While a Harris victory would mean “more of the same”, AMP’s Shane Oliver believes a Trump victory could lead to a weakening in US institutions, democracy and global alliances, while a narrow Trump loss could even see political unrest.
“A Harris victory would mean a continuation of the status quo,” Oliver said. “Trump would be far from the status quo though.”
Noting that while Trump’s policies in support of tax cuts and deregulation could help boost the supply side of the US economy, on balance his policies – with higher tariffs resulting
in higher import prices, lower labour force growth and potential moves to weaken the Fed’s credibility – risk adding to inflation.
“There is also a risk that an even higher budget deficit, with no sign of improvement when US public debt is already very high (at 125 per cent of GDP), will result in a market backlash and higher bond yields. Furthermore, his brinkmanship and erratic policy making style is likely to add to policy uncertainty which could hamper business investment,” the chief economist said.
According to Oliver, how the economy reacts will largely be based on sequencing.
“If he runs with tax cuts and deregulation first it could boost shares and the economy in say 2025, but if he runs first with sharp tariff hikes and immigration cuts it could be taken more negatively early on,” Oliver cautioned.
But the most significant disruption anticipated from a Trump presidency relates to trade.
While Kamala Harris is expected to uphold current policies - retaining Trump’s initial tariffs and introducing additional subsidies for green manufacturing in the US - Trump threatens to escalate protectionism dramatically, with potential average tariff increases from 2.5 per cent to 17 per cent. His focus on targeting countries with trade surpluses could lead to heightened market disruptions and accelerate the deglobalisation process.
For Australia, the biggest issues from a Trump presidency could come from heightened global trade tensions, Oliver said, with an OECD study recently showing a potential 1.2 per cent GDP reduction if trade wars escalate.
Namely, Oliver noted that while Australia’s exports to the US account for only 4 per cent of its total exports, as an open economy with high trade exposure to China, Australia would be vulnerable to an intensification of global trade wars.
“Resources shares would be most at risk and the $A would likely fall,” Oliver said.
“Of course, similar fears existed during the last Trump trade war, and it didn’t turn out so bad. And there would still be demand for iron ore somewhere – it just may switch from China to the US and elsewhere,” he added.
Share markets should be ‘okay’
As for share market implication, Oliver said that despite the heightened policy uncertainty the election year is “normally okay for US shares”.
“Since 1927, the election year, or year 4 in the presidential cycle, has had an average return of 12 per cent, which is also the average across all years,” the economist said. “So far, they have returned 22 per cent. It’s usually years 1 and 2 which are below average”.
In the coming weeks, however, the economist believes heightened volatility may arise as investors shift their attention to the potential risks of a new trade war, a decline in the US labour force, and growing uncertainty surrounding a Trump administration.
Following Trump’s 2016 victory, shares surged 38 per cent by January 2018 due to his focus on business-friendly tax cuts and deregulation, but fell in 2018 as attention turned to trade wars.
“So, if Trump wins, the market reaction in the first six-12 months will be heavily influenced by the sequencing of tariff hikes versus tax cuts,” Oliver predicted.
Moreover, the economist flagged that historically, US shares have performed better under Democrat presidents, averaging a 14.4 per cent annual return since 1927, compared to 10 per cent under Republicans.
However, according to Oliver, the best results have come when a Democrat is in the presidency with Republican control of Congress, while a complete Republican sweep has led to the worst average returns.
