US elections: the aftermath

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Although it is too early to predict the course of Donald Trump’s presidency, there are a few broad indicators regarding the direction of the new administration. Trump’s key policies focus on immigration, taxes and trade. Economic growth is also expected to be emphasized. We expect policies in these areas may provide additional momentum for corporate earnings growth in 2017.

There is a lot of uncertainty about president-elect Trump’s economic plans. What Trump will focus on (first) and what he will agree with Congress is unclear. However, it seems to us that fiscal stimulus and immigration will probably have priority over protectionism.

While fiscal stimulus would boost demand, curbing immigration would reduce supply. This combination points to higher inflation and possibly more Fed rate hikes. There are two elements to the fiscal stimulus. The first is an increase in infrastructure spending. Trump has not given many details here, apart from saying that his plan would be “double” the size of Clinton’s proposed package. That points to spending of USD 550 billion over a 5-year period, worth around 0.5% of GDP per annum. Tax cuts represent the second pillar of Trump’s fiscal stimulus plan. Trump’s initial package of tax cuts have been estimated by the Tax Policy Center as being worth an enormous 4% of GDP in 2017-2018. However, there are signs that the president-elect is converging towards the more modest tax plans of House Speaker Paul Ryan.

Assuming that Trump would go with the more modest tax plan, and taken together with the infrastructure spending, total fiscal stimulus in 2017-2018 would amount to 3% of GDP. This would significantly increase US economic growth over the period, all other things being equal.

Donald Trump has proposed reducing both legal and illegal immigration. His immigration plan aims to ensure that job openings are offered to American workers first. Other proposals relate to reducing illegal immigration, both through enforcing current law and by implementing new policies. Given the tight labour market, the impact of these measures could be large. At current levels of around one million immigrants per year, immigration is an important source of labour supply and economic activity. Migrants represent around 0.6% of the total labour force per annum. If we assume that around a third of the immigrant flow declines in one year, then the labour force would slow by around 0.2%-points and unemployment would – other things being equal – decline by a similar amount.

Higher economic growth due to fiscal stimulus would also push down unemployment, leading to a tighter labour market and higher wages. Although these are back-of-the-envelope calculations, they give an indication of the effect that these type of measures could have. A more radical stance of deporting ‘all’ illegal immigrants could have much larger economic implications.

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