What does the election of Donald Trump change in the US?

The election of Donald Trump radically changes the current equilibrium.

Tax cuts programmed for 2017 will support private demand. Cuts are expected to total around 6,000 billion dollars over 10 years. This would lead to a 4.1% increase in US household income after tax. However, the reduction is not attributed evenly. The highest incomes would enjoy an increase of around 14%, whereas mid-income households would benefit from an increase of only 2%.

Growth in 2017-2018 will be driven higher in the US by around 0.3 – 0.6%. This is slightly less than observed in 2003 after the tax cuts implemented by Bush totalling 10,000 billion over 10 years. The policy increased growth by an estimated 0.6 – 0.9% in 2003.

This strong long-term change in budgetary policy will have a positive impact on the private demand profile. The balance between budgetary policy and monetary policy will no longer oblige the Fed to systematically maintain interest rates at floor levels.

Investor outlook will be durably modified since the Fed will have greater leeway to raise base rates. Under these conditions, long-term US interest rates, and particularly short term rate futures contracts, must be expected to steepen durably.

Tax measures alone will not modify the US economy from its current profile, characterised by modest growth (2.1% average annualised since the low recorded in Q2 2009 – Q3 2016).

A change in regime would involve a lasting improvement in productivity and employment. Productivity indicators are weak (0.6% annualised growth on average over the past 4 years) and employment dynamics will be weighed down lastingly by a lower activity rate (the percentage of active persons, or aspiring to be active, in relation to the comparable total working population aged 16 years and over). In order to restore a stronger growth rate, the productivity profile must be durably improved via investment, while increasing the active population (which is not coherent with deporting foreigners).

Infrastructure investment could play a vital role (1,000 billion over 10 years in the Trump programme) if Congress ratifies the plan and if the funding is more clearly defined than a simple public-private arrangement. None of these points are certain to be accomplished however.

Philippe Waechter – Chief Economist – Natixis Aset Management