What would a Trump presidency mean for the American economy?
25 JUL, 2024
By Schroders
Author: George Brown, senior US economist at Schroders
After weeks of speculation, President Biden announced over the weekend that he was withdrawing from this year's presidential race and supporting Vice President Kamala Harris as the Democratic candidate. Although her nomination as the official candidate has not yet been confirmed, the cards are in her favor and she seems the most likely candidate according to betting odds.
Attention now focuses on Kamala Harris's possible running mate. Among the most likely candidates are the governors of the most contested states. Meanwhile, the chances of the Democrats retaining the White House have slightly improved, mainly because Harris has a blank slate to change the narrative around the elections.
As for the market reaction, we have seen that yield curves have steepened in recent weeks as expectations of a Trump victory increased. This was because a crushing Republican victory would allow Trump a freer hand in fiscal stimulus. Conversely, a Democratic president would face a divided government. Therefore, the recent steepening of yield curves may reverse if Harris, or another Democratic candidate, narrows the gap in the polls.
However, Donald Trump still seems the most likely winner. The recent assassination attempt has given his campaign a considerable boost that could accompany him until the November elections. Given Trump's lead in the polls, we outline our main economic expectations if a Trump victory were to occur.
Protectionist measures could pose inflationary risks
The central pillar of Trump's economic agenda is protectionism. As president, he referred to national security concerns to raise tariffs under the so-called Section 232 powers. Beijing was the most common target, with the average tariff applied to imports from China rising from 3% to nearly 20% during his term. If re-elected, Trump has proposed increasing it to 60%, as well as gradually eliminating all imports of essential goods from China. In addition, imports from the rest of the world would be subject to a basic tariff of 10%.
If applied, these proposals would represent a significant inflationary shock. However, we suspect that Trump has no intention of implementing them in full, but rather to use them selectively to obtain trade concessions.
Three factors should help mitigate the inflationary impact of tariffs:
- Firstly, the dollar is likely to appreciate, especially against the renminbi, as Beijing would probably pursue a devaluation.
- Secondly, the expansion of corporate profit margins since the pandemic should serve to absorb higher import costs.
- Thirdly and finally, goods could be diverted through countries that maintain more favorable trade conditions with the United States, as China appears to have done since the start of the trade war.
Immigration may be a greater challenge
An immigration restriction would likely be more disruptive this time than during Trump's previous tenure in the White House. Job growth in recent years has been driven almost entirely by foreign-born workers. Therefore, it is likely that lower immigration will exacerbate worker shortages, especially in sectors that heavily rely on foreign labor, such as agriculture and construction. This could lead to a resurgence of wage growth that would further fuel inflationary pressures.
Isolatedly, higher inflation and lower job creation would act as a headwind for the economy. But our forecast is that this will be more than offset by various growth-promoting policies. Of these, the most important will be Trump's promise to extend the provisions of his 2017 Tax Cuts and Jobs Act (TCJA) that expire next year.
Growth should also be supported by Trump's deregulatory agenda. One of the biggest beneficiaries would be the energy sector. Trump has promised to end delays in federal drilling permits and leases, remove limits on natural gas exports, and reverse car emission rules that come into effect in 2032.
A Trump victory is likely to mean stronger growth and higher inflation
If Trump wins the election, our expectation is that American growth will be stronger and inflation firmer. However, Trump's campaign has been vague, so it's difficult to make assumptions about economic policy.
One thing we are sure of is that most of the macroeconomic impact will not be felt until 2026 onwards. Not only because of the time it will take to legislate and implement his program, but also because of the delays associated with the transmission mechanism of policies, which will end up impacting activity and prices.
In terms of growth, our analysis suggests that the US economy would grow by 2.2% in 2025 under a second Trump presidency. It would then accelerate to 2.7% in 2026, as the administration's growth-promoting policies come into effect, before moderating back to 2.3% in 2027, as rising inflation weighs on consumer spending.
