As the dust begins to settle on the US elections, our Asia Economists look at the immediate after effects of Trump winning the presidency, as well as the outlook for the markets in Asia ex-Japan.
The last few days have sent shockwaves through the markets, as the unexpected win by the Trump camp sent investors flooding to quality in a knee-jerk reaction to the ensuing political uncertainty. In our Asia Special Report entitled Trumping Asia (25 July 2016), we argued that, aside from Mexico, Asia ex-Japan is the region on the front line should a President Trump follow through on his main campaign pledges.
The world economy has already been dealt a blow, as the sheer uncertainty ahead will force companies to shelve investment plans and households to delay big-ticket purchases, while the market meltdown stands to have negative wealth, confidence and credit effects. Of course, Trump may not follow through. But on the other hand, compared to the UK and Brexit risks, the stakes for the rest of the world are much higher if the most important country in the world – in terms of size of economy, capital markets, reserve currency and military power – were to turn inward. The outlook is very uncertain, but to provide some early and tentative guidance we have calculated some very preliminary estimates of the impact of a Trump presidency on Asian GDP growth in 2017, assuming that he follows through on several of his campaign pledges:
Asia is home to many of the world’s most trade-orientated economies, home to the world’s largest manufacturing workshop and home to a web of free trade agreements and vertical supply chains. Trump has said that if elected he will use all means available to get a "better deal" for the US from its trading partners. This includes: opposing the Trans-Pacific Partnership (TPP); renegotiating NAFTA under the threat of withdrawal; naming China a “currency manipulator”; raising import tariffs; and using all means available under US law and international agreements to protect American workers from allegedly unfair trading practices of other countries. While Trump has threatened trade barriers against Mexico, Japan and China, the knock-on effects from China – the world’s largest manufacturing assembler – to other Asian countries that are major suppliers of high value-added parts and components to China – namely Japan, Korea, and Singapore – could be substantial. While the initial impact of weaker demand is likely to be disinflationary for Asia, over time trade disruptions could unleash a supply shock, as shortages of tradable goods and, particularly, commodities, drive up cost-push inflation. Trade disruption and resulting cost pressures could see protectionism spread and multinational companies pull out from Asia. So, in the worst case, Asia could face a stagflation environment in 2017.
Threats to regional security
Trump’s pledge to bolster the US military presence in the region amounts to a commitment to pursue the current US policy of the strategic pivot, under which 60% of US naval forces are to be deployed in the Pacific Basin by 2020. However, there seems a potential contradiction here. Trump has also committed to force America's allies − including, specifically, Japan and South Korea − to meet the full cost of the security guarantees provided by the US. At the very least, US foreign policy in Asia has suddenly become significantly more unpredictable. If the US bolsters its military presence in Asia, it risks butting heads against a more assertive China. On the other hand, trimming the existing military presence back until its cost is covered in full by the host country’s existing contribution, or closing US bases and withdrawing forces completely, could embolden China to further increase its foreign policy assertiveness in the region. In the worst case, trade wars and geopolitical tensions could feed of each other.
Zealous US fiscal expansion = a more aggressive Fed
Trump has laid out an ambitious plan to cut personal income taxes, primarily top-end tax rates for individuals, and corporate taxes from 35% to 15%, with a 10% repatriation tax. At the same time, he has made many comments about increasing spending on infrastructure, the military and for veterans. It is unclear how these spending increases will be offset, and on some estimates the US budget deficit could increase by USD10trn over 10 years.
With the US labour market approaching full employment, a very expansionary fiscal policy is likely to be quite inflationary in the medium term, and US inflation would likely be exacerbated further by pledges to increase trade barriers (higher import costs) and limit immigration (higher labour costs). The initial tightening of financial conditions and increased investor uncertainty could cause the Fed to delay hiking rates in December. But further out, higher inflation will likely result in a steeper Fed rate hiking cycle and the US bond market will probably soon start to anticipate this. Our US Chief economist, Lewis Alexander, has used the Federal Reserve staff’s FRM/US econometric model to run some simulations to provide some indication of the potential impact of Clinton and Trump proposals on the US economy (see Special report: US Election and Economic Policy).
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