Donald’s Trump’s election as the 45th president of the United States has significant implications for the US and global economies.

While some of Trump’s policies are consistent with the Republican Party’s traditional advocacy of laissez-faire economics and small government, his views on trade and immigration represent a dramatic shift from the past.

However, key to the outlook will be whether President Trump pursues a more mainstream Republican agenda than his campaign rhetoric suggested.

In terms of fiscal policy, Trump is proposing the largest tax cut in US history. Independent estimates of the cost of those tax cuts amounts to between $6-7 trillion over the first decade and over $20 trillion by 2036.[i] Trump claims the cuts will be self-financing via stronger economic growth. To date, no independent analysis has been produced to validate that claim. At the same time, Trump has pledged to spend up to $500 billion on infrastructure projects. All told, his fiscal plans are estimated to raise Federal debt to 127% of GDP over the next decade, compared to 86% of GDP on current proposals.[ii] In effect, if Trump’s tax and spending plans were to pass, he would deliver a massive debt-financed fiscal boost.

The big question is whether the increase in economic and policy uncertainty associated with a Trump presidency would offset any potential fiscal impact. Moreover, more protectionist measures could negatively impact trade and global growth. We believe there is a risk that business and consumer sentiment could fall following Trump’s victory if he does not adopt a more conciliatory tone than he used in the campaign. While this may not necessarily translate into an immediate weakening in economic activity, the biggest risk is likely to come from a sharp fall in business investment.

The Republicans continue to control both Houses of Congress. This should make it easier for Trump to enact his policies, particularly his proposed tax changes, which are essentially aligned with Republican proposals. However, Congress will also have to raise the debt ceiling, which may prove extremely difficult given the Republicans’ use of it as a political tool throughout the Obama presidency. The Republicans still lack the majority required in the Senate to force through most legislation over Democratic objections. For that reason, Trump’s full economic program (including his proposals on infrastructure spending) is likely to be amended or watered-down to some extent.

In terms of monetary policy, we expect the US Federal Reserve (the Fed) will closely monitor financial conditions in the run-up to the December Federal Open Market Committee meeting. If financial conditions tighten materially, we expect the Fed to delay hiking interest rates until there is more clarity on the economic outlook. However, if financial conditions are little changed, we think the fundamental case remains for a rate hike in December. Longer term, if Congress passes Trump’s flagship economic policies but shelves his more extreme trade policies, we would expect to see higher inflation, a sharp increase in US government debt issuance, and further dollar strength, while US interest rates would be expected to rise faster than was previously anticipated, and the yield curve would steepen.

The main risk from Trump’s victory is that his tax and spending plans get stuck in Congress but he carries through his threats on raising tariffs. With elevated uncertainty, no fiscal boost and a potential trade war, the US could slip into recession, dragging the rest of the world with it.

Protectionism is already on the rise globally. Trump’s victory will likely accelerate this trend. For example, he has advocated withdrawing from free-trade negotiations with Europe and the Pacific-Rim countries and promised to repeal the North American Free Trade Agreement. He has also threatened large unilateral tariffs on goods from Mexico and China and vowed to force US businesses to repatriate production. As such, Trump’s victory could prove extremely destabilizing and poses a material risk to global economic growth over the medium-term. It could be particularly damaging for countries with small open economies and larger emerging nations, especially Mexico.

Investment professionals listed are members of AIA/AIC’s Participating Affiliate, Aviva Investors Global Services Limited(“AIGSL”).

[i] See Tax Policy Centre estimates:
http://www.taxpolicycenter.org/publications/analysis-donald-trumps-revised-tax-plan

[ii] Committee for a Responsible Federal Budget:
http://crfb.org/blogs/scoring-clinton-and-trump-different-growth-assumptions

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2016-0487_AIA/AIC_November  Commentary