President-elect Donald Trump could be either the best or the worst thing to happen to the global economy in 2017 and 2018, and no one is really sure which way things will swing, according to research from Oxford Economics.
The research house’s annual Global Risk Survey examined what investors see as being both the biggest risks to the world economy over the next 12 months and the biggest potential upsides.
In both cases, the top answer was directly linked to Trump’s presidency.
Trump has repeatedly said he plans to impose punitive taxes on companies that move substantial chunks of their business outside the US, saying in a series of tweets over the weekend:
"The U.S. is going to substantially reduce taxes and regulations on businesses, but any business that leaves our country for another country, fires its employees, builds a new factory or plant in the other country, and then thinks it will sell its product back into the U.S without retribution or consequence, is WRONG! There will be a tax on our soon to be strong border of 35% for these companies wanting to sell their product, cars, A.C. units etc, back across the border."
Oxford's analysis of Trump's likely protectionism makes worrying reading for those concerned about the sluggish growth the world has witnessed in recent years, outlining its so-called "adverse" scenario - basically the worst thing that could happen (emphasis ours):
In our adverse Trump scenario, we assume that, after a brief honeymoon period, the new president reverts to a highly protectionist and isolationist stance, fails to implement a significant fiscal stimulus package and proceeds with immigration curbs and deportations that result in substantial labour force declines. Against a backdrop of heightened uncertainty, the US and global economies are badly shaken.
On trade, President Trump proceeds with his proposed 35% and 45% trade tariffs on Mexico and China in the second half of 2017 and maintains them throughout his presidency; further tariffs are also imposed on South Korea and Taiwan. These trading partners retaliate by matching the tariffs imposed by the US.
A potential trade war comfortably beats a downturn in the Chinese economy, and geopolitical issues in the Middle and Far East as the biggest fear, as the chart below shows:
However, Trump is also seen as a potential boon to the economy, with his seemingly expansionary fiscal policy set to bump up US growth, in turn helping the global economy. Here's more from Oxford Economics, explaining their positive scenario for Trump's presidency (emphasis ours):
"In the upside scenario, the result of congressional negotiations is a significantly more expansionary fiscal package than assumed in the baseline. The package is larger, with $1 trillion worth of personal income and corporate tax cuts and a $250 billion public infrastructure investment plan. It also benefits lower-income households, with a higher propensity to spend additional income, to a greater extent than the package assumed in the baseline.
"As a result, the US economy grows more quickly than in the baseline. It benefits not only from the initial impact from lower taxes and increased infrastructure spending, but also increased confidence in Trump and his team's ability to govern."
"The global economy grows more quickly as stronger US growth spills over, fears over increased protectionism dissipate and confidence improves."
And here's the chart, comparing this scenario to other upside risks: