Investment Clock insights

Have Trump's economic forecasts crossed the line into make believe?


Trevor Greetham

16 September 2016

In a keynote speech last night at the Economic Club of New York, US Republican presidential candidate Donald Trump unveiled extremely ambitious plans for the economy. He proposed broad brush tax and deregulation policies that he said would allow the US economy to grow at 3.5% a year, up from the current 2% trend, creating 25 million new jobs over the next 10 years and generating additional tax revenues to pay for shiny new infrastructure.

The forecasts are about as upbeat as you can get away with without crossing the line into make-believe. In fact, some economists will conclude that line has been crossed.

The US unemployment rate has fallen from a peak of 10% in 2009 to just under half that level today and there is little spare capacity. The only way to get this kind of growth and job creation without inflation rising out of control is to boost the productive capacity of the economy and that is easier said than done.

America did indeed grow at 3.5% a year in the 1950-2007 period on the back of rapid labour force growth and productivity gains but since then the demographics have become less favourable with post-War baby boomers entering retirement. Stricter immigration rules under a Donald Trump administration would also be a potential drag on growth. That leaves productivity. Cutting red tape and operating an America first trade policy could help but the effects are uncertain and in some cases could just as easily be negative if US companies' access to global trade is restricted.

Politics is often more about style than substance. Trump's policies are barely credible but they sound great. Donald Trump is only 3% behind Hillary Clinton in national opinion polls and experts are giving him a 40% chance of winning in November.

Traditionally investors have favoured the pro-market stance of the Republican Party over the Democrats but there are big question marks over important elements of policy under a President Trump. We'd expect signs of Trump improving in the polls to trigger bouts of stock market volatility this autumn.

That said, markets usually overreact to political news. With global growth positive and policy loose, we'd see a pull back as a chance to add to stocks, particularly in the emerging markets, which should benefit from better data out of China and a relatively soft US dollar.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.