Briefing highlights
- Trump and the outlook for the U.S. economy
- Business leaders back carbon pricing
America's greatness
Many analysts believe Donald Trump will juice the economy, but some question whether he can make America all that great again.
Let’s start with those who have raised their forecasts for economic growth since Mr. Trump defeated Hillary Clinton for the U.S. presidency.
“In the wake of the U.S. presidential election, we have revised our forecasts of U.S GDP growth and inflation upwards,” said Kit Juckes of Société Générale.
“This leads to a higher path for Fed funds, Treasury yields and the dollar,” he added, referring in the first case to the Federal Reserve’s benchmark rate.
Société Générale’s U.S. economists now see economic growth of 2.3 per cent in 2017, not a big revision from their earlier projection of 2.2 per cent, but the following two years are another matter.
They now forecast growth of 2.1 per cent and 1.2 per cent in 2018 and 2019, respectively, nothing to write home about but far better than pre-election projections of 1 and 0.2 per cent.
Capital Economics differs somewhat, but the idea is the same for the next two years. It raised this year’s growth forecast by 0.7 of a percentage point to 2.7 per cent and next year’s by 0.3 of a point to 2 per cent.
After that, oops.
“We don’t yet have a formal forecast for 2019, but our initial impression is that, as the stimulus begins to fade, GDP growth will slow markedly,” said Paul Ashworth, the group’s chief U.S. economist. “At that stage the current economic cycle will be looking very long in the tooth and a recession will be a distinct possibility.”
Indeed, Société Générale has now cut its 2020 growth forecast to just 0.6 per cent from 2.5 per cent.
Then there are those, like Bank of Nova Scotia’s Derek Holt, who question it all.
“Could the market assumption of great things for growth to come from a new Trump administration skid right off the rails in 2017?” he said in a report this week.
“You bet it could,” he added, listing just what could go wrong.
First comes the issue of the Fed, and whether Mr. Trump turns it “more hawkish” by first filling two vacancies and later possibly replacing two top officials, including chair Janet Yellen, when their tenures expire.
There’s a twist here.
“If appointees make the Fed appear to be more hawkish, actually becoming so in the face of uncertainties surrounding these risks is more uncertain since the Fed still has a dual mandate to respect and I would have full faith in its focus upon doing so,” Mr. Holt said.
“Not being hawkish for the right reasons could pose downside risk to the economy, and just in time for the Congressional mid-terms as the first big political test.”
Then there’s the post-election strength of the U.S. dollar, which makes American exports more expensive.
“Give it time and American exports may take a hit while American consumers buy more from abroad regardless of the Trump administration’s home bias,” Mr. Holt said.
“Oh, the irony if a Trump administration oversees a worsened trade deficit,” he added.
Then there’s the threat to the housing market. And, as we all know in the wake of the financial crisis, one of the easiest ways to scare an American is to talk about those risks.
Indeed, the 30-year mortgage rate is now up by about two-thirds of a percentage point since late September, Mr. Holt noted.
The Scotiabank economist also questioned the vaunted repatriation of manufacturing work.
“In order for Trump’s protectionist bias to result in bringing manufacturing ‘home,’ we perhaps need to overlook the fact that domestic manufacturing inventories remain rather high,” Mr. Holt said.
“Produce more at home when you can’t move the product you’ve already got on the shelves?”
Then there’s the fact that production cost savings in other countries are “compelling.”
As for Mr. Trump’s infrastructure plans, the “spending proposals are not a fundamental game-changer,” Mr. Holt said.
“The effects on growth last for a year or two, after which maintaining infrastructure spending will maintain levels of activity but not add to growth. … US$1-trillion over a decade means an average $100-billion impact per year in a US$19-trillion economy before deflating infrastructure spending relative to broad GDP.”
And what will Americans do with their tax cuts?
“Boomers are older now, and they’re still recovering from the confidence and housing wealth shock incurred in 2008-09. They could well pocket the tax savings in preparation for retirement.”
There’s one more thing, which speaks to the man himself.
“Off this list is the more difficult to assess evolution of potential trade shocks to growth and geopolitical instability that a Trump administration could pose to the world economic and political order,” Mr. Holt said.
Businesses back carbon pricing
A coalition of senior business executives and environmentalists is adding its support to Canada’s push for carbon pricing and other actions to address climate change, despite some concerns Canadian businesses will face a disadvantage against competitors in the United States.
The leaders argue in a letter that the most advanced countries are pursuing policies to forge cleaner, more innovative economies, and Canada needs to keep up or lose out in a growing global market, The Globe and Mail’s Shawn McCarthy reports.
Canada has begun to make progress in the transition to a low-carbon economy, says the Smart Prosperity letter, which was signed by top executives of more than 40 corporations, including Suncor Energy Corp., Cenovus Energy Inc. and Royal Dutch Shell PLC’s Canadian operation.