Economists say Donald Trump unlikely to follow through on US trade promises

President-elect Donald Trump speaks to supporters during a rally in Fayetteville, N.C., Tuesday, Dec. 6, 2016. (AP Photo/Gerry Broome).
President-elect Donald Trump speaks to supporters during a rally in Fayetteville, N.C., Tuesday, Dec. 6, 2016. (AP Photo/Gerry Broome). AP Photo/Gerry Broome

Donald Trump’s shock White House win has not altered U.S. economic forecasts much, with economists in a Reuters poll expecting three rate rises by the end of next year based on little follow-through on most of the soon-to-be president’s protectionist campaign promises.

The outlook for growth and inflation in a Reuters poll also remains muted despite a Wall Street surge, underscoring a wide gap between how the economy is expected to perform by analysts and what ebullient financial markets are currently pricing in.

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The dollar and 10-year Treasury yields have surged in the month since Trump’s victory, on trader expectations of an inflationary boost from planned tax cuts and infrastructure spending, especially with the economy close to full employment.

“The (Federal Reserve) is within striking distance of its inflation and full employment mandate,” said Dan Silver, economist at JPMorgan, who expects an imminent hike followed by two more in 2017, adding: “The risks of a faster normalization of policy, however, have increased.”

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“If the U.S. administration enacts a substantial fiscal stimulus while avoiding the more protectionist measures that sometimes have been discussed, the increase in growth and inflation might push the Fed to consider more than two hikes in 2017.”

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Several Fed officials have said recently a more expansive fiscal policy would reinforce the case for quicker rate hikes, cautioning that the Trump administration’s economic plans should not be cast as if the economy is in crisis.

The Reuters poll this week of over 120 economists, including all the 23 primary dealers — large banks that do business directly with the Fed — showed they unanimously expect the Fed to raise rates to 0.50-0.75 percent at its Dec. 13-14 meeting.

Fed funds futures are currently pricing in a 95 percent probability of a move next week, converging with the consensus in Reuters polls of a December hike that has held for half a year.

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A follow-up increase is forecast for the second quarter of 2017, and then again in the final three months of the year, taking the Fed funds rate to a range of 1.00-1.25 percent, similar to Fed rate setters’ forecasts.

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This steady view on rates comes despite a 2 percent rally in the dollar since the election to a near 14-year high, which has tightened financial conditions along with a 50 basis point rise in 10-year Treasury yields.

A little over a third of economists said there would be a significant or very significant risk to growth from a strong dollar next year.


Little more than threats?

For most of his campaign, Trump vowed to recast U.S. trade and immigration policy along protectionist lines by imposing steep tariffs on Chinese imports, moving manufacturing jobs back to the country, while also promising hefty tax cuts.

But analysts aren’t buying that he will actually put up significant barriers to trade.

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About two-thirds of the respondents who answered an extra question said it is unlikely Trump would follow through on most of the protectionist policies he spoke of during the campaign, which may help explain why equity market analysts in a separate Reuters poll this week are so optimistic.

“Our baseline now assumes President-elect Donald Trump delivers a fiscal boost, but it does not come without a good dose of uncertainty surrounding his trade policies,” wrote Ellen Zentner of Morgan Stanley in a recent note.

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“We are assuming that trade protectionism goes little further than threats, but it is enough to dampen business investment and tighten financial conditions, providing a prolonged current of uncertainty in 2017.”

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The expected burst of government spending has, however, not brightened prospects for growth, which is likely to meander between an annualized pace of 2.1 to 2.3 percent in each quarter next year, after notching 2.2 percent in the current quarter.

Analysts such as those at FT Advisors, for example, who have historically held some of the most bullish views, expect growth to peak at only 3.0 percent in the second quarter.

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The highest forecast across the poll horizon was 3.8 percent, well short of the peak hit in the current cycle post the financial crisis of 5.6 percent in Oct-Dec 2009.

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Jim O’Sullivan of High Frequency Economics, the most accurate U.S. forecaster in Reuters polls last year, predicts the best pace of growth over the next year to be lower, at just 2.7 percent.

The Fed’s preferred gauge of inflation, the Core PCE Price Index, is also expected to lag the central bank’s 2 percent target through all of next year, averaging 1.8 percent in 2017, down from 1.9 percent in last month’s poll.

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