What could be the global economic and market impact of Trump’s policies? We know the ones proposed, and their estimated impact on US fiscal deficit, but will the overall effect be as simple as one might think? Could there be policy offsets?

The US economy has been resilient, despite massive policy rate hikes by the Fed, and data has surprised to the upside more recently. Previous year GDP numbers were also revised upward. However, federal government fiscal deficit is very high at 6.4 per cent of GDP and is expected to be 7 per cent even after 10 years.

Now, Trump’s proposed plans are estimated to increase the deficit by $7.8 trillion in the next 10 years (as per the Committee for a Responsible Federal Budget), i.e. 10 per cent instead of 7 per cent. The major contributor here is the extension of the Tax Cuts and Jobs Act from 2017, when Trump was the President, which made provisions for lower taxation of individual income, estate & gift tax and deductions for certain investments by companies.

If extended beyond 2025, this alone is expected to add $5.3 trillion to the deficit over the next 10 years, while other plans together add another $5 trillion. There are some partially offsetting measures, identified to increase savings, and there could be cuts to government expenditure elsewhere. So, there could be offsets but we have to wait for the details.

Changing context

Further, the economic context is quite different today than it was when Trump was President during 2017-20. US growth has been resilient but it cannot stay insulated from the effect of rates which have stayed high for quite some time now, despite recent cuts by the Fed. Credit card and auto loan delinquencies have been rising.

Lower immigration and corporate refinancing at higher cost could be drags. Where the recent higher productivity settles is also to be seen. Europe too is faced with higher inflation, tighter monetary policy and higher fiscal deficit than before the pandemic but growth is much weaker. The question has already shifted to whether the ECB should cut faster.

China factor

China continues to deal with slowdown in the property sector and consumer demand. Monetary policy was eased and now fiscal is in the spotlight but announcements so far have fallen short of expectations and have not exactly targeted the core problems. So, world-ex-US is weaker (vs. 2016-2017) and the US too should start feeling the impact of higher rates.

More immigration control and import tariffs could further hit growth. Can US fiscal policy ignore the potential ramifications on interest rates, growth and the US Dollar? It might need balancing measures to mitigate the impact. How monetary policy responds to the fiscal trajectory will also be important. In India, cyclically, we see softness — September quarter corporate earnings growth moderated and so has corporate tax collection growth, bank credit growth has eased, private capex cycle hasn’t picked up materially, recent fiscal impulse has been rather muted (given elections, rains, etc.) and private consumption growth has been moderate for a while. However, underlying macro strengths like higher services trade surplus, moderate core inflation and fiscal consolidation remain.

The direct impact on India, when Trump was President last time, was also quite moderate. It was mainly from refusal to exempt India from higher tariffs on steel and aluminum imports, and withdrawing India from the Generalized System of Preferences.

This time, if US increases oil production, it could be good for oil prices, and the China+1 story could bring tailwinds but will also depend on our policies and capabilities. We need to brace for uncertainty but global macroeconomic data will remain crucial.

The writer is Senior Vice President & Economist – Fixed Income, Bandhan AMC

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