US: President Trump to mould the economy - Rabobank
Research Team at Rabobank suggests that if the plans he presented during the presidential campaign are anything to go by, the new US President Trump will stir things up drastically in a number of respects right from the start.
Key Quotes
“US budgetary policy will be eased significantly, with increased spending on infrastructure and defence. This is good for the US economy and could also positively affect the potential for growth. A large tax cut for high income groups and business could provide some support for business investment, but it will make little contribution to economic growth. Any positive effects will in any case take some time to become evident. Against this additional spending, there will be efforts to make cuts in other areas of government expenditure, but we expect the net effect to be a quite drastic worsening of the general government balance and a sharp rise in the already excessive level of government debt. This could lead to higher capital market interest rates and over time to a weaker dollar. We also expect the current Fed chair Yellen to be replaced at the end of her term in early 2018 by someone to whom Trump is more favourably disposed. This could undermine confidence in the Fed’s independence and put further pressure on the dollar.”
“Another negative point is that Trump favours a protectionist policy on trade. During the campaign, he gave notice that he intended to immediately confront China in the area of trade politics, accusing the country of currency manipulation. The probability that the US will sign new trade treaties such as TTIP in the coming years is – based on Trump’s election promises – nil. He will also be looking to amend existing trade treaties. If these policy proposals are turned into action, the negative effect will not only be felt in the growth of world trade, but also in the US itself. Free trade is on balance good for economic growth, although there are also losers. But the losers are not helped by trade restrictions. If Trump actually enters into trade conflicts with major trade partners, the US will face countermeasures. This could significantly harm the American economy and reverse the initial boost to growth. Protectionism is not the answer to today’s problems ‐ not in the US, and not whether things will actually take such a course is difficult to say in advance. Trump has to get Congress on his side in order to turn his policy proposals into action.”
“The Republicans now hold a majority in both the House of Representatives and the Senate, which can significantly increase the potential effectiveness of the president. This means that measures like tax cuts for the most wealthy, investments in infrastructure and defence, more scope for the extraction of shale gas and cancellation of the climate treaty can probably be effected quickly. The climate will be one of the first victims. At the same time, the members of Congress will be looking out for the interests of American business, and these interests are not generally served by a hard protectionist stance. Although we think that the US will take a more protectionist direction, the stance may turn out to be less extreme as one might infer from the election campaign.”
“For now, we expect the US to still generate economic growth of 1.7 per cent in 2017. In subsequent years, we expect the negative effects of a more protectionist policy increasingly to overshadow any positive effects of a more expansive budgetary policy, taking the economy to a lower growth trajectory. Over time, a sharp worsening in the US debt position will damage confidence in the US as a safe haven and put downward pressure on the dollar.”