Donald Trump’s return to the White House marks a historic win. He is now only the second president, after Grover Cleveland, to serve non-consecutive terms.
Trump’s victory signals a likely shift in US policy, as his administration eyes tax cuts, immigration restrictions, and sweeping trade tariffs.
While equity markets, the dollar, and Treasury yields have shown optimism leading up to his win, his agenda’s economic and market impacts will hinge on the swift approval of his policies in Congress.
With Trump’s second term on the horizon, investors are keenly observing how far he will go with his proposed economic interventions.
It should be noted that while Trump plans a revisit of his signature policies, their impact may differ this time around.
The economic landscape has shifted since the COVID-19 pandemic, which triggered a surge in inflation that may not be fully under control.
There is also a question of how far will he go to deliver on his poll promises.
However, if his administration replicates his election rhetoric, the policies could carry significant economic risks, particularly for the national debt, with far-reaching implications for growth and market stability.
Addressing debt ceiling tops immediate priorities
The national debt has risen significantly since Trump took office in January 2017, with both parties contributing to heavy overspending.
Upon taking office, Trump’s first major challenge will be handling the US federal debt limit, set to reset on January 2.
Treasury Secretary Janet Yellen plans to deploy “extraordinary measures” to keep the government functioning, but Trump’s administration will face a tight deadline to negotiate budget adjustments and raise the debt ceiling.
With Republican control of both the Senate and House appearing likely, analysts expect a smoother path for his fiscal plans.
However, if Democrats secure the House, Trump may face challenges to his tax-cutting agenda and broader policies.
Domestic agenda: tax cuts and tighter immigration laws
Trump’s primary focus is likely to be on domestic policy, echoing the “America First” platform that characterized his first term.
His main goals include extending the 2017 Tax Cuts and Jobs Act (set to expire in 2025), reducing corporate tax rates, and exempting tips from taxation.
A Republican majority in Congress would simplify passing these measures, but resistance from a Democratic-led House could lead to delays and modifications, especially regarding corporate tax cuts.
Immigration is also expected to be a top priority. Trump’s plans emphasize tightening immigration laws, cracking down on illegal immigration, and limiting legal migration.
However, reduced immigration and extensive tariffs could challenge the US economy in the medium to long term, analysts at ING Think said.
The US labor force growth has increasingly relied on immigrant workers, who now make up 19.5% of the workforce.
If immigration is curtailed, sectors such as agriculture may face severe labor shortages, driving up wages and fueling inflation.
While aimed at boosting job opportunities for American citizens, these policies could have long-term impacts on the labor market, particularly in industries reliant on immigrant labor, such as agriculture.
Phase two: trade tariffs on China and other global imports
Once domestic issues are underway, Trump is anticipated to focus on trade policy.
His administration plans to impose aggressive tariffs, with a potential 60% tariff on Chinese goods and 10-20% tariffs on imports from other countries.
This protectionist approach aims to encourage American production and reduce reliance on imports.
However, the phased introduction of these tariffs, expected by late 2025 or early 2026, reflects the risk of economic disruption, ING Think said.
China would likely face tariffs first, followed by other nations in a staggered rollout.
While US manufacturers might benefit from reduced foreign competition, tariffs raise the risk of price increases for consumers.
Historical data shows that tariffs on products like washing machines led to significant consumer price hikes.
If tariffs are extended broadly, inflation could rise, and consumer spending could decline, potentially impacting the broader economy.
Additionally, retaliatory tariffs from affected countries could harm US exporters, complicating Trump’s goal of creating jobs through protectionist measures.
Near-term growth but long-term challenges
Trump’s pro-business policies, particularly tax cuts and reduced regulation, are expected to fuel optimism among investors and high-income households.
With less tax pressure, high-income earners are likely to maintain strong consumer spending, which has been a key growth driver.
Companies, too, may start investing again as regulatory uncertainty clears, potentially boosting capital expenditures.
However, tariffs on imports will likely raise prices for consumers and add costs for US manufacturers dependent on foreign components.
Trump’s fiscal policies also threaten to increase the national debt significantly.
The bipartisan Committee for a Responsible Federal Budget estimates that his proposals could add $7.75 trillion to the debt over the next decade.
This fiscal expansion could pressure the Federal Reserve to raise interest rates, potentially offsetting the growth benefits of his tax cuts and increasing borrowing costs for businesses and consumers.
A report by Barron’s notes,
Those close to Trump often point to the 2016-era adage that he should be taken “seriously, but not literally.”
He wants a strong economy and a favorable legacy, they say, and would adjust course if, for instance, an aggressive tariff agenda appeared to threaten American prosperity, the report says citing people close to him.
Overall, analysts believe that while the near-term growth outlook appears positive, the more aggressive Trump becomes with fiscal and immigration policies, the greater the long-term challenges for the US economy.
The post US Election 2024: How Trump’s tax cuts, immigration rules, and tariffs could shape the American economy appeared first on Invezz