Stock markets worldwide have been marked down by on average 5% in response to the unexpected Trump victory. Less noticed in the excitement has been the probability of further Republican victories in the Senate and the House of Representatives. For the first time since 2007 the Presidency, the Senate and the House of Representatives are likely to be under the control of the same party. So the Republicans would be in a position to implement many of the proposals in the Trump agenda.
We have been analysing the effects of a potential President Trump for some months and this note sets down the fruits of our analysis.
The New Chauvinism
The Trump vote (and also the UK’s Brexit vote) has been a reaction by those whose incomes have been squeezed. In my book The Inequality Paradox (due out early next year) I show how globalisation is only one of a range of pressures that have led to this. But because trade and immigration are highly visible, many have chosen to react against them. Even though many will be worse off (and the economy decisively so, especially when other countries retaliate) as a result of less immigration and reduced trade, these two have become symbols of a world that is working much less well for less skilled workers in the West than it once did.
The Trump proposals involves renegotiation of NAFTA, naming China as a currency manipulator, an end to the Trans Pacific Partnership (though no mention of TTIP) and the US Trade Representative bringing cases against China.
On immigration there is the famous wall to be built between the US and Mexico plus a host of detailed proposals to reduce US immigration to ‘levels within historic norms’.
Other countries will retaliate, particularly China. The worst case would be world growth starting to stall as it did after the Smoot Hawley Tariffs in the 1930s.
My rough and ready calculation is that world growth is likely to be around ¼ to ½% per annum slower from 2018 onwards in response to creeping protectionism and reduced migration.
International relations will be more fraught and there is always the risk that a President who combines inexperience and volatility will miscalculate. Worst case is WW3! In which case growth and other calculations become irrelevant…more likely though is chauvinism and tit for tat spreading round the world.
Ultimately Trump’s election is not good news for Asia (who will be drawn more into China’s embrace) or Europe where his lack of commitment to NATO means that Russian attacks on Baltic states (and they have even threatened Sweden!) move from unlikely to fairly unlikely.
Defence spending will rise worldwide as other countries realise they cannot depend on the US to defend them.
Oddly, one possible casualty, particularly if there is spillover into the French and German elections next year, is the euro. The European banking crisis could revive in spades as a result of the short term falls in markets and a more chauvinist Germany might fail to support the recapitalisation of the failing banks.
The ‘special relationship’
Paradoxically President Trump is at least partly good news for the Brits. We have our own nuclear deterrent so are not so dependent on NATO. We will have to boost spending on conventional military. It is likely that the other Europeans will feel the need to cozy up to us, which hugely improves the likelihood of successful Brexit negotiations. Trump will be keen to do a trade deal with the Brits (partly because he knows that this will hit few American jobs). Politically Theresa May is likely to be President Trump’s closest ally and will be seen around the world as the person who can negotiate with him. Trump is essentially an Anglophile (actually pro Scot but totally anti SNP) who will be able to work with the UK.
Energy
Many of the Trump proposals are to reduce the cost of energy, by promoting fracking and reducing environmental restrictions.
But in practice the main constraint on fracking is the low oil price.
Trump probably helps put a ceiling on energy prices (which will be reduced anyway by lower world growth). Factor in a price of about $40 on average for the next 3 years.
Tax and Spend
Under Obama and potentially under Clinton, shares of tax and spend in GDP in the US were moving towards European levels. This will be reversed. US companies could be significantly more competitive than they might have been in international markets as a result of this and also of the initially cheap dollar.
Lower taxes will boost the US economy but not by enough to offset any impact of trade restrictions and reduced immigration.
And this might be exacerbated by tit for tat retaliation. But trade down telephone lines will be less easy to block so the US IT sector should continue to drive growth.
Economic outlook
The markets have been marked down. Although this is a logical response to fears of less growth from trade wars, it makes more sense for some countries than others. The UK on most scenarios probably gains from Trump. Japan and Korea clearly lose as does much of Latin America and the Arab world. France and Germany, with elections next year, will be looking over their shoulders.
But when the Trump programme is analysed in detail, many investors will see some things that they like – lower taxes, reduced regulations and reduced government spending – as well as others they don’t.
Any falls in the US dollar and the US stock market could be reversed quite quickly.
US growth is unlikely to stutter in the short term. Probably the decisive result of the election will be associated with a mini spending boom. Janet Yellen will have to be careful about when she raises rates in response to this because it (as in the UK post Brexit boom) may not be long lived and a premature rate rise as the mini boom blows out might trigger an over reaction.
Medium term, cutting off the supply of cheap imports and tightening the labour market will lead to more inflation, though lower energy prices will work in the opposite direction. So by end 2017 it is likely that US rates will be slightly higher than we previously expected – around 1½%.
But our best guess is US growth of just under 2% this year and next and probably a rate rise delayed into early 2017. The dollar by end 2017 should be 5% higher against the euro (if it survives that long).
Douglas McWilliams
President
Cebr