How will Trumponomics impact the US economy in 2017?

How will the new presidency affect the US economy?The winds of change

On the face of it, the ideological and political differences between the outgoing Obama administration and the incoming Trump regime could not be greater. Barely a single policy is likely to remain unaffected, with everything from public spending to international relations predicted to shift into sharp reverse under the auspices of a maverick who’s made his mark by defying convention throughout the presidential campaign.

In the last months of 2016, the financial markets reacted to Trump’s unexpected victory via a textbook surge in stocks and government yields as well as a significant upshift in the value of the dollar following predictions of increased growth and higher levels of inflation on the wave of announcements regarding deregulation, tax reforms and infrastructure spending.

So, it seems likely that Trumponomics is set to remain a dominant influence in the coming months, with observers closely monitoring whether Trump’s deeds match his words and forecasting how his administration will balance higher growth with spiralling inflation without plunging the country into a recession.

A new approach from the Fed?

The combination of a more active fiscal policy with buoyant economic figures may prompt the Federal Reserve to develop an approach that is more strategic than has been seen thus far, including greater tightening to reduce the economy’s reliance on central bank controls.

While this could be regarded as a positive and healthy move towards rebalancing policy in the US, it’s an option that’s less likely to find favour among the economies of Asia and Europe, where central bank controls are still an important part of economic recovery for many countries.

There is the danger that this greater disparity in policies and economic performance will encourage the inward migration of foreign capital to the US and put upward pressure on the dollar, leading to the reinforcement of Trump’s anti-globalisation stance and initiating a move towards more protectionist policies.

Turning away from the world

Trump believes that globalisation is bad for America. He has indicated that he’d like to impose a tariff of 5% or more on all imports and has already assembled a team of advisers and negotiators with experience in protecting US manufacturers – such as steelmakers – from international competition.

However, Speaker of the House of Representatives, Paul Ryan, has already said that Congress will not be raising tariffs. And while successive American governments have created tariffs to protect domestic producers, the fact is that a ready supply of cheap steel from China, for instance, benefits the American firms that consume it, leading to bigger profits and more employment on US turf.

Perhaps more importantly, most US imports are in goods and services that don’t undermine its domestic economy. America’s biggest import from China is electrical equipment. The production of an iPhone entails not only its manufacture in China but involves Californian R&D expertise and component supply from countries in Asia and Europe, as well as metals from Africa. Here, the imposition of tariffs would be as damaging to US companies as to those from overseas.

What lies beneath

It’s likely that America will remain at a heightened state of uncertainty as its political and economic systems adapt to the changes ahead.

It’s possible that Trump may well back off some of his more extreme plans – mass deportation, for example – while other policies may be modified or morphed into less radical options. Added to which, Republican hawks may push to downscale infrastructure plans and proposed tax cuts.

The uncertainty about the scope and detail of Trump’s economic programme make it difficult to make accurate predictions. Ultimately, Trump’s administration will need to retain credibility if it is to hold on to public support. If the net result of the president’s policies is to alienate the markets and damage America’s reputation as a safe haven for investors, national sentiment could rapidly change.

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