10

The International Barriers to Trump’s Economic Plan

DUBAI – US President-elect Donald Trump should have a relatively clear road ahead at home for the implementation of his economic program: with Republicans holding majorities in both houses of Congress, he seems likely to benefit from a break in the political gridlock that has paralyzed the body for the last six years. But the United States economy does not exist in a vacuum. If Trump is to succeed in delivering the high growth and genuine financial stability that he has promised, he will need some help from abroad.

Trump has established infrastructure investment, tax reform, and deregulation as central components of his strategy to boost the US economy’s actual and potential growth. Confident that his plan can unfold as intended, he has set ambitious targets, including GDP growth approaching 4% per year.

For now, investors seem to be pretty much sold. Under the assumption that the incoming Trump administration will ultimately refrain from triggering a trade war, they moved fast to price in optimistic prospects for higher real growth, higher inflation, and more money entering the financial markets. This has enabled the US Federal Reserve to begin to normalize its monetary-policy stance; in addition to a 25-basis-point interest-rate hike on December 14, the Fed has indicated that the pace of such hikes will accelerate in 2017.

As a result, markets seem convinced that the US will gradually exit its prolonged period of excessive reliance on unconventional monetary policy, replacing it with a mix of looser fiscal policy and pro-growth structural reforms – an approach much like that pursued by former US President Ronald Reagan. President Barack Obama sought to pursue a similar approach, but was frustrated by a highly polarized Congress.