11.11 Weekly Viewpoint : The day after: anticlimax

Trump is a medium-term question mark, but in the short term postelectoral Republican political mandate is likely to have expansionary effects on nominal US growth in 2017…..

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Intesa Sanpaolo – Research Department For professional investors and advisers only

The outcome of the US elections was radically different from what was expected by the polls on several fronts:

1) Trump won a solid majority of Electoral Votes,

2) the executive and legislative bodies are given a clear mandate, with a Republican majority in both Houses of Congress, alongside a Republican President;

3) the vote was markedly anti-establishment. The implications of the vote may be read on two fronts, domestic and international. Trump’s position is not “conventionally Republican”, embracing an expansionary fiscal policy with little concern for its effects on deficit and debt, and a markedly protectionist foreign policy.

At the domestic level, the Republican victory on both the presidential and congressional fronts has clear expansionary fiscal policy implications: lower taxes for businesses and households (probably with even greater inequality), higher public spending (on infrastructures especially), and slacker regulations (environment, financial institutions). The implications are those typical of any economic model: stronger nominal growth and larger deficits, implying stock markets on the rise and bond markets on the decline (with higher yields). This is what has happened in the US in the aftermath of the vote: the 10 Treasury crossed the 2% threshold, the S&P index retraced the electoral night’s futures decline and closed higher. There is little controversy over these forecasts: the market is pricing in, and rightly so, the high probability of a tendency towards greater fiscal stimulus, although the size of stimulus will then be offset by more cautious positions in Congress on deficit growth.

The difficulty in assessing the consequences of the vote lies in the international component of the post-electoral economic policies. Trump’s markedly protectionist stance (drastic tariff hikes towards China and Mexico, possible abandonment of international trade agreements, NAFTA included) is an obvious risk, amplified by the presence of a president with no political track record, and with a tendency to personalise conflicts. In our view, however, the implications on this front are likely to be contained, and could mostly take the form of an embargo on new trade agreements. An open trade war on all fronts seems improbable. However, uncertainty is justified and explains the concern of the foreign markets.

The weighted average of the two components (domestic and international) of future US economic policy seems, at least for now, supportive for the global economic cycle, since Congress and the President will focus first on tax reform and other domestic issues rather than opening a full-fledged trade war. A potential problem lies in the fact that fiscal easing may be coming at the wrong time in the US, with the economy already at full employment, possibly generating more pressures on inflation than on real growth.

The next important step for the US scenario will be the appointment of the key members of the administration, that will provide indications on the extent to which the Trump campaign manifesto will effectively be implemented (see editorial). On 15 November the Republican Party will hold its House leadership election, possibly clearing some uncertainty on the relationship between the party and the President, after a very controversial electoral campaign. Congress and the President need each other to pursue any reform: vice President Pence, well integrated in the party, may be able to play a conciliatory role. It will be important to see if Ryan will retain the party’s leadership. The task of drafting the tax reform in Congress will be handed to the Speaker of the House: Ryan would have the necessary competences to speed up the legislative process in 2017.

In conclusion, Trump remains an unknown entity as President, and uncertainty over US foreign policy management is high, as widely envisaged ahead of the vote. However, the combination of an clear Republican mandate in Congress, and of the President’s unorthodox positions on the fiscal front (fiscal easing without the obsession of a balanced budget) will probably prevail, at least in the near term, over fears of an open trade war. It is reasonable to forecast an acceleration of nominal growth in the United States in 2017. How much of this growth will be in prices and how much in real growth will remain to be seen.

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