Trumponomics


trumponomicsWith Donald Trump taking office as the 45th President of the United States today, there are plenty of opinions on how his economic policies could help the United States and the global economy. Here’s our take on Trump’s style of economics, Trumponomics.

The consensus on many of The Donald’s campaign promises since his electoral success in November is they will remain campaign priorities and not necessarily translate into action. Especially as so many of them will need bipartisan support to become legislation, and that means compromise.

Plus, some are long-term policies, and while they will have the greatest effect on the UK, they will take the longest to implement. Chinese President Xi Jinping defended globalisation at Davos this week, warning that isolationist policies would slow global trade; a thinly disguised criticism of Donald Trump’s approach to tariffs on imports. Whichever way it goes, the new administration’s approach to trade could have the biggest effect on the UK economy in a post-Brexit world.

The key Trumponomics policies we should look out for in 2017 are tax cuts, regulatory reform and infrastructure investment.

Tax Cuts

Corporate tax was a central theme of the election. Trump sees it as the first step to improving competitiveness and attracting foreign inward investment, particularly for US companies that manufacture in China and Mexico. America has one of the highest corporate tax rates of all the most developed economies at 35%. Compared to Ireland’s 12.5% and the UK’s 20%, cutting it to 15% as he has suggested would put it among the lowest.

The new President also wants to make it easier for global US firms to repatriate their retained profits held overseas to pay dividends or invest in creating jobs. There is already some bipartisan support for this. It would create a one-off boost to the US economy with a massive influx of capital. It is likely to drive the dollar up and could be an incredible boost for the US stock markets.

All Republican presidents have the broad goal of lowering taxes. Donald Trump’s administration is no different and there are also likely to be some cuts to personal income tax. Who this will affect and benefit will become clear with time.

Regulatory Reform

The choices for Donald Trump’s cabinet suggest we should look out for broad regulatory reform. For example, his new Labour Secretary, Andy Puzder, is well known to be anti-unions, against the minimum wage and pro automation.

His new Treasury Secretary, Steven Mnuchin, who has earned tens of millions of dollars working at Goldman Sachs over the last twenty years, will lead banking reform. He is expected to start work on watering down the Dodd-Frank Act; legislation that was implemented after the 2008 Global Financial Crisis, to regulate financial services and prevent another banking crisis.

The first reform we expect to hear about is reform of the Affordable Care Act (Obamacare). Trump has said this would be one of his first deliverables. His Vice President, Mike Pence, has spent much of the transition period in Washington working on the new plans and building consensus in Congress. We expect an announcement on this within a few days of the inauguration.

Reforms by their nature are difficult to evaluate because their impact is uncertain. Depending on the direction, the above reforms are the ones with the potential to have the greatest impact.

Infrastructure Investment

Of course, the most anticipated infrastructure project we are looking for more details on is the infamous wall along America’s border with Mexico. This will be part of Trump’s $1 trillion rebuilding of US infrastructure over the next 10 years. A major pillar of his growth and job creation initiatives.

His challenge will be balancing the investment with tax cuts, which is an enormous challenge if he wants support across the aisle in the House of Representatives. An infrastructure investment bill will be a high priority item for this year’s legislative agenda. Economists have projected this will be a major contribution to economic growth as it creates new jobs, but it may not have an effect until next year. Just in time for mid-term elections.

What it all adds up to

No one can say with any certainty what President Trump will do nor what he will be able to get passed in the House. The unexpected EU Referendum result and the FTSE rally that followed is a stark reminder of how difficult forecasting can be.

The US economy has been picking up for some time, that’s why we have seen the US interest rate rises that have contributed to the pound’s weakness. Most economists forecast a modest increase in US GDP in 2017, with the potential for a greater positive effect coming in 2018.

Long-term interest rates moved higher in the US due to rising inflation and optimism that Trumponomics will drive stronger economic growth. The US central bank, the Federal Reserve, expects to hike interest rates three times this year.

Rising rates create short-term negative bond performance but boost bond investors’ returns as higher income over the long-run. You should expect the transition period to be difficult, but the long-term benefit to be positive.

Rising interest rates can raise the cost of debt capital for businesses, but if accompanied by steady economic growth, this could be good for shares. The fly in the ointment for American corporations will be the strong dollar. So, large US firms that make their profits domestically are expected to perform better than multinationals. Almost the inverse of the FTSE in 2017.

We set have set out more about how to invest for what this year has in store for your finances in our piece, Investing in 2017.

If you would like to help with your 2017 financial plan, especially if you’re reviewing your portfolio or planning to retire inlight of Trumpnomics, get in touch today.

 

Past performance should not be taken as a guide to future returns and whether you are investing in active or passive funds, you may get back less than you invested.

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