Donald Trump's protectionist policies top risk to US economy in 2017

Donald Trump (Photo Courtesy)

The top risk to US growth would come if President-elect Donald Trump keeps his protectionist promises, according to a Reuters poll that shows economists have not joined in the market exuberance since the shock November vote. For most of his campaign and after the election, Trump vowed to make sweeping changes to US trade and immigration policy, threatened to impose steep tariffs on Chinese imports and proposed hefty tax cuts.

While financial markets have retreated in the past week and hopes of a sudden spurt in inflation have faded, US 10-year Treasury yields are still up more than 25 per cent since Election Day, and stocks have hit record highs. Still, more than two-thirds of the 70 respondents to the question in the Reuters survey taken over the past week said Trump’s protectionist policies were the biggest threat to the world’s largest economy this year.

“There is no question that near the top of the list of downside risks is the potential for more follow-through on the anti-free trade rhetoric,” said Jim O’Sullivan of High Frequency Economics. “I am kind of assuming that the (incoming) administration will be practical on this,” said O’Sullivan, the top forecaster of U.S. economic data in Reuters polls for 2016, the second year in a row he achieved that distinction.

The strong dollar, which hit a 14-year high early this month and is up close to 6 percent since Trump was elected, poses an additional near-term risk. Worries around the globe over Trump’s confrontational style and a strengthening dollar are likely to be key themes among political and business leaders at the World Economic Forum in Davos, Switzerland, this week. Sweeping tax cuts for businesses and individuals, and the prospect of some infrastructure spending, have also not brightened prospects for US economic growth, which Trump has said he aimed to boost to 3.5 percent.

More than 80 per cent of respondents said “no” when asked if now was the right time for such aggressive tax cuts, with the economy close to full employment. The unemployment rate was 4.7 percent in December. The latest poll estimated growth slowed to 2.2 percent in the fourth quarter from 3.5 percent in the third quarter. Through 2017, economists predicted the economy would expand at an annual rate of 2.1 percent to 2.5 percent each quarter, just 0.1 percentage point higher than the previous estimate. The full-year median was 2.3 percent. The most optimistic growth forecast for any point in 2017 was 4.1 percent, far short of the post-financial crisis peak of 5.6 percent hit in the fourth quarter of 2009.

“Obviously people have been assuming the growth-sapping parts (protectionist measures) are not followed through, but they may have run ahead of themselves in predicting how much stimulus will be enacted and how much growth will be boosted,” said O’Sullivan, who was also the most optimistic on growth among the top forecasters. A little fewer than one-third of the respondents, including three of the top 10 US economy forecasters in Reuters polls last year, upgraded their 2017 growth outlooks in the latest poll. —Reuters

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