US Watch
Group Economics Macro & Financial Markets Research
19 July 2016
Clinton vs Trump
A Democratic victory seems likely in November’s presidential elections
We don’t think that the outcome of the elections will substantially change the US economy in the coming years
Maritza Cabezas
Senior Economist
A divided government with a Democratic President and a Republican majority in the House and possibly in the Senate, will make large policy
Tel: +31 20 343 5618
shifts more difficult
maritza.cabezas@nl.abnamro.com
Georgette Boele
Although we expect policies to be toned down once in office, both
Co-ordinator FX & Precious Metals
candidates want to increase government spending. But Mr Trump would
Strategy
combine it with corporate tax cuts, resulting in a large increase in debt
Tel: 020 629 7789 georgette.boele@nl.abnamro.com
As for the US dollar, political developments have less of an impact, instead the growth/inflation mix and real interest rates play a larger role
Despite political uncertainty, we expect USD safe haven flows to remain low
With the US presidential elections heating up, we ask what impact the nomination of President Clinton or President Trump may have on the economic landscape. Although the economic agendas of Hillary Clinton and Donald Trump are not specific enough to make reasonable quantifications, we have tried to compare the major issues in both agendas and what the political constellation (majority in House and/or Senate) would mean for the implementation of these policies. Our base case scenario focuses on a divided government, with a Democratic administration, but where the House and possibly the Senate having a Republican majority. This will likely result in recurrent episodes of political uncertainty given the rising polarisation, making transformations more difficult. However, in light of the common ground in some major issues, including infrastructure spending, we think that some progress will be made on these fronts.
Hillary likely to go to Washington Early November the US will hold presidential elections, as well as elections for the House of Representatives and for the Senate. Ahead of July’s National Conventions, Hillary Clinton has been comfortably leading most polls by a descent margin (4 ppts). In the past, the accuracy of election polls has been dependent on how close a call the results are. Overall, it therefore seems more likely that the Democratic candidate will win the presidential elections, but that the Republicans will continue to hold majorities in the House, since the Democrats are short 30 seats to becoming a majority, while Republicans are only short 5 seats. It is therefore unlikely that Democrats will control the House. The outcome of the Senate is more difficult to predict.
Insights.abnamro.nl/en
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US Watch - Clinton vs s Trump - 19 9 July 2016
The economic deb bate has fallen to the back kground in theese elections s… This tim me the US elecction process has h surprised many m by the annti-establishme ent bias. Presidential candidattes, including Mr. M Trump, hav ve banked on thhe anti-globalis sation and anti-migration sentim ment, inequality y and the desire e to defend nattional self-interrests. In fact, during the camp paign the econo omic agenda has h fallen to thee background and a instead communication has n notably drawn on fear, trying to attract voterrs that are scep ptical about globaliisation.
…while economic agendas rem main vague The ec conomic agend da of Donald Trump outlines few f concrete vviews, while Hillary ets 31 priorities Clinton n’s approach se s, but remains vague in manyy aspects. Both h candidates share to some extentt the views on blocking or rolling back free ttrade agreements and increas sing governme ent spending (s see table below w). But Mr Trum mp has stronge er convic ctions. He categ gorically rejects s trade deals and a has promissed to take a more m aggres ssive approach h against China a and Mexico to o balance tradee relationships. These policie es could lead to o isolationism as a countries wo ould likely retal iate. US exporrt growth would most likely shrrink. The larges st policy differe ences are relateed to migration n and care policy. Mrrs Clinton repre esents continuity with the Obaama administra ation on healthc these issues, while M Mr Trump plans s to reduce imm migration, incluuding building a wall with Mexico o. This type of immigration po olicies would tig ghten the labouur market as th he labour force contracts. c With the economy nearing full em mployment, laboour shortages could c have a large impact on wage es and eventua ally lead to less s employment. As for government sp pending, both candidates c are e likely to increaase governmen nt spending. Howev ver, Mr Trump significantly so o. Mrs Clinton prioritises p healtth care and soc cial security, which is mostly offse et by new reven nue. Meanwhile e, Mr Trump waants to bring co orporate d to 15% frrom 35%, while e Mrs Clinton proposes p to payy for new spen nding with taxes down income e tax increasess primarily on high h income tax x payers. The C Committee for a Respo onsible Federall Budget has es stimated that th he total budgettary impact from m Trumps propos sal would mean n an increase of o debt/GDP ra atio by 52 ppts by 2026, while e under Mrs Clinton ns plans debt/G GDP would increase by 12 pp pts. We think thhat Trump’s sig gnificant debt in ncrease is not vviable. It would d face resistanc ce even within the Republican n Party since US U debt/GDP w would become unsustainable e (120%).
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US Watch - Clinton vs s Trump - 19 9 July 2016
Econo omic agenda Clinton vs T rump Clinton Trum mp Y
Reject TPP T
Y
Major diffferences Clinton: deta ails unclear Trump: proposes declaring China a currenc cy manipulator and plans to im mpose duties on China imports
Renego otiate NAFTA
Y
Y
Similar views s, but details unnclear
Limit miigration
N
Y
Clinton: path h to citizenship
Increase e defence spending
N
Y
Trump: build d wall and pausee immigration work w visas Clinton: defe eating ISIS, holdding China acco ountable, standing up to Putin throughh partnerships Trump: Significant increasee in defence spe ending to make military the most powe werful Increase e infrastructure spending
Y
Y
Clinton: boos st spending US D 275 billion (1.5% of GDP) in next five years y and revivee Build America Bonds, financed thro ough business ttax reform Trump: supp ports substantiaal but unspecified spending
Increase e R&D spending
Y
N
Clinton: proposes increasinng funding for th he National Institutes of Health (NIH) annd National Scie ence Foundation Trump: has said s more conce cerned about forreign threats than about R&D R
Repeal affordable care e act
N
Y
Clinton: incre ease subsidies ACA and allow 55 and over to buy into medicare m Trump: repeal ACA
Decreasses corporate ta ax
N
Y
Clinton: no specific s tax propposal, limit earning stripping via interest deductions, d raise se ownership thrreshold to 50% to qualify for expatriatioon Trump: reduce corporate tax ax and pass-thro ough income to 15%, 10% % tax accumulate ted untaxed fore eign profits, tax multinatio onal foreign inco come
Increase e individual tax rates
Y
N
Clinton: 4% surtax income oover USD 5 mn me greater 30% minimum tax on taxpayyers with incom than USD 1 million x brackets, 0%, 10%, 20% and 25%. The Trump: 4 tax top applies for incomes > U SD 150,000 sin ngle and 300,000 dou uble filers.
Increase e minimum wag ges
Y
N
Clinton: raise e federal minim um wage to US SD 12 per hour Trump: no mention
Y= yes N= N no Source: Hillary Clinton and Donald Trump economic agenda as and press, ABN N AMRO Group E Economics
Repub blicans and D Democrat votters pessimis stic on the US S economy Although the US eco onomy is showing some impro ovement, US vo voters are sceptical about my in 2012 when Obama II ca me into office, it was in a n the future. If we look at the econom weake er condition tha an it is now. Ho owever, there is more uncertaainty now regarding the economic outlook.
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US Watch - Clinton vs s Trump - 19 9 July 2016
Economy b better off than n in previous elections % yoy (aveerage for each yea ar)
20
16.1
16 10.8
12
8.1
8 4
5.3 1.3
2.1
1.3
5.1
2.6 0.0
0 GDP P
consumerr spending
residential investment Obama 2012
non residential uneemployment investment
Now
Source: Thomsson Reuters Datas stream, ABN AMR RO Group Econom mics
Indeed d, the scepticissm about the ec conomic outloo ok is larger for R Republican supporters than fo or Democrat su upporters, but in both cases sentiment s is deeteriorating. Acc cording to survey ys conducted b by YouGov, since mid-2015 le ess than 10% oof Republican voters v think that the economy is g getting better. Democrat vote ers are more poositive about th he economy, but stilll only around 3 30% think it willl get better. Ho owever, they haave become more m negativ ve since one yyear ago, when around 50% thought the ecoonomy was gettting better. These differences exxplain the scale e of the transformation that is being propose ed for the economy. Indeed, the e Republican candidate c is loo oking for an ovverhaul of a bro oad range of issues s, including tax reforms, migra ation, trade and d national secuurity.
Possible scenarios s for governm ment set-up Given the political co onstellation in the House and in the Senaate, we think th hat a divided nment will be tthe most likely y outcome. We e sketch two m more likely scen narios and a govern low probability scena ario. In the firs st two scenario os, Hillary Clintton is Presiden nt and in the last Do onald Trump iss President. The variants in th he first and seccond scenarios s relate to the majoritty in the House e and in the Se enate.
mocrat Presid dent, Republlican majority y in House, Democratic majority in I. Dem Senatte We think that under this scenario (most likely), policy p transform mation will be difficult. Still olices that are ed by both pparties, including boosting the po e to some extent supporte infrastructure and de efence spendin ng will likely be e implemented.. We think tha at overall the policy proposals willl not have a major m impact on o economic aactivity. The economy e will continu ue to grow at moderate leve els and inflation will be moviing towards the 2% target. Under this scenario d debt/GDP will likely increase somewhat sin ce the econom my will not be able to o reach the deb bt targets simply by growing. II. Dem mocrat Presiident, Repub blican majoritty in House, Republican majority in
Senatte Under this scenario ((next to most likely), Republicans have thee majority in the e House and Senate e. The potentia al for policy transformation is even more lim mited. We see this scenario as mo ore fragile, with h higher politic cal risks. Unde er this scenarrio, for instanc ce increasing individual tax rates a and health care e related reform ms will be morre difficult to ac chieve, while migration policy will also be diffic cult to reconcile. Here therre would be more m political stalem mate and uncerrtainty. The eco onomy could be under pressuure until both parties p reach
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US Watch - Clinton vs s Trump - 19 9 July 2016
compromise. In this sscenario, econ nomic growth will w be weaker, but it is difficu ult to quantify extent given vague p policy details. III. Republican Pre esident, Repu ublican majorrity in House,, Republican majority in
Senatte This is s a low probabi lity scenario. We W think that th he proposals m made by Mr. Tru ump will be scaled d back once he e is in office. In general, as alrready mentioneed, after electio ons the positio on of the incom ming President is i much more nuanced. n Howeever, we think that the politica al risks resultin ng from uncerta ainty will be high under this sccenario. The US economy would be more isolatted and trade growth g would decline. Meanw while foreign dirrect investm ment would like ely be hurt. Re equiring undocu umented migraants to leave the US would likely raise r social tennsions as well. In this scenario o economic groowth would be consid derably weak a nd inflation pre essures could increase, as gro rowth potential falls. The proposed wou debt/G GDP ratio would d increase sign nificantly. The transformation t uld cause signific cant uncertaintty, which would d also weigh on n the economy..
How did d the US do ollar behave during d previo ous Presidenccies? Our research suggessts that econom mic developments and sentim ment in financia al market have a larger impact on the US dollar than politica al developmentts. The US do ollar has a er. The US dolllar is at times a cyclical curreency and at tim very sp pecific characte mes a safe haven currency. Thiss means that att some times cyclical drivers ddominate and set the trend es its safe haven characteristtics prevail. It is crucially for the US dollar, whiile at other time important what driverrs dominate in what environm ment. Below theere is an overv view of how the US S dollar behave ed during past presidencies.
US do ollar during p previous Pres sidencies Presideency Ford Carter Reagann I Reagann II G Bushh Clinton I Clinton II GW Bush I GW Bush II Obama I Obama II
Developments during d Presidency US dollar Above 4% growthh, good growth/inflation mix, increase in real yieelds (not positive thoughh) 2.0% Sharp growth sloowdown, negative growthh/inflation mix, higher annd positive real yields -13.0% Above 5% growthh, good growth/inflation mix, real yields high andd coming off 68.0% Slowing economiic growth, negative grow wth/inflation mix, no channge in real yields (high levels) l -39.0% Growth pick-up, good g growth/inflation mix, sharp drop in real yieelds (to zero) -0.2% Some growth picck-up to 4.5%, weaker growth/inflation mix, highher real yields -4.2% Growth slowdownn, EM crisis, weaker groowth/inflation mix, higheer real yields 21.4% Some growth picck-up, higher growth/inflaation mix, sharp drop in real yields to negative -28.7% Sharp drop in groowth, GFC, negative growth/inflation mix, positivve real yields again 0.5% Sharp improvemeent in growth and growthh/inflation mix, eurozonee crisis, sharp drop in reeal yields again to -1.5% % -1.5% Improvement in growth g and growth/inflatioon mix, EM & Commo crisis, c improvement in reeal yields 16.4%
GFC – global g financial criisis Source: ABN AMRO Grouup Economics, Bloomberg
The most positive co ombination for the t US dollar would w be abovee trend econom mic growth, improv ving growth mo omentum, posittive growth infla ation mix (meaaning growth is above inflatio on) and rising o or high real yields (official inte erest rate - inflaation). This wou uld be a cyclica al driven US do ollar. Only the Presidency P of Reagan R I show wed this unique supportive combin nation, while R Reagan II was the t opposite for the US dollarr. What is more e, when Reaga an became pressident in 1981 he was able to o increase the A America’s self-esteem m/moral. As a rresult, the US was w seen a stro ong global pow wer and this als so gave a strong support to the e US dollar. Offten the cyclical drivers are noot all pointing in n the same on, so their imp pact could be more m neutral. The T US dollar ccould also be in n high directio deman nd as a safe ha aven during a major m crisis. Th he US dollar ralllied sharply du uring Clinton II beca ause of the varrious crises (As sia FX, LTCM, Russia, LatAm m) and Obama II because
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US Watch - Clinton vs s Trump - 19 9 July 2016
of EM FX crisis and ssharp drop in commodity c prices. In both Preesidencies therre have also been supportive s facto ors from the cy yclical/fundame ental side.
How will w the US do ollar behave going g forward? Our forecast horizon does not cove er the four yearrs of the upcom ming Presidenc cy. Our forecasts cover up to o the end of 2017. Our base scenario s suggeests that US ec conomic growth h will remain be elow trend, imp proving only slig ghtly in 2017. The growth/infflation mix is not supportive with in nflation expecte ed to be above e growth. Meannwhile, real inte erest rates are forrecast to remaiin negative (les ss negative tho ough). Overall, this is not a su upportive combin nation for the U US dollar. If this s trend were to o continue, it iss unlikely that th he US dollar will rally due to cycliccal drivers.
Not a US d dollar supporrtive combina ation Our forecastss
Upcoming Prresidency Economy Fiscal balancce as % of GDP Current acco ount balance as % of GDP Monetary pollicy Inflation y-o-yy Growth/inflatiion Real interest rates (official rate e - inflation)
01/0 01/2017 31/12/201 17 Change 0.1 1.7 1.8 -2.4 -2 2.4 0.0 -2.6 -2 2.7 -0.1 0.8 0.5 1.3 0.5 1.4 1.9 1.2 0 0.9 -0.3 -0.9 -0 0.7 0.3
Source: ABN A AMRO Group Econ nomics
The qu uestion remain s if the US dollar will rally bec cause of safe hhaven demand d during a major crisis. In the re ecent years we have experien nced EM FX crrisis, sharp com mmodity selld UK vote to lea ave the EU. Go oing forward we w expect unce rtain financial markets, m but off and not a new n major crisiis in the making g. As a result, safe haven flow ws towards the e US dollar will like ely be low. The ese developme ents are in a co ontext of a longg-term US dolla ar trend that has turned negative. However, if there were to eru upt another maajor crisis, the US U dollar could rally r substantia ally on safe hav ven demand. Iff Trump were too become Pres sident (low probab bility in our view w), the US dollar will probably y weaken over time. This is because b we expectt that his policie es will be inward looking and will weaken thhe fundamentals of the US economy.
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US Watch - Clinton vs s Trump - 19 9 July 2016
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