The Trump effect – economic analysts divided

Donald TrumpAnalysts are divided over whether the policies of newly elected President Donald Trump will improve global economic prospects or make them worse.
Trump’s plans to increase infrastructure spending, cut corporation tax, repatriate money held offshore, scale back regulation and improve competition in the healthcare market could prove positive for the economy says Close Brothers Asset Management chief investment officer Nancy Curtin.
But LGIM global economist James Carrick says Trump will exacerbate a structurally weak US economy because structural productivity problems will increase if he forges ahead with his plan to restrict immigration.
Neil Woodford says Trump’s election could be negative for emerging markets
Curtin says Trump’s fiscal policies are pro-growth, citing his aim of reducing corporate tax rates from 35 per cent to 15 per cent, simplifying the tax code and allowing repatriation of offshore cash through a one-off amnesty tax of 10 per cent to fund increases in fiscal spending. He plans to spend $1 trillion over 5-10 years – a 17 per cent increase in US construction spend – in various infrastructure projects. He also wants to increase defence spending by $55-60 billion per annum, a circa 10 per cent increase, and force others, including Nato members, to do the same.
Analysts cite other risks as including his proposed withdrawal from the Transatlantic Trade & Investment Partnership (TTIP) negotiations and an intention to renegotiate NAFTA and NATO’s terms of reference, the lifting restrictions on the production of US energy reserves, tariffs on China and Mexico and any measures or rhetoric that are seen to undermine the sanctity of US sovereign debt.
He plans to repeal Obamacare and increase cross-state competition for health care insurance, which is possibly positive for health care stocks but negative for managed care and insurers.
Axa IM believes Trump’s victory will spell higher interest rates in the US, with the Fed rate approaching 2 per cent in the future.
Woodford says: “From a financial market perspective, to an extent, we have a playbook on what happens next, courtesy of the aftermath of the EU referendum in June. Given the relatively muted response from markets thus far, perhaps investors have learnt that there is no need to panic – it was wrong to overreact to the Brexit vote, and in my opinion, it would be wrong to overreact today.
“The election result could, however, puncture the love affair that the market has had this year with emerging market equities and debt. Globalisation will come under the spotlight under a Trump administration and I believe we should expect a greater focus on domestic political priorities at the expense of free trade and globalisation.”
Curtin says says: “We think there are some positives to this outcome as well as some risks ahead.
“His plans to roll back regulation, the outlook of which is both positive and negative. On record, Trump has said that he will repeal Dodd-Frank regulation which he believes is putting too many onerous restrictions on the banks. He has also said that he would like to re-instate the Glass-Steagall Act, separating investment from commercial banking, which could be a negative for certain institutions. Generally, less regulation is positive for small business.
“These initiatives will need support from Congress, and while Trump is a Republican, it must be remembered that he is his ‘own brand of politics and policy’ and will still have a major job ahead to bring rank and file Republicans on board.
“Our exposure to sectors such as defence and technology will benefit from any increases in spending in these sectors. However, his policies – at least in the short term – are likely to be viewed as bond negative; yields might move higher on increased fiscal deficit spending and fears that this, and less immigration, might spark inflation. More growth and a steeper yield curve, however, would generally be positive for bank shares. Higher yields should support the US dollar.
Carrick says: “While the US economy has grown by an average of 3 per cent in the past 50 years, there is a stark difference between growth in the last decade of 1.5 per cent and the 3.25 per cent of the previous four decades. We believe this slowdown reflects structural rather than cyclical factors. And demographics – not policies – are largely to blame. The US birth rate peaked in the late-1950s with the Baby Boomers. These workers are now in their late 50s and their productivity is declining, bringing down the average.
“Ironically, the growth in the labour force is now driven entirely by immigration. This is a political hot potato and one that has underpinned Trump’s campaign.
“Despite the tight labour market, Yellen believes there is still ample slack in the US economy. In particular, she has indicated there are many ‘discouraged’ workers who can re-enter the labour market, as well as part-time workers who would prefer to work full time.
“However, we worry the US economy is running out of slack – particularly if the President-elect delivers on his promise to halt immigration.
“When the labour market tightens and wages begin to rise, marginal workers are drawn back into the labour force. While this extends the length of the economic cycle, our analysis suggests these marginal workers don’t prevent wages from picking up. Instead, they are a symptom of rising wage inflation.
“By end-2017, we foresee a tight US labour market pushing up core inflation. The Fed will then be caught between trying to raise rates to dampen inflation without wishing to squeeze the indebted corporate sector too much.
“Just as baby boomers are reaching the end of their working lives, this economic cycle is also getting close to the end.”
Axa IM CIO fixed interest Chris Iggo says: “Donald Trump promises to raise aggregate demand. He wants to double America’s economic growth rate. He wants to spend on the infrastructure (perhaps even getting some longer term supply side gains from that) and he doesn’t mind financing all of that by borrowing at record low interest rates. It’s what many people have been calling for.
“This means a higher trajectory for interest rates than would have otherwise been the case. It should mean that, in the year ahead, the Federal Reserve (Fed) raises its GDP growth forecasts and the gap between market expectations and the Fed’s “dot plots” becomes reduced. Maybe even the Fed begins to focus on the potential for higher rates in the future than it has communicated on in recent months. Markets will move more quickly than the Fed so the yield curve will steepen, but eventually the Fed will raise rates towards 2.0 per cent.”
Royal London Asset Management head of fixed income Jonathan Platt says: “Having initially sold off sharply, the yield on US government bonds has already risen back. However steeper yield curves and the implied level of future inflation have both risen, indicating longer term uncertainty.
“In Europe and the UK, government bond markets have actually changed little, while corporate bonds are a little weaker, but not significantly, although again yields on longer dated debt has risen.
“The main implications of this election are likely to be higher inflation as a result of fiscal policies such as tax cuts and infrastructure spending. In the medium term this will raise US and global interest rates, but there may be a short-term hit to consumer and business confidence. However, a comparison with Brexit would suggest that this could be overstated.”