Trump card or wild card?

Which will have the greater effect on investments: potential US growth or international uncertainty?


Michael Grady

With a CV which includes roles at The Australian Treasury and the Bank of England, Michael Grady is Aviva’s senior economist and strategist. He’s responsible for developing the analysis which forms a key input into investment processes across the business.


Donald Trump’s victory in the US presidential election has the potential to have a profound effect on the global economy in various ways. Trump intends to increase government spending on infrastructure, such as roads and bridges, and cut taxes. This is likely to boost economic growth in the US and around the globe, and banish fears that the world is on the brink of an era of deflation, or a sustained period of falling prices. 

Some people might think declining prices would be a good thing but the prospect gives economists sleepless nights. People defer spending, taking the reasonable view that it is pointless buying a product when it will be even cheaper in the future. The problem is that such behaviour, when mirrored by consumers around the world, can tip the global economy into a downward spiral that is difficult to arrest.

So Trump’s policies are likely to result in higher inflation. That also means the pace of interest rate hikes in the US is likely to quicken in the second half of 2017 and into 2018.


The big question...

However, one of the biggest questions facing investors is whether the increase in uncertainty associated with a Trump presidency could outweigh the impact of his policies designed to boost economic growth. The geopolitical risks are substantial, especially if Trump were to spark some sort of retaliatory trade war with China and others.

For now, financial markets are giving him the benefit of the doubt. Hopefully, he will choose a sensible path that avoids a trade war. All the same, the risk  the new president will  follow a more damaging course cannot be dismissed, given a large part of Trump’s campaign was focused on protectionism, or shielding US industries from foreign competition. He could, for example, selectively impose tariffs (effectively taxes) on specific imports from certain countries if he can make the case there are unfair practices going on. 

Even if Trump doesn’t impose tariffs, undiplomatic comments in the early days of his presidency over trade, immigration and other foreign policy issues could be enough to create significant economic uncertainty; knocking investor sentiment and businesses’ appetite to invest. That ultimately would hurt US and global economic growth. 


Bringing it closer to home

So what does this mean for us in the UK? The direct economic impact is likely to be modestly positive. If Trump boosts US and global growth that should be good for the UK’s economic growth prospects, as well as jobs and wages. It should also prove positive for share prices since faster economic growth tends to boost company revenues and profits. However, the financial spillovers could also signal higher yields (which move in the opposite direction to prices) on gilts, or UK government bonds. 

That would be bad for investors in those bonds as the fixed interest rates that they pay would be less attractive and hence their price would fall. On the other hand, it could be good news for those thinking of buying an annuity (a guaranteed, fixed annual retirement income paid to purchasers for the rest of their lives) in the coming years. Annuity rate changes are closely linked to the yield on 15-year gilts. However, if Trump were to pursue a highly protectionist policy, there is a risk that the positive impact on the UK of more growth in the US is outweighed by slower global trade. 

One thing is certain: at some point in 2017, Trump will put his cards on the table. But even then it may be some time before we find out whether we’ve been dealt a bad hand.


 AR01842 12/2016

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