Yet the economic environment in which his expansionist fiscal and budgetary policy will find itself is one of an economy at the peak of a cycle, with the job market reaching near full employment and inflation close to the Fed’s 2% target. The impact on growth will therefore be less severe than if the US economy had been in recession. We therefore anticipate modest GDP growth of 2.0% and 2.3% in 2017 and 2018, as well as rises in consumer prices of 2.0% and 2.2% respectively.
The impact of Donald Trump's fiscal and budgetary policy on growth will be less severe than if
the US economy had been in recession.
Furthermore, the tightening of financial conditions, notably with the strengthening of the dollar and higher borrowing rates since the summer of 2016, could restrict growth during the first half of 2017. The positive effects of lower taxes and increased budgetary expenditure which, according to our calculations, could generate 0.5 percentage points of additional annual growth in 2017, should offset these negative effects from the second half of the year.
Companies will be among the main beneficiaries. Donald Trump proposes to reduce corporation tax from 35% to 15% and the Republican Congress should support this approach, although it is proposing a smaller reduction (to 20-25%). Growth in 2017 should therefore be mainly stimulated by fixed investment and inventory rebuilding. Should oil prices continue to stabilise, this will also enable companies in the energy sector to boost activity and make further investments in machinery and equipment. According to our assumptions, an infrastructure programme based on public incentives designed to generate USD 50bn of private financing per annum could be implemented and stimulate investment from Q4 2017 into 2018. However, the low capacity utilisation rate and the recent rise in bond yields could restrict corporate investment. Households will also be affected by higher borrowing costs and residential investment, which is especially sensitive to movements in long-term rates, could see a slight fall in the short term.
The other beneficiaries of tax concessions will be households, whose tax rate could fall from an average of 20% to around 15%. Working on the assumption that 25% of tax savings are spent on consumer goods, according to our calculations, growth in consumption and GDP could accelerate by an extra 0.35 and 0.25 percentage points respectively in 2017 . However, with the US economy being close to the peak of its cycle, the impact may be lower.
Overall, we believe that consumption will grow by 2.3% in 2017 and 2.4% in 2018.
The two other impediments to excessive growth in consumption are higher inflation, which would reduce consumer purchasing power, and the recent rise in borrowing rates, which could discourage households from taking out credit. Overall, we believe that consumption will grow by 2.3% in 2017 and 2.4% in 2018.
Taken as a whole, should these stimulus measures be implemented, companies will be able to create more jobs. Turning to unemployment, the rate could continue to oscillate at around 4.9%, notably because the creation of new jobs would enable certain individuals to re-enter the active population. However, structural forces could keep the rate of participation in the active population low. Should any increase in the demand for employment not be followed by supply, upward pressure on wages could be significant in 2017.
Accelerating growth and higher wages will sustain inflation, which should rise to 2.0% in 2017. In spite of the strength of the dollar, which will restrict excessive inflation growth via lower prices of imported goods, the Fed should nonetheless be forced to tighten monetary policy. We also forecast a hike in the Fed Funds rate in December 2016, followed by two further increases in 2017. The monetary tightening that we are anticipating will maintain upward pressure on the dollar, with the EUR/USD rate at 1.05 by the end of 2017.
The favourable growth outlook should also see inflation expectations remain high, leading to 10-year yields of around 2.50% by the end of 2017.
Our current scenario does not take into account the measures put forward by Donald Trump during his campaign in the areas of international trade and immigration.
Uncertainty regarding the implementation of these measures remains high. However, exports will likely continue to suffer from the strong dollar, especially in early 2017. The higher levels of imports anticipated from the second half of the year, due to domestic demand stimulated by lower taxes and the rise in the dollar, will widen the trade gap.
The exceptional uncertainties that remain around the implementation of the Trump programme considerably increase the risks in our scenario.
- The worsening budget deficit resulting from the lower tax take and increased public expenditure could cause long-term yields to rise, or even lead to investor caution.
- Should Donald Trump introduce an exceptional 10% tax on the repatriation of profits generated and stored abroad, upward pressure on the dollar could become much more intense, leading to lower exports.
- If the measures implemented turn out to be more modest than previously announced, the outlook for growth and inflation rates could be lower. Lower inflation expectations could then give rise to a downward trend in bond yields. Conversely, greater budgetary stimulus than currently anticipated could push inflation higher, leading to further monetary tightening.
- The measures taken by Donald Trump in the field of international trade could pose a risk to domestic and international stability, leading to a global recession.
Our scenario of modest acceleration of growth is based on the assumptions we believe to be the most robust given the information currently available. But in light of the uncertainties that prevail, the breadth of potential scenarios is wide, with the worst being global recession and the best leading to growth at around 3-4%.
Consensus | Note: sovereign bond yields are averages for annual figures and period-end levels for quarterly figures.
1 Our estimates are based on the hypothesis of the “Committee for a Responsible Budget”, which has assessed tax reduction proposed by Donald Trump at 1,650 billion dollars over the next 10 years.