Will President Trump boost the US economy?

Will President Trump boost the US economy?An upturn for the economy?

After a period of sluggish performance, the US economy may be set for an unexpected upturn. The incoming Republican administration seems determined to throw all its resources into boosting the economy which, together with the much-touted trade restrictions shoring up the price of imports, is almost certain to fuel inflation above the average 2.2% of Obama’s second term.

While under Barack Obama, labour regulation and environmental legislation expanded greatly – witness the scope of Obamacare, for instance – its subsequent contraction under Trump may well encourage businesses to start investing again.

How much Trump’s policies will raise output and inflation is hard to know. If there’s plenty of room for expansion, Trump’s policies could kick-start growth and output and productivity could rise sharply, but as the economy approaches full capacity, inflation will soar.

Tax cuts ahoy

There are two sides to Trump’s position on tax. Sensible reforms, including the proposed amnesty for multinational companies repatriating foreign profits, should meet with broad approval. More controversial is Trump’s plan for a swingeing income tax cut that will disproportionately benefit the wealthy.

While giving rich savers a nice bonus rather than targeting gains on the poor may not be popular with a large section of the populace – an example, perhaps of Hillary Clinton’s accusation of ‘Trumped-up trickle-down economics’ – tax cuts may well provide a welcome boost to business confidence.

Market movement

However, the combination of large tax cuts and a boost in public spending in an economy with near-full employment is certain to result in higher interest rates as well as a hike in inflation.

With the likelihood of additional trade protectionism and a focus on the status of immigrant workers, the effect of high inflation and long-term interest rates could have a major impact on financial markets, regardless of any intervention by the Fed. As the dollar is already overvalued, the risk of an over-pumped dollar is very real.

From a global perspective, US interests seem set to shift away from free trade, globalisation, and open markets in a move that’s bound to be negative for emerging economies and multinationals – even American ones – that have based their business models on free trade and open capital flows.

The impossible dream?

Many would claim that high growth under Trump is a distant dream. However, some believe that because the sluggish growth over the last decade has been largely due to the fallout from the 2008 global financial crisis, it may not be a stretch to see that crisis reaching its natural end and the economy returning to normal.

Aside from all the spin, of course, much will depend on whether Trump’s new administration turns out to be competent or ends up as chaotic as the presidential campaign. Some analysts are convinced that Trump will trail catastrophe in his wake but while the risks are very real, it may just be that after years in rehab, America could be ready to move up a gear.

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