A Trumping Victory

Donald Trump has claimed victory in the US presidential elections, defeating rival Hillary Clinton in a surprise result after a bitter campaign.

 

More surprisingly, however, the Republican Party has made a clean sweep of the presidency, the House of Representatives and the Senate (the two chambers of Congress), making the passage to legislative change that much easier.

 

Equity markets have recouped early losses and are now rallying, but Ord Minnett thinks a Trump victory is concerning – more so for other economies rather than the US. The president-elect’s agenda, in so far as it advocates fiscal stimulus for the US economy, with tax cuts for low income earners and companies, increased protection of domestic jobs and industries, e.g. coal and oil, and a pledge to outspend Clinton on infrastructure, should be positive for the US.

 

However, his extreme stance on foreign trade, including potential increases to tariffs, and withdrawals from free trade agreements that do not benefit the US, will increase trade tensions, and is likely to create growth headwinds for countries dependent on trade with the US. In a worst-case scenario it could result in a retaliatory response from trade partners that also puts the US growth at risk.

 

Trump’s unconventional approach means the first 100 days in the job will be particularly important in clarifying his priorities. Until this can be assessed, the market is left with a prolonged period of uncertainty as to what the implications will actually be.

 

There is increasing public division in major economies, with the pro-Brexit vote in the UK and now a Trump victory in the US. It appears the advocates for more barriers to global trade and immigration are gaining the upper hand – a negative development for longer-term global growth, in our view.It is also likely to exacerbate fears around more disruptive leadership change when French and German elections take place in 2017.

 

There is limited detail on how Trump’s spending measures will be funded, other than to cut non-defence spending by 1% per annum, but it appears likely that debt and deficit levels will rise at a faster pace under the new president.

 

The Committee for a Responsible Federal Budget estimates that under the existing law, public debt will increase by US$9 trillion to US$23.1 trillion by the end of FY26. In their view, Trump’s proposals could add an additional US$5.3 trillion to that estimate, taking the debt/GDP ratio to circa 105%.

 

Furthermore, for the US, his measures should stoke inflation – whether via demand stimulus from spending measures, higher import costs via trade barriers, or higher wage costs as labour supply tightens. This could have some spillover to other economies.

 

One silver lining – an un-cooperative Congress previously meant that many proposals have been difficult to turn into reality, but with the Republicans sweeping both the House of Representatives and the Senate there should be less political gridlock to implementing policies that can drive domestic growth (even if it may come at a cost to other countries!).

 

There is also likely to be less debate around the debt ceiling when it is reinstated next year, and Congress should find it easier to pass a Budget this time. However, to prevent Trump pursuing a destabilising agenda, we would need to believe that there are enough checks and balances applied within the Republican Party in developing and debating policy.

 

For our full report on the implications of the US election, please contact your Adviser.

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