News in Charts: Another electoral shock. But ‘Trump Lite’ should triumph over ‘Donald Dark’

Riding a wave of popular discontent against globalisation, immigration and the political and economic establishment seems to work. For the second time this year, investors were caught off-guard by an anti-establishment vote at the polls. But when the dust has settled, what will Donald Trump’s victory mean for the US, and for the global economy?

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During the long election campaign, Donald Trump made countless extreme and often contradictory promises. He undoubtedly poses a threat to the status quo. But he is unlikely to be the disaster for the US economy that many seem to fear.

The most likely outcome, in our view, is what we call ‘Trump Lite’, where the US President is unwilling or unable to enact most of what he has promised. In this world, US economic growth strengthens a little in the near term, in response to greater fiscal stimulus, and further out, in response to a more rapid normalisation of monetary policy.

The alternative is the world of ‘Donald Dark’. With public support for his isolationist rhetoric, Mr Trump’s victory ushers in a new era of protectionism. This sees global trade as a share of global GDP fall sharply. This is good for American workers. But it is bad for emerging market economies, and a disaster for capitalists the world over.

Initially, investors were in a state of panic following Mr Trump’s victory, and equity markets across the world tumbled. But those sharp falls have since been reversed, with financial markets betting on a more moderate, pragmatic version of Donald Trump taking office.

Reflecting this, and the fact that Mr Trump is unlikely to be able to implement many of his more radical policies, the prospects assigned to a US rate hike in December are now a little higher than they were in the weeks before the election. In other words, markets appear to be pricing in something closer to what we describe in our ‘Trump Lite’ scenario.

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Trump Lite

Markets were betting on a Clinton victory, much as they had bet on a ‘remain’ vote in the UK’s EU referendum earlier this year. And like Brexit, Mr Trump’s agenda represents a step away from globalisation towards a more isolationist approach. Yet, for all of his flaws, the US economy could fare a lot better under Mr Trump than many expect.

For a start, Mr Trump may be unwilling or unable to push through the agenda he set out in his campaign. Politicians often make promises that they do not plan to keep. It is doubtful whether Mr Trump really intends to deport 11 million undocumented immigrants, force Mexico to build a wall and start a trade war with China. Besides, even if he does attempt some or all of those things, a Republican-controlled Congress may yet slap him down.

Second, Mr Trump has pledged a massive fiscal splurge in the form of lower taxes and more spending on law enforcement and the military. Most of this is likely to get the backing of a Republican-controlled Congress, and will provide a meaningful boost to US economic growth in the near term. Furthermore, to the extent that this is inflationary and allows a faster normalisation of US monetary policy, we think that it will benefit the economy over the longer term too.

Last but not least, cyclically, the US economy is already in decent shape: it grew at an annualised pace of 2.9% in Q3, consumer confidence is quite high, annual wage growth hit a new post-recession peak in October and the current level of job creation is well above the neutral level of 60,000 or so that we judge to be consistent with a stable unemployment rate. The uncertainty posed by Mr Trump’s victory may prompt some firms to put investment on hold, but these doubts should be at least partially offset by Mr Trump’s plan to slash the corporate tax rate from 35% to 15%.

Donald Dark

Admittedly, Mr Trump’s win poses several uncertainties and potential risks. But the biggest risk to the economy is the possibility of a sharp reversal in globalisation. This could be triggered either by Mr Trump’s success emboldening isolationist political movements in other countries, or by Mr Trump starting a trade war with key trading partners such as China and Mexico.

Although the US is a relatively closed economy, it would not be immune to a sharp downturn in global trade. Indeed, we project that if global trade as a share of global GDP were to fall back to levels seen in the early 1980s over the next five years or so then the US economy would suffer an outright recession. We give our risk scenario, Donald Dark, around a 1-in-3 chance.

Last week’s News in Charts examined the implications of ‘Donald Dark’ for emerging markets. We noted that the Mexican peso had appreciated and depreciated with the implied odds of Mr Trump winning the Presidential race. Since then, the Mexican peso has fallen sharply on the back of Mr Trump’s victory, reflecting his threat to impose a 35% tariff on Mexico’s exports to the US.

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