White House race expected to chill growth

Posted on July 31, 2016

©AFP

Uncertainty over the direction of economic policy in a hard fought race for the White House is expected to chill US economic activity this year, as companies put projects on hold despite record-low borrowing costs.  

More than two-thirds of economists surveyed by the Financial Times said the contest between Donald Trump and Hillary Clinton would act as a headwind to growth in the US, blunting large scale investments until businesses have a better view of the regulatory, tax and government spending climate.

    Several economists told the FT they had included the election — now less than 100 days away — in their models and that it would weigh on growth in the second half of the year, which is nonetheless expected to surpass an anaemic expansion recorded in the first six months of 2016. Figures on Friday showed second-quarter growth fell far short of Wall Street expectations, rising 1.2 per cent as business spending weakened.

    “There is more uncertainty around US economic policy now than there has been for quite a while,” said Lewis Alexander, economist with Nomura. “You look at what Donald Trump proposes in particular and it raises all sorts of questions, the threats around trade, the threat of the costs to move jobs overseas. It raises the degree of uncertainty . . . around investment.”

    “The option value of waiting to find out if you are in a Trump world or Clinton world is very high for a lot of industries,” added Krishna Guha, the vice-chairman of Evercore ISI. “This is particularly the case when you’re dealing with candidates who have very different policy platforms and would be quite different in office.”

    The International Monetary Fund has predicted US growth will slow this year to roughly 2.2 per cent, a slight deterioration from 2015 as productivity slips and the dollar’s strength inhibits the competitiveness of US exports. 

    Roughly 70 per cent of the economists polled between July 28-29 said a Clinton victory in November would be positive for growth in the US, compared with just under 14 per cent for Trump. The remainder who responded to the question said neither the Democratic nor Republican nominee had yet offered compelling plans that would accelerate activity.

    Mrs Clinton has emphasised a $275bn infrastructure spending plan and a higher minimum wage, funding some of her proposals with increased taxes on high-income earners. Mr Trump, by contrast, has promised to slash tax rates, increase spending on the military and withdraw from or renegotiate global trade deals.

    The option value of waiting to find out if you are in a Trump world or Clinton world is very high for a lot of industries

    – Krishna Guha, Evercore ISI

    “Things [Donald Trump] has said have really been counter to what would be deemed good economic policy,” said Kathy Bostjancic, an economist with Oxford Economics. “Hillary Clinton looks safer to businesses and investors. It doesn’t mean an increase in the minimum wage is something the business community would fully embrace . . . because it could hit profit margins, but it pales into comparison of choking off global trade flows with enormous tariffs or creating a global trade war.”

    The 56 economists said they broadly thought US interest rates would remain anchored as lacklustre growth both home and abroad deterred the Federal Reserve from tightening.

    Seventy-three per cent of those polled said they expected the Fed to lift rates once this year to 0.625 per cent, with two-thirds projecting the move in December — one year after the US central bank began its slow path towards normalisation.

    While the results showed a clustering of forecasts for Fed policy for the remainder of 2016, responses were slightly more diffuse for 2017. Thirty-six per cent of economists said the Fed would lift rates twice — to 1.125 per cent — while a further 30 per cent said the central bank would raise rates between three and five times next year. Not all economists responded to each of the FT’s questions.

    Gideon Rachman

    Republicans, Democrats and the disunited states

    Trump & Clinton composite

    The two parties are trying to rally core supporters rather than win over the undecided

    “The committee faces a weak external environment that is capable of generating plenty of shocks,” Mr Guha said, pointing to the Brexit vote in the UK. “[The Fed] has had to cope with a troubling uneven flow of US domestic data. While it was generally positive there were always some holes in the data.”

    Economists and investors will scrutinise figures due later this week on the health of the US labour market, which rebounded in June from a sharp and unexpected slowdown earlier this year. While disappointing gross domestic product growth has proven a scourge to policymakers, economists broadly said the US was unlikely to fall into recession over the next 12 months. The poll put the odds of recession in the US at 20 per cent, unchanged from a survey conducted by the FT in May.

    eric.platt@ft.com

    Twitter: @ericgplatt

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