The impact of Trumponomics
Much is being written and said about how a Trump presidency will affect the US and global economy. Trump himself - on his campaign website - says he will create 25 million jobs over a decade, and boost growth to 3.5 per cent per year on average (potentially rising to 4 per cent). The media reaction has ranged from calling Trumps plans for the economy a “total disaster”, “unmodellable”, “ill-designed” and “harmful”. Here is a little overview of recent views being aired in the financial media.
Short-term economic growth but huge budget deficits
Donald Trump expects to inject $1 trillion into the US economy through infrastructure projects, during his initial period in government. This is expected to boost the economy above current growth rate of 2-2.5 per cent, according to Joel Naroff, president and founder of Naroff Economic Advisors and a former chief economist for TD Bank, who recently gave a talk at FEI’s Current Financial Reporting Issues Conference. CFO Magazine's report of the speech quotes Naroff as saying: “This is the most traditional Republican economic plan I’ve seen. Just as Reagan and Bush got stronger growth, at least for a short period of time, so will Trump.”
However, Naroff also stated that Trump's proposed tax cuts and spending increases would result in annual budget deficits for the US government of $900 million to $1.2 trillion during Trump’s first term.
Initial business uncertainty
Michelle Meyer, from Bank of America Merrill Lynch (BAML) told Euromoney's Peter Lee she has shaved 50 basis points off US growth forecasts for the first half of 2017 on the basis that businesses might delay investment in an atmosphere of heightened uncertainty.
Trump also intends to renegotiate trade pacts and treaties, placing higher tariffs on goods imported from Mexico and China and reviewing NAFTA and pulling out of the as yet unapproved trans-Pacific pact (TPP). For example, he has mentioned a 35 per cent tariff on motor vehicles imported from Mexico, which has infuriated executives at Ford. CEO Mark Fields – quoted by NBC News – said that "A tariff like that could have a huge impact on the US economy.”
Trump wants far fewer business and financial regulations and there has been talk of dismantling the Dodd-Frank Act. This has been widely praised by some in the financial and banking sectors. Peter J. Wallison writes in the Wall Street Journal that “The repeal or thoroughgoing reform of that destructive law is certainly a key step toward an economic recovery.” However, the idea of repealing the Dodd-Frank Act was criticised by Barney Frank, one of its co-sponsors, who told CNBC: “"If he wants to have a national debate about whether we should go back to mortgages to people who can't repay them and then securities based on those bad mortgages, I welcome it.” See CTMfile's article on this - Will we be safe from economic melt-down if Dodd-Frank is dismantled?
Euromoney's Lee argues that it's almost futile to try to predict Trump himself and how the economy could pan out under his leadership. Trump's election win means that everything is now unpredictable. He quotes Paul Donovan, an economist at UBS Wealth Management, as saying: “This is the return of political economics. We have to realise that random events, random shocks, will come in. The very mathematical approach economics has taken in the past is one we must move away from in analysing the economy in future.”
Deportating immigrants = economic contraction
Undocumented workers are estimated to number around 8 million in the US in total, although Trump has said he will deport 3 million people. The majority of undocumented workers in the US work in leisure, hospitality and construction – although up to 1 million also work in professional and business services. Max Ehrenfreund writes in the Chicago Tribune that the deportation of such a large part of the workforc could lead to a reduction of agricultural production by 9 per cent and declines of 8 per cent in construction and leisure and hospitality over the long term. He adds that manufacturing output could decline by $74 billion over the long term, “followed by somewhat more modest declines in wholesale and retail trade and financial activities”. Ehrenfreund, quoting two economic experts, adds: “Undocumented workers are responsible for about 3 per cent of the US economy overall. Deporting all of them would result in a substantial contraction”.
15% corporate tax rate
Bond investor Bill Gross, who manages the Janus Global Unconstrained Bond Fund, told Fox Business he believes lowering the corporate tax rate to 15 per cent is “unnecessary”, saying: “Yes, we have a 35% marginal tax rate but really an effective 24, 23% tax rate that’s amongst the lowest in the world.”
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