US: Election result has increased uncertainty around the economic outlook - NAB

Antony Kelly, Senior Economist at NAB, suggests that the US election result increases uncertainty around the economic outlook as we wait to see what parts of the election platform are delivered and when.

Key Quotes

“Persistent bouts of volatility could have implications for Federal Reserve monetary policy as the Fed typically pushes back any planned rate hikes in such an environment. Uncertainty can also affect business investment decisions and consumer confidence. Of course, how significant these affects will be is unclear. There is always a degree of uncertainty following an election. Businesses wondering whether they will get a corporate tax cut or what regulations might get cut will hardly put-off investment, but investments based around supply chains in Mexico or China might.”

“With markets quickly settling post the election and the economic data remaining supportive for a hike we are leaving our call for a Fed rate hike in December unchanged.”

“Looking beyond the short-term, the chance of greater fiscal stimulus (and public debt) from promised tax cuts and public spending, offset by only limited budgetary savings, will have implications for the economy and Fed policy. How the Republican Congress – which has in the past tried to curb spending – will react is unclear, although tax cuts would have strong appeal and infrastructure spending may receive bi-partisan support.”

“Fiscal stimulus in an economy close to full employment, while it may give some extra support to growth, is more likely to be inflationary and suggests a risk that the Fed may have to increase rates more aggressively. This, coupled with higher public debt, could see long-term bond yields move higher and strengthen the US dollar.”

“In terms of their potential effect on growth, going in the opposite (negative) direction are possible measures to curb what the President-elect sees as “unfair” trade, and to reduce illegal immigration. In relation to trade, actions that have been flagged include declaring China to be a “currency manipulator”, a 45% tariff on US imports of Chinese goods, and seeking to renegotiate or even pull out of NAFTA (a US-Canada-Mexican trade agreement). The risk is that such actions could trigger trade tensions.”

“Such trade and migration policies are also potentially inflationary with flow on implications for Federal Reserve policy. Clearly, given this new environment, uncertainty around the forecasts has increased. However, the risks for growth are not one-sided and with a lack of clarity around what will actually be implemented and when, we have left our forecasts unchanged for now.”