US elections: economic and market implications

by Oddo BHF Asset Management

300Donald Trump is the winner of the US presidential election, with a much greater margin than any poll had suggested. In addition, both houses of Congress fell to the Republican party, giving him the maximum possible support in office. Markets are shocked and eager to learn what of his radical agenda will be implemented, when and how.

The effects of many of Trump’s broader political proposals cannot be quantified. But a thorough read of “Donald Trump’s Contract with the American Voter”, the president-elect’s 100-day plan, gives a flavor of priorities likely to emerge in the months ahead. Trade-related issues, eg, renegotiation of or withdrawal from NAFTA and the scrapping of TPP, reconsideration of NATO arrangements to lower the US’ global defense contribution, and more rigid immigration policies are among the features that will concern the international community the most. Domestically, Trump has pledged to cut taxes for corporates and individuals and target vested interests in Washington D.C.. In addition, Trump has made proposals to promote conventional fossil energy sources and cut environmental regulations. These are just some of the radical propositions of the Trump campaign.

Key fiscal items of the Trump campaign:

  • Individual tax simplification and cuts of $2.6 to 4.5tn over 10 years.
  • Corporate tax rate cut from 35% to 15%, closing of tax loopholes, with net relief of $2.6tn.
  • Overall spending is estimated to decline by some $400bn over 10 years, with blocked Medicaid payments and discretionary spending cuts over-compensating additional spending on defense and for veterans’ programs.

An analysis of Trump’s fiscal proposals by the bi-partisan Committee for a Responsible Federal Budget suggests that Trump’s plans, would increase debt by $5.3 trillion to 105% of GDP over 10 years. And a UBS study concludes that they would boost growth by 21 basis points p. a. on average over 10 years which appears to be a small benefit for the high price of ballooning debt and its consequences.

Given that the US economy is already operating close to its potential growth rate, even such small fiscal stimulus may lift inflation. In addition, more rigid immigration policies would lower labour supply and put upward pressure on wages. Trade restrictions would probably imply higher tariffs on imported production goods, also lifting companies’ cost base and pressure on consumer prices. To this end, especially the net effect of Trump’s agenda on growth is hard to estimate, most of his agenda appear to be reflationary for the US economy which suggests the Fed will have a close look and perhaps accelerate the normalization of rates.

Beyond all this, we need to be aware what the impact for the rest of the world is going to be. Besides the more obvious economic effects, there are broader political ones, in our view, potentially lifting the fortunes of populist and movements in many countries, eg, in Italy and Germany which is likely to add to already-existing uncertainty

Laurent Denize
Global Co-CIO, Oddo Meriten AM

Holger Fahrinkrug
Chief Economist,Oddo Meriten AM GmbH





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