The 2016 US Presidential election has certainly been an interesting, and divisive, one. The outcome could potentially have a number of ramifications for not only the US but also the world economy. Colonial First State’s Chief Economist, Stephen Halmarick, has been in the US recently and has been closely studying what has been happening. A summary of his views follows, or you can read the full report here.
The most recent opinion polls for the Presidency range from a tie to a Clinton lead of 12 points… and most economists and political analysts …are assuming this outcome. Nevertheless, as was the case with the ‘Brexit’ vote, the opinion polls could be misleading and there is a concern that the markets and the media may be underestimating the power of Donald Trump’s ‘the system is rigged against you’ message. Trump supporters generally feel like things need to change – but they are not sure of the specifics.
If Hilliary Clinton wins the Presidential election, her priorities are expected to be:
- Tax reforms: this could include corporate tax reform, including lowering the rate to around 25%, but also removing a number of deductions, i.e. widening the base. There is also likely to be a lower repatriation tax rate of arount 10-15%. This package is expected to be roughly revenue neutral. Income taxes on wealthy individuals are likely to rise.
- Infrastructure: An infrastructure spending package of $US200bn-$US350bn over the next few years.
- Education: Increased spending on both higher ($US500bn) and early ($US200bn) education.
- Health Care: A focus on reforms to Obamacare to try to lower the costs and improve the coverage.
- Immigration Reform: Better controls and a focus on skilled workers, but with limited move on a path to citzenship for illegal immigrants.
- Trade Policy: A modified TPP, with worker protections, is likely to be passed prior to the 2018 mid-term elections.
- Wages: An increase on the minimum wage.
- Other: Housing finance reforms, improved climate change regulations, sugary drink regulations, paid family leave and financial regulations.
- It has been estimated that Clinton’s policies would improve the US budget position by around $US1.2 trillion over the 2016-2026 period.
Immediately after the election, a Clinton victory is likely to see a short-term rally in risk assets, i.e. equities and credit, especially in those sectors of the market focused on international trade. In 2017, we also expect some form of fiscal policy easing, i.e. dominated by infrastructure spending that should also be positive for the economy and markets.
If Donald Trump were to win, his policy priorities are expected to be:
- Tax Reforms: Including a substantial reduction in both income tax (down to three basic rates, 12%, 25% and 33%) and cuts in the company tax rate to around 20-25% (from 35% currently).
- Health Care Reform: Repealing Obamacare with a focus on reducing costs and entitlements.
- Defence: Increased spending on both Defence ($US450bn)and Veterans’ programs ($US500bn).
- Trade Policy: A much more agressive trade policy, including naming China as a currency manipulator and imposing tariffs on selected Chinese imports, changing the terms and conditions of NAFTA and abandoning the TPP.
- Immigration Reforms: Reduce the flow of both legal and undocumented immigrants, including some deportation efforts and much tougher rhetoric.
- Infrastructure: An infrastructure spending program, similar to Hilliary Clinton’s, of approximately $US300bn over coming years.
- Other: Housing finance reforms, loosening M&A regulations, loosening media ownership and liberalising energy drilling requirements, reversal of some climate change policies.
- It has been estimated that Trump’s policies would worsen the US budget position by around -$US3.5 trillion over the 2016-2026 period.
Trump’s policies would, over time, be highly stimulatory, expansionary and, ultimately, inflationary. Although there would likely be an immediate sell-off in risk assests upon a Trump victory on 8 November (i.e. weaker equity and credit markets, a weaker USD and a rally in Treasury bonds), over the next year or so, if he was able to get his election policies through Congress, we are likely to see an acceleration in the pace of growth of the US economy and a surge higher in the USD. The equity markets are likely to respond positively to this stimulus. However, once these effects begin to fade, the downside risks are likely to mount.
The inflationary implications of Donald Trump’s policies are likely to see the Fed raise interest rates much more agressively than currently priced into markets. Trump’s anti-trade policies and commitment to increasing tariffs are also likely to be negative for growth, so that within a year or so…[the US economy] could weaken significantly (perhaps heading towards recession).
It is important to recognise that some of the issues that have been highlighted in this election are very significant. Data from the US Census Bureau shows that around 40% of families in the US have seen very little or no increase in their real income since the 1980s. Over the same time period, the top 20% of families have seen an increase in real income of around 30%, while the top 10% have seen an increase of just under 60%. In contrast, in the period from 1947 to 1973 the pace of increase in real family income in the US was roughly at the same rate for all income groups.
Donald Trump has tapped into the concerns of a large group of people who have either lost their jobs, their relative income or (perhaps most importantly) their status.
One of [Stephen’s] US colleagues put the election in context. His view was that a Clinton victory would produce a relatively narrow and normally distributed set of consequences and possible outcomes for policy, the economy and markets. In contrast, a Trump victory would produce a wide range of possible policy, economic and market outcomes, with significant tail-risk on both sides and the potential for a number of ‘black swan‘ events.
As always, if you have any questions or concerns about your particular circumstances, please feel free to get in touch.
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