Global Economics Analyst:Global Economic Implications of the Trump Agenda(Fawcett/Stehn)

Following Donald Trump’s victory in the US presidential election, the focus nowturns to the potential economic implications of his proposed policies. TheNovember 12 US Economics Analyst used the Fed staff’s FRB/US model toanalyse the consequences for the US economy. In today’s companion piece, weassess the potential global economic spillovers from the Trump agenda using ourglobal macro model.

    Following the US simulations, we analyse four of Mr. Trump’s policy proposals,including fiscal stimulus, trade tariffs, restrictive immigration policies and ahawkish tilt in Fed policy. We first analyse the policies individually and thencombine them into possible packages, including our own assumed policyoutcomes.

    Fiscal stimulus has positive global spillovers, as stronger US demand boostsimports for foreign goods and services. Dollar strength reinforces the positivespillovers to DM economies with floating exchange rates, but limits the gains inEM economies. The spillovers to China, for example, depend on the extent towhich the Renminbi appreciates with the dollar and the net effects are lesspositive for EM economies that rely heavily on dollar-denominated debt.

    The other components of Mr. Trump’s agenda (trade policies, immigration andFed) have negative global spillovers as US inflation is higher and US growthslows. The growth drag is generally muted for DM economies with floatingexchange rates but significantly negative for some EM economies (includingChina).

    Taken together, our analysis suggests that Mr. Trump’s policies might act as amodest drag on global growth. DM growth receives a brief boost from the fiscalstimulus but then weakens and spillovers into EM economies are negativethroughout. Moreover, the risks around this base case appear asymmetric. Alarger fiscal package could boost global growth moderately more in the nearterm, but a more adverse policy mix would likely act as a significant drag onworld growth in subsequent years.