One of the most pervasive themes (perhaps the most pervasive) in the post-election world is the rampant skepticism surrounding Donald Trump’s proposed stimulus package.
The thing is, no one really knows what he plans to do (outside of some specific tax proposals borrowed from Paul Ryan) and further, no one is sure how these as yet unstated proposals will hold up when subjected to Congressional scrutiny. In short, whether or not “Trumponomics” makes it off of Capitol Hill is an open question.
Most of us assumed – probably because they basically said as much – that the FOMC would implement December’s baked-in hike, but reserve judgement on any kind of dot shift until we got a bit more clarity on the new President’s proposals. As it turned out however, the Fed, like the electorate, got swept up in Trump mania and decided to telegraph three hikes in the new year instead of two in order to convince the market that they weren’t going to be “falling behind the curve.”
Markets responded in kind, driving up yields and sending the dollar to its highest level since 2003. Already, Trump’s having a “yuuuuge” impact and he really hasn’t even said what he plans to do yet – let alone take office.
With all of this in mind, Barclays is out with some useful commentary and visuals that together help to catalogue what we do know about the President-elect’s plans. Here’s more:
After Mr. Trump’s unexpected election, U.S. policy is likely to undergo a significant shift over the next few years given the unconventional nature of his campaign rhetoric. While the precise details of his policies are scant as yet, we think it is useful to classify Trump’s economic agenda (“Trumponomics”) into four arrows (similar to the three arrows of “Abenomics”).
Ease of implementation differs across the four arrows In our opinion, a key consideration is that each of these four arrows have different probabilities of being enacted given their alignment with traditional Republican principles (Figure 11),
In our view, the probability of implementation is not uniform across the four arrows. Although two of the arrows — tax cuts and deregulation — are consistent with traditional Republican principles, and as such should be relatively “easy” to implement, the other two — trade protectionism and fiscal stimulus — are not. Still, much of trade policy can be conducted by executive order; which leaves fiscal stimulus as likely the most challenging arrow to implement, in our view. Macroeconomic impact of the four arrows U.S. protectionist trade policy could lead to increased risk of a slowdown in global GDP as it could generate tit-for-tat responses from other countries. For example, our economists estimate that even modest increase in tariffs to China (15%) and Mexico (7%) would result in a net decline of annualized real GDP growth of 0.5% (US Economics Research: 2017-18 US economic outlook: There’s a new tariff in town, November 9, 2016). The increased tariffs and subsequent reduction in trade would naturally also have a direct effect on Asian countries. Assuming a full 45% tariff on Chinese exports, our Asian economists expect a 0.7% reduction in China’s GDP. They think this would also have an indirect effect on Taiwan since a significant portion of its intermediate goods are assembled in China. On the other hand, while the long-term impact of the other three arrows is open to debate, they are arguably positive for asset prices in the short term. Of these, fiscal stimulus is likely to be the most powerful, especially against the backdrop of a decline in monetary easing across the globe we discussed in the previous section. Thus given favourable financial conditions and an increase in inflation expectations, as expected the Fed increased rates by 25bp in December and the “Fed dots” indicate that number of expected hikes during 2017 has now increased from two to three. The ECB has decreased the size of its QE program, the BOJ is attempting to reshape the nature of its monetary stimulus program and the BOE backed off its plans to further reduce rates this year. Finally, while the long-term impact of reduced regulation in the financial or energy industry or the tradeoffs of lower corporate taxes versus reduced government spending is a matter of partisan debate, in the short term these should improve corporate profitability. According to our U.S. equity strategy team, the implementation of corporate tax cuts from the current effective tax rate of 26.6% (statutory of 35%) to 15% in the United States could increase U.S. EPS by 10%. Our U.S. economists estimate that the fiscal spending and tax cuts are likely to more than offset the drag from any higher tariffs for the U.S. economy. They caution that their estimates are quite sensitive to assumptions about the magnitude and timing of the policies.
