US Election: Trump poised for victory
The 2016 US Presidential election has been the most brutal and divisive campaigns in living memory. It came at a time of significant unease in the US about lack of economic progress, stagnant real income growth, rising job insecurity, and a serious questioning of the United States’ place in the world.
That has contributed to an election campaign that was strong on anti-globalisation ‘America first’ sentiment, had a high level of anti-immigration “they’re stealing our jobs” rhetoric, and came with calls to ‘rein in’ Wall Street and limit the powers of the Federal Reserve.
Furthermore, the campaign featured two of the most disliked candidates in the history of US elections: Donald Trump for his alleged misogyny and racism, while significant questions have been repeatedly asked about Hillary Clinton’s trustworthiness and links to Wall Street.
Right from the start it appeared to us that the person who would emerge as the 45th US President would be the person who came through the campaign as the least disliked of the candidates. That dubious honour appears to have gone to Donald Trump.
Mr Trump faces a huge challenge in not only leading the world’s second largest economy but also reuniting a country that is deeply dissatisfied with its lot and questions whether it is on the right path. To complicate matters, there has never been a bigger division in opinion about what the right path looks like.
The Trump policy platform: what does he want to do?
Mr Trump campaigned on the following policies:
Significant personal tax cuts, including a cut in the top marginal tax rate to 33% from 39%
A cut in the corporate tax rate to 15% from as high as 39%, and a removal of estate duty
Higher infrastructure spending
Reduce non-defence discretionary spending by 1% per annum, but increase spending on defence and veterans
New trade protection polices and the winding back of a number of existing trade agreements such as NAFTA
The deportation of 11 million illegal immigrants, a ban on Muslims entering the US, build a wall between the US and Mexico, and require firms to hire Americans first
The repeal of Obamacare and allow the importation of foreign drugs
On foreign policy, reposition alliances to put ‘America first’ and get allies to pay more, and would confront China over the South China Sea.
How much will he be able to do?
As we have noted many times before, the various congressional and judicial checks and balances in the US political system makes it difficult for US Presidents to do much. That’s especially the case when one or both Houses of Congress remain in opposition control.
In this case, both the Senate and the House have remained in Republican control. However, that does not necessarily make it easier for Mr Trump to get the more populist of his policies through – many Republicans don’t support a number of his policy positions.
In particular, markets will rely on the more conservative Congressional Republicans to prevent both a budget deficit blow-out and aggressive trade protectionism. Much will depend on the extent to which Mr Trump himself holds to his policy positions. History is littered with examples of populist politicians who suddenly become quite pragmatic and rational once elected.
Impact on the US, the world … and New Zealand
If enacted, many of Mr Trump’s policies would provide a boost to the US economy in the near-term. The combination of big tax cuts and increased defence and infrastructure spending will provide an initial fiscal stimulus. Also, less regulation may provide a supply-side boost to growth.
Over the longer-term, however, higher protection along with the risk of a trade war would mean higher prices, while lower immigration would likely boost wages and costs for business. That would ultimately mean higher inflation, higher interest rates and a hit to growth.
Implications of a Trump win are negative for the global economy. Higher trade protection, rising geopolitical tensions, along with general US economic policy uncertainty, will be negative for growth, and particularly for small open trading nations such as New Zealand.
What happens next?
This result is a negative for risk assets as investors worry about the new President’s protectionist trade policies and the implications for US and global growth. Safe haven assets such as bonds and the US dollar will be likely beneficiaries.
Following the initial reaction, we expect a settling down period with risk assets likely to get a boost from lower bond yields and the realisation that the Fed would likely remain on hold, at least in the near-term.
Further out, the outlook depends on which polices are likely to be enacted. That will depend on the extent to which Mr Trump retains his populist tendencies or becomes more pragmatic. It will, of course, also depend on the extent to which Congress can be relied on to rein in the new President’s populist tendencies. On both of these counts, only time will tell.
Thanks to Shane Oliver in our Sydney office for his contribution to this post.
This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act).
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