President Trump: Implications for the US economy – Westpac

Research Team at Westpac, suggests that the election of Donald Trump to the presidency creates a great deal of uncertainty over both the economic and policy outlook for the US.

Key Quotes

“In the short term, the key point to consider is how this uncertainty will impact confidence amongst households and businesses.

Uncertainty over what a Trump presidency will mean for main street America is likely to see a more subdued growth pulse for this sector, particularly for purchases which depend on credit such as vehicles. Having seen a moderation of late (in activity more so than prices), housing is also at risk of dampening GDP growth on a six to eighteen month basis, as conditions are re-assessed by both households and construction firms.

For corporates, uncertainty over Trump’s agenda is yet another reason to hold off on further investment. As we have continued to emphasise, equipment investment in the US has been persistently weak over the past two years, having suffered a cumulative decline of 2.6%. There is no reason to expect a return to growth materially above zero anytime soon.

Given that it looks as though the Republicans will control Congress, Trump should be able to pass his intended policies. However, there is always the risk that some Republicans oppose the president-elect, resulting in delays and/or alterations to planned policies. That being said, looking a year or two out, assuming they are enacted, Trump’s policies on taxation could be supportive of growth.

Lower federal taxes – reducing the number of federal income tax brackets from 7 to just 3 (12%, 25% and 33%) and potentially removing estate taxes – would aid households’ marginal incomes and wealth. Meanwhile, a lower corporate tax rate should incentivise investment in the US. On both fronts however, the concern is that other tax changes could negate any benefit to the economy.

For corporates, while Trump plans to cut the headline tax rate from 35% to just 15%, he has also stated that he plans to remove the deferral of taxes on corporate incomes earned overseas. If this occurred, it could result in US firms running down domestic cash stock piles to pay tax rather than increasing US investment (so as to maintain their offshore capital).

That then brings us to the critical point of trade relations. Both Trump and Clinton have recently outlined their opposition to the Trans Pacific Partnership (which, as an aside, would have benefitted Australia if implemented), but Trump has gone a great deal further on international relations, raising the possibility of tariffs and the re-negotiation of existing trade agreements. Heading down this path would create lasting uncertainty for firms looking to invest in the US and export globally, with good cause to believe that other countries would retaliate. Also, firms may also (rightly) perceive risks to aggregate growth in the US and therefore be unwilling to spend on expanding their domestic production and distribution capacity in the US.

In addition to the above, a number of Trump policies such as building a wall between the US and Mexico; labelling China as a currency manipulator; and deporting immigrants have the capacity to inflame foreign relations broadly, potentially resulting in repeated waves of financial market uncertainty and being to the lasting detriment of the real economic activity as potential growth is curtailed.”