Making America great again?

Today, Donald Trump’s election looks quite unlikely. In fact, delegates at this month’s Republican convention could well rebel and nominate another candidate for the White House. Even if Trump is nominated, negative opinion of him – and structural demographic advantages for the Democratic candidate – would make Hillary Clinton very hard to beat.

As the outcome of the Brexit referendum reminds us, however, the well-prepared investor must plan for a range of scenarios, considering the possible consequences of even the most unlikely outcomes.

Predicting the economic impact of a Trump election is extremely difficult, particularly as his policy positions change by the day. There also remain questions about whether any of those positions would actually be implemented by Congress.

Nevertheless, and if we exclude some of his more extreme suggestions, key elements of Trump’s economic platform include:

• Massive tax cuts (resulting in an estimated $9.5trn reduction in revenues over 10 years)
• Increased military spending, with no cuts to Medicare or Social Security
• Deportation (voluntary or forced) of close to 11 million undocumented immigrants
• High tariffs on goods from China and the imported products of any US company that has moved jobs offshore

Assuming all these measures were implemented, the immediate effect would be stimulative: the domestic economy would receive a boost from increased government spending and higher wages from employers competing to replace lower-cost immigrant labor.

However, that positive impact wouldn’t last long, as punitive tariffs and increased labor costs would be passed on to consumers in the form of higher prices. Retaliatory tariffs could also be expected (China and Mexico represent a third of US non-oil exports), which would hurt corporate profitability and likely depress hiring.

In the slightly longer term, the US would witness rising inflation due to increased costs, higher wages and increased government borrowing to fund an additional annual shortfall of $1 trillion. This, in turn, would lead the Federal Reserve to raise interest rates to combat inflation, leading to a drop in employment and, potentially, domestic recession.

Analysis by Moody Analytics suggests the following specific outcomes for the United States:

• Unemployment would increase from 5.5% to 7% (representing a loss of 3.4 million jobs)
• Inflation would rise from 1% to 4.2% (leading the Fed to hike interest rates)
• National debt would grow from about 75% of GDP to more than 130%
• 10-year Treasury rates would increase from 2.4% to 6.7%

Trump’s defenders dismiss such analysis and insist upon the stimulative effects of cutting taxes. But history shows that tax cuts are no panacea.

Consider the disastrous experience of the state of Kansas, which dramatically slashed taxes in 2012 and has since grown far more slowly than neighboring states such as Nebraska and Missouri. Rating agencies have warned that they may reduce Kansas’s credit rating as a result of growing deficits.

If Trump has his way, the same could happen to the United States. Which raises the question: What impact would his election have on the rest of the world?

While a US recession would of course negatively influence international growth, an international trade war would pose an even more serious challenge to the global economy.

It seems quite probable that president Trump would unilaterally rescind many important trade treaties, and it’s not hard to imagine him slapping tariffs or other retaliatory measures on any country that annoyed him.

The possibility of a global trade war therefore cannot be dismissed, with higher costs to consumers worldwide and multiple countries falling into recession.

President Trump’s political and diplomatic policies could also have economic consequences, but speculating about this is pointless. Foreign policy does not seem to interest him – with his campaign’s only overseas travel so far being a chaotic visit to the Trump Turnberry golf course in Scotland the day after the UK referendum.

Ultimately, it’s anyone’s guess how the most unusual major-party presidential candidate in US history would actually conduct policy. But there is no doubt that the economic platform he has espoused so far would be highly negative for the United States and the world.

 

Paul Broholm is Amsterdam-based chief investment officer at Theodoor Gilissen, a member of KBL European Private Bankers, which operates in the UK under the name Brown Shipley

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