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Euromonitor International has introduced a new macroeconomic scenario, mapping out likely outcomes should Donald Trump become US president. The scenario suggests US GDP would nearly stagnate in 2017. Growth over 5 years would be 4.7% less in total than currently forecasted.
We assign a 10-20% probability to this scenario.
8th November, 2016 will see a tough battle between the sharply different views of the two US presidential candidates. These elections might also become a turning point for the US economy. The Democratic candidate, Hillary Clinton, is associated with broad continuation of current economic policies and Euromonitor’s baseline macroeconomic scenario for the USA is based on the assumption of a Clinton victory (which we consider the most likely scenario, supported by the poll results at the time of writing).
In contrast, Donald Trump’s economic proposals as the Republican candidate combine unsustainably high tax cuts, which would significantly raise the US budget deficit, with protectionist and anti-immigrant policies that would raise costs for US businesses and consumers alike. Political tensions with China and Europe are also very likely to rise.
In our analysis we consider the tax system, immigration policies and trade restrictions proposed by Donald Trump. Further economic and foreign policies were taken into account indirectly, judging on their potential effect on economic sentiment levels. In the scenario we assume that policies proposed in the candidate’s programme will only partially be implemented after the negotiations with Congress. We used the Euromonitor Macro Model to quantify the consequences of these policy changes.
Donald Trump’s proposed tax reforms include major tax cuts for both personal and corporate taxes (e.g. the corporate tax rate should be lowered to 15% from the current 35% level). Initially, this might work as a stimulus to the economy. However, no significant spending cuts are included in Donald Trump’s programme. Government expenditure is actually set to increase, for example, with plans to boost military spending and increase veteran administration financing. In 2015 the combined federal, state and local budget deficit in the USA reached 4.3% of GDP. The current candidate’s proposal taken at a face value would lead to a steep increase in budget deficit.
Donald Trump is also expected to implement policies which would further limit immigration to the USA, especially from Mexico (3.6% of the US population is Mexico-born, while a total of around 18% have Hispanic or Latino background). He has also proposed to introduce measures such as the nationwide e-verify program and increase the number of Immigration and Customs Enforcement (ICE) officers, to identify and deport undocumented workers already living in the USA. This leads us to assume a forecast decrease in the US labour force, inevitably reducing the country’s economic potential.
The presidential candidate has tended to position himself as a proponent of protectionist foreign trade policies. In his programme he aims to introduce significant trade tariffs on important US trade partners, such as Mexico and China. His expressed intention to withdraw from the Trans-Pacific Partnership and re-negotiate NAFTA, is also likely to limit the overall US trade volumes, including export levels. As a result, the US economy will become more insular during the Trump presidency, which will result in higher costs for US investors and consumers.
While the proposed changes sound rather radical, Donald Trump admits that the programme is subject to negotiations with Congress and the expected outcomes are substantially milder policy reforms than those currently being proposed to the electorate. In our scenario, we assume that Congress and Senate are likely to block the more extreme elements of Trump’s platform, leading to more moderate tax cuts and smaller trade tariff hikes.
The potentially destabilising impact of Donald Trump’s policies, the expected outlook of an increasing budget deficit (arising from high tax cuts coupled with no proposal for a decrease in expenditure), greater trade restrictions and strained foreign relations are likely to cause confidence losses, which will depress consumer spending and business investment. Fiscal concerns would also cause US long-term government bond yields to increase, spilling over into higher private sector interest rates.
The restriction of immigration and reducing the number of undocumented workers in the country (even if not implemented on the full scale currently proposed) is likely to result in a reduced labour force and dampen the US’s economic potential. While the job placements of immigrant workers would become vacant, it is unlikely that many US nationals would be prepared to accept the type of jobs made available, due to a mismatch of qualifications and pay expectations. This would in turn prompt some companies to curtail their operations due to an inadequate labour force, and actually push the unemployment rate up.
If stricter trade policies are implemented, costs for US consumers and business can be expected to rise, leading to slower GDP growth. Furthermore, the partner countries are very likely to respond by raising trade barriers for the USA and this will negatively affect US exports.
Euromonitor predicts that in the event of a Trump downturn scenario, GDP growth would only reach 0.3% in 2017 and 1.0% in 2018, compared to the baseline forecasts of 2.1% both in 2017 and 2018. The unemployment rate would also be expected to rise, reaching 6.2% by 2018. Inflation is likely to remain almost the same as in the baseline scenario, since the upward pressure due to increased import prices would be compensated by subdued domestic demand. The Federal Reserve is likely to react to the slower growth with looser monetary policy measures, reaching a lower bound of zero interest rates and perhaps adding more quantitative easing.
Should Donald Trump be elected, an economic slowdown is highly likely, yet it is not the only possible path. We therefore assign a 10-20% probability to this scenario (60-70% conditional on Trump victory).
DISCLAIMER: This scenario was developed using Euromonitor’s Macroeconomic Model incorporating three main economic policies – tax, trade and migration – Trump is proposing and the polls at the time of writing to quantify the consequences of these policy changes. The scenario assumes that policies proposed in Trump’s campaign will only be partially implemented after the negotiations with Congress. Euromonitor recognises this is not the only scenario should Trump be elected president and assigns a 10-20% probability to this scenario.