What to expect from the economy after Trump's victory

A protectionist policy in the American economy could send shivers down Europe's spine.

The market soared on the news that Donald Trump had won the election. The dollar rose and so did the American stock indices, reaching all-time highs and with an eye on the predictions included in the winning candidate's electoral program. Vítor Madeira, an XTB analyst, believes that "tax cuts could be more beneficial for economic growth, having a greater economic influence in the short term”.

Paulo Monteiro Rosa, economist at Banco Carregosa, nods to the fact that Trump has promised to maintain and expand the 2017 tax cuts (Tax Cuts and Jobs Act), further reducing corporate taxes to between 15% and 20%. As for international trade, he proposes a policy of increasing tariffs, including a general tariff of 10% on imports and duties of up to 60% on Chinese products. A strategy that "could push up the prices of consumer goods”, he told our newspaper.

On the other hand, when it comes to housing, and unlike the losing candidate, Trump does not promote price controls, but supports tax credits that encourage housing development. He also supports a single credit of five thousand dollars per child. "Such support could help reduce child poverty, especially among low-income families, but it also implies financing challenges that could further aggravate the US budget deficit, especially in the long term,” the economist points out.

Paulo Monteiro Rosa recognizes, however, that one of the headaches will be related to public accounts: the US continues to have high budget deficits, above 6% of nominal GDP. "The ratio of public debt to nominal GDP is 122%. However, the resilient nominal economic growth, currently around 5.5%, can still absorb a large part of the current 6.3% deficit. It is historically rare to have such a high deficit in times of economic expansion,” adding that, ”the government will continue to have high budget deficits. At the very least, the expenditure associated with an increasingly ageing population and its health care, and the growing costs of servicing the debt (interest) make fiscal deficits of around 5 or 6% almost inevitable.”

And he warns: "A possible slowdown in the economy, or even recession, would significantly boost the budget deficit, perhaps above 10%, with lower revenues and more spending driven by automatic stabilizers.”

AND EUROPE?

The European economy has always been linked to the American economy. However, the XTB analyst notes that the US has changed its vision, defending a self-sufficient stance in relation to other forces. And that this view could deepen with the victory of Donald Trump, "who has a desire for protectionism of the US economy, so the implementation of tariffs on imports could have a negative impact on exports from other countries, thus affecting the European economy, either directly or indirectly”. He added: "When the US economy is in an expansionary phase, the effect has been beneficial for the European economy, so tax reduction policies in the US could have an indirect positive impact on the European economy,” but said that "given the weakness shown recently by the European economy, the outcome of the result remains very ambiguous.”