Markets may be celebrating what they believe is a new golden age for the U.S. economy under president-elect Donald Trump, but many economists have a much more sobering take.
They believe that some of the central tenets of Trump’s economic policy are downright harmful to the U.S. and global economies. Those policies include pulling the U.S. out of trade agreements such as NAFTA and levying tariffs on key trading partners like Mexico and China.
Investors, at least for now, do not seem to mind and there are a few explanations for their positive reaction. Doug Porter, chief economist at BMO Capital Markets notes that Trump’s decisive election eliminates fears of the kind of dragged-out government deadlock seen in 2000 that paralyzed the economy. The Republicans also now control both chambers of Congress, giving Trump a unified government that can pass legislation more quickly.
But economists also warn that viewing Trump as the saviour of the American economy could be just a little bit of wishful thinking.
“Investors appear to be pricing in the hope that Congress will keep the most positive aspects of Trump’s proposals (tax cuts) and blunt the most harmful aspects (protectionism),” Porter said.
Most elements of his economic policy have the potential to ignite inflation well above what is currently priced in
Among the more worrying portions of Trump’s economic platform include a 45-per-cent tariff on Chinese imports and a 35-per-cent tariff on some Mexican imports. The president-elect accuses those countries of exploiting their cheap labour at the expense of the U.S. middle class, but levying tariffs risks exploding a trade war that could spread to other countries.
Meanwhile, economists at firms including the Bank of America Merrill Lynch and Citigroup all warn that the lack of clarity around other key proposals (deregulation, foreign policy) mean that it is impossible to predict how markets or even the economy will perform over the next few quarters.
Benjamin Tal, economist at CIBC World Markets, notes that so far, despite some unknowns, Trump’s policies will likely lead to one unavoidable economic reaction: inflation.
“The combination of lower taxes and increased spending can have a notable impact on the economic growth and inflation in late 2017 and further into 2018,” Tal said. “While we have not yet changed our GDP growth forecast, the likelihood is that if we do, it would probably be to raise it.”
Trump’s platform includes a massive stimulus undertaking that he promises will create 25 million new jobs over the next decade. He has also boasted that his plan will lead to annual GDP growth of 3.5 per cent per year, with the potential to reach four per cent.
“Donald Trump is inflationary,” Tal said. “Most elements of his economic policy have the potential to ignite inflation well above what is currently priced in.”
Economists at Bank of America Merrill Lynch note that inflationary pressures could force the U.S. Federal Reserve to begin raising interest rates more quickly than originally expected. Higher interest rates are a key monetary tool to control inflation, since they tighten financial conditions.
On Friday, Fed vice-chairman Stanley Fischer said the Fed is still on path to hike interest rates at its meeting next month despite some uncertainty following Trump’s election.
Of course, some economists are not convinced that Trump’s win guarantees economic growth or even inflation. Economists at Capital Economics note that in addition to the economic damage his trade policies could create, there are a lot of obstacles to his stimulus policies getting passed.
Republicans have spent much of their time combating expanded government spending by President Barack Obama and it will be hard for them to suddenly change their tune.
“We are not convinced that Trump will be able to get a massive fiscal expansion through Congress,” economist John Higgins said. “Nonetheless, some shift towards looser fiscal policy does seem possible.”