Could Trump policies lead the US to recession?


HSBC has issued a note to investors off the back of the US election warning Donald Trump’s policy proposals would “likely put the economy into a recession after a year or two”.

Chief US economist Kevin Logan says while Trump’s fiscal spending and proposed tax cuts would provide an initial boost to the economy, his immigration and trade policies would undo any gains within a reasonably short period of time.

Trump has proposed renegotiating Nafta and implementing high tariffs on China and Mexico. He has also talked of restricting immigration based on nationality and religion and that he will deport up to 11m illegal immigrants, who are an important source of labour for the US.

“While tax cuts that were implemented in the first year of a Trump administration might give GDP a substantial boost for a year or so, the combined supply shock from a contraction in the labor force and from a disruption to international trade would likely put the economy into a recession after a year or two.

“In our view, the full implementation of Trump’s policy proposals would increase the volatility of aggregate economic activity, with potential repercussions for the volatility of financial markets as well, and lead to tighter monetary policy.”

However, Logan says the willingness of Congress to enact legislation will ultimately decide whether Trump’s proposals make it into law.

Hermes Investment Management group chief economist Neil Williams says the threat of recession will have a negative impact on US GDP growth and equities/growth assets, but would be positive for conventional treasuries.

“[Trump’s] macro plans are likely to lead to slower growth, and a weaker footing for an economy that may have to weather some subsequent distress to asset prices (higher money rates, weaker equities).

“He advocates tax cuts skewed toward higher earners, yet reductions to immigration and trade.

“Taken literally, this infers a hit to tax revenue of about $4tn (22 per cent of GDP) over five years, which would only be part financed by spending cuts. Congress could push back on this.”

However, Charles Stanley chief investment officer Jon Cunliffe does not expect a US recession.

After an initial fall in markets we suspect that negative views will mellow, and more will come to suspect that a Trump Presidency will not tip the US into recession or slower growth after all.”

We expect the world economy to continue to grow, and for the USA to lead that recovery next year as it has done in 2016. 

“Whilst the new President may struggle to get through all his programme, the tenor of he wants to achieve is reflationary. This should prove to be better for shares than for bonds.”