a tougher stance on trade policy. He opposes the Trans-Pacific Partnership and favours renegotiating the North American Free Trade Agreement. However, President Trump could yet prove much more moderate than candidate Trump in this area. Indeed, Trump stressed co-operation with other countries in his acceptance speech.
Our baseline economic forecast for the US remains for US real GDP growth to reach 2.0% in 2017, up from a forecast 1.5% in 2016. We are not changing our forecasts for the present, since Trump’s policies remain highly uncertain and, even with a fiscal stimulus, any budgetary boost is unlikely to impact economic growth before the second half of 2017 at the earliest.
Expectations for a Fed rate rise in December are now in question: much will depend on how long financial markets remain in turmoil and on how far any strengthening of the trade-weighted dollar tightens monetary conditions. However, our main scenario for the moment remains that the Fed will hike rates by 25 bp in December and twice more by similar amounts in 2017.
As for markets, if it becomes apparent that Trump and a Republican-led Congress herald a return to supply-side economics and, potentially, a major shift in fiscal policy, higher growth could provide a more supportive environment for equities and potentially the dollar in the medium term, but would be negative for bonds.