Although much is unknown about the new US president’s economic policy, our chief economist says the central theme is a shift from monetary easing (via Fed stimulus) to fiscal easing (via tax cuts and spending), which could have a major impact on Europe.
Trump is expected to shift economic policy toward fiscal easing by cutting taxes, deregulating banks and increasing trade barriers and immigration hurdles
His policies should prompt the Fed to hike rates more than the markets currently anticipate
Equities may benefit from Trump in the near term, not least because European stocks are already slightly cheap
3 ways Trump’s economic policy could affect Europe
When Donald Trump assumes office, he is expected to focus US economic policy on fiscal easing, primarily by cutting taxes for corporations and the wealthy, deregulating banks and other industries, and increasing trade barriers and immigration hurdles. Given that the US has the world’s largest economy, his “Trumponomics” will likely
have a range of significant effects on Europe.
Here are three of the most pronounced:
1. Direct economic influence
Fiscal easing is likely to have a slightly positive near-term impact on global growth and, consequently, on European growth. Over the longer term, however, the United States’ negative view of globalization and immigration should dampen trend growth.
2. Monetary policy spillover
In response to Trump’s focus on fiscal easing – and the already observed improvement in cyclical data – we expect the US Federal Reserve to hike rates by more than the markets currently anticipate. The combination
of easier fiscal policy and tighter monetary policy should result in a stronger US dollar versus the euro. The euro area will therefore get additional growth stimulus, and the ECB could potentially cease its quantitative easing policy sooner than expected.
3. Political effects
Trump’s surprising victory could provide a tailwind for populist, anti-European and anti-establishment parties and movements in Italy, France and Germany. Consequently, political uncertainty is likely to increase. Europe’s economic landscape could also shift toward policies that are unfriendly toward the free movement of labour, services and capital, which would hurt growth in the long term.
Market implications of Trump’s presidency
The euro is likely to weaken in the near term, but because current valuations are already quite low, we view USD/euro parity as an extreme scenario. As the ECB is also set to become less expansionary, at least marginally, the euro may very well be in a stronger position in a year’s time. The euro bond markets are likely to see their prices move lower and yields higher as a consequence of several factors, including reflationary policies in the US; slightly less accommodative monetary policy during 2017 in the US and, in all likelihood, the euro area as well; and bond valuations that are still expensive.
Equities may benefit from Trump’s presidency in the near term, not least because European stocks are already slightly cheap. However, the expected political uncertainty, the potential change in ECB policy and the clouds hovering over the long-term US growth outlook are likely to dampen the upside in the medium term. As such, we expect today’s rather lowgrowth environment to linger.
Stefan Hofrichter is AllianzGI’s Global Economist and Head of Macro Research since 2011. Stefan and his team are responsible for advising clients, in-house professionals and sales colleagues on global economic trends and asset allocation.
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