Since the Republican house leadership failed to repeal and replace Obamacare, emerging-market executives (and US country managers) have begun to question the Trump administration’s push for growth-boosting legislation in the US. Failure to pass this legislation would have significant ramifications for global market conditions. If the once-expected impacts of Trump’s policy plans – stronger demand for emerging markets exports due to dollar strength, higher US tariffs on imported goods, and stronger US fiscal spending on infrastructure – are no longer likely, then multinationals will need to reassess the impact of the US economy in their portfolios.
Key components of Trump legislative agenda now in peril
President Trump’s legislative agenda is pivotal to his ability to achieve the promise of accelerating economic growth in the US. Unfortunately, the signal failure of the Trump administration and the Republican-controlled congress to pass the American Health Care Act (AHCA) has driven increased pessimism about the government’s ability ultimately to pass any major legislation. FSG is revising its expectations for the outcomes to two major legislative agenda items:
- Targeted tax cuts, not comprehensive tax reform: The Trump administration and congressional Republicans have made a comprehensive corporate tax reform and a simplification of income tax brackets the centerpiece of legislative agenda. However, comprehensive reform of the tax system will prove at least as difficult as repealing and replacing Obamacare has been. Due to legislative rules, to make the tax cuts permanent and passable with only a simple majority in the US senate, the Trump administration will need to pay for the tax cuts with new revenue. With the border-adjusted tax cut already floundering and alternative tax increases a hard sell for House Republicans (and with limited prospects for Democratic support), tax reform discussions are likely to be prolonged and difficult
- Infrastructure tax incentives, not infrastructure spending: President Trump has also sought to push through a major infrastructure program, amounting to as much as US$ 1 trillion in fiscal stimulus. However, funding for this increase in spending has become more difficult to find since cuts to healthcare entitlements were meant to partially pay for increased spending. This leaves the Trump administration with limited options, and decreases the chances of passing policy that has received only tepid support from Republicans in congress
If the Trump administration continues to struggle to pursue a stimulating program through congress, FSG has a bias toward a downward revision to our GDP growth forecasts for 2017 and 2018. Our current GDP growth forecasts point to 2.1% growth in 2017 and 2.5% growth in 2018.
How a failed Trump legislative agenda would impact emerging markets
Absent big policy changes from the Trump administration, expectations for global economic conditions are likely to return to those that preceded President Trump’s surprising victory last November. This would signal a return to a more gradual strengthening of the dollar and more limited uplift to global growth from US performance. However, emerging market executives will have to continue to monitor how a weakened Trump administration may shift focus over the coming years:
- US demand will provide limited uplift to emerging market exports – Without significant reforms and/or stimulus, US economic growth is unlikely to lift far above the average 2% growth of the post-crisis years. This will lead to limited uplift for key trading partners, as well as limit upward pressure on commodities from accelerating US demand
- Fed rate hikes would be more measured – Higher expectations for economic growth and inflation, driven by expected fiscal stimulus and tax reforms, are likely to moderate somewhat as those policies become less likely. While the Fed will continue to monitor inflation carefully, the prospects of a massive currency volatility driven by Fed policy would be significantly curtailed, limiting pressure on emerging market central banks to tighten to avoid damaging currency volatility
- Dollar appreciation would be weaker and more gradual – A worsening outlook for Trump’s legislative agenda has already led the US dollar to weaken significantly over the last few weeks. While a persistent tightening cycle in the US will drive a steady appreciation of the U.S. dollar, the prospects for an inexorable “super-dollar” effect harming emerging market performance is now much more unlikely
- Reprioritization of trade and immigration – The Trump administration’s failure to pass ambitious legislative reforms would likely drive the administration to prioritize issue areas where the executive branch has relatively more leeway. Except for a limited set of executive actions supportive of deregulation, this will likely lead the administration to focus attention on renegotiating trade deals and taking a harder line on immigration, neither of which will likely be supportive of emerging market (or US) growth