US: Trumpgate and the economy - Rabobank

Philip Marey, Senior US Strategist at Rabobank, suggests that an increasing amount of time and energy in the White House and on Capitol Hill is spent on ‘Trumpgate’: the possible collusion of the Trump campaign with the Russians as they interfered in the 2016 US Presidential election and President Trump’s possible interference in the Russia investigations.

Key Quotes

“We consider three different political routes that could be taken in the US and on the route that seems most likely at present, the Republicans will continue to defend their President. However, if voter support for Trump falls to such an extent that the Republicans in Congress fear for their re-election, they may opt for an alternative route by starting impeachment proceedings. This will lead to the removal of President Trump if and only if impeachment in the House of Representatives is followed by conviction in the Senate. A third, but even less likely, route for Republican defection is the invocation of the 25th Amendment by the Vice President and the majority of the Cabinet, which could be taken in case of exceptional circumstances. If confirmed by Congress, this would lead to the irreversible removal of President Trump from office.”

“In the Republican Defense scenario we will continue to see slow progress on fiscal policy which might lead to a modest boost to GDP growth in 2018 or later, but nowhere near what financial markets had priced in shortly after the elections. Nevertheless, markets are likely to find support in the ongoing economic recovery. On balance, we expect 2-3% GDP growth in the coming years in this scenario with the Fed hiking 2-3 times per year.”

“However, if Republican Defection leads to impeachment proceedings or the invocation of the 25th Amendment we should not expect much fiscal stimulus. At best, if President Trump survives, we will see very slow progress and a very modest boost to GDP growth toward the end of his first term. However, confidence among consumers, businesses, and investors is likely to remain muted as the impeachment proceedings or the invocation of the 25th Amendment may seed doubts about the direction the country is going. Financial markets are likely to muddle through. We could see GDP growth slow down to 1-2% and the Fed may slow down to 1-2 hikes per year.”

“In contrast, if the situation deteriorates to a removal of President Trump from office, fiscal policy would come to standstill until his removal, confidence will plunge and we could see a ‘Trump slump’ in markets. We could see GDP growth slow down to 0-1% and the Fed temporarily pausing its hiking cycle. However, once Vice President Pence takes over we could see a ‘Pence rally’ in the stock markets, a return of confidence among consumers and businesses and the prospect of a modest fiscal stimulus, although it will still take considerable time as the divisions within the Republican Party will not disappear with the disappearance of Trump. This could bring the economy back to 2-3% growth and induce the Fed to resume its hiking cycle at a pace of 2-3 hikes per year. The length of the growth slowdown and Trump slump would only be a matter of months in case of the 25th Amendment, but in case of impeachment & conviction it could very well last a year.”