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Donald Trump's economic package unlikely to match rhetoric

Jessica Irvine

Sharemarkets will likely shrug off Donald Trump's decision to withdraw from the Trans-Pacific Partnership trade deal. On best estimates, the deal would have delivered only minor benefits for the US and Australian economies.

What really matters is what becomes of the rest of his ambitious economic agenda.

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President Trump signs three executive orders

President Donald Trump has signed memorandums to pull the US out of the proposed TPP, freezing most federal government hiring and reinstating a ban on providing federal money to international groups that perform abortions.

The Aussie bourse surged more than 10 per cent after the US election, spurred by Trump's election night promise of a huge infrastructure spending spree, along with massive tax cuts.

If realised, these stimulatory policies would mean stronger US growth, higher interest rates and a stronger US dollar.

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For Australia, that would mean a lower Australian dollar. Aussie interest rates would follow US rates higher, as expensive imports and the expansionary impact on exporters and import-competing firms stoked inflation pressure.

Building all these new roads, railways, bridges and tunnels in the US would also inevitably require more industrial inputs, for which Australian commodities could help provide the raw base.

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Win. Win.

Anticipating nothing?

But it may be that the anticipation of a Trump stimulus package proves more arousing than the act itself.

Markets have already cooled as a new tone of scepticism prevails.

The United States is not, after all, a totalitarian state. Trump will face fierce opposition to much of his program from within his own Republican ranks, who generally favour smaller government and freer markets.

While it did not feature in this election, the US debt ceiling debate is set to return in 2017, when strict spending caps for defence and domestic spending return.

Getting Republicans to vote for higher infrastructure and defence spending at the same time as voting in another increase to the $20 trillion debt ceiling may prove a big ask.

Stepping away from the TPP may have a minor impact, but erecting new trade barriers would do more harm than good to the US economy.

And the details of Trump's trillion-dollar infrastructure package remain sketchy, at best.

Trump's website refers to a National Association of Manufacturers estimate of a $US1 trillion infrastructure gap – over the coming decade.

If evenly spread over 10 years, a trillion-dollar spend would provide a 0.5 per cent annual boost to American GDP, currently $18.7 trillion.

Nothing to sniff at.

Follow through

But will Trump deliver? Already there is talk of a smaller package, more in the order of half a trillion than a trillion dollars. And much of it will be delivered through incentives to the private sector. Start counting into your tally a few projects that would have happened anyway, and the promised fiscal stimulus soon turns flaccid.

If it does, then Trump's 4 per cent target for economic growth is also likely to disappoint. On estimates already revised to take into account Trump's win, the International Monetary Fund's best guess is that the American economy will grow by 2.3 per cent this year and 2.5 per cent the next.

The latest US national accounts, which will be updated on Friday, showed economic growth accelerating to 3.5 per cent. But don't be fooled. When Americans talk about annual growth, they usually mean "annualised" growth – that is, take the last quarter's growth rate and assume it lasted for an entire year.

Using this annualised measure, it may indeed be possible for Trump to claim victory on his 4 per cent claim – all he needs is one strong quarter of growth. But a sustained uptick towards 4 per cent annual growth seems ambitious, to say the least.

Like all developed countries, the US economy remains shackled by a large debt overhang and an ageing population.

And despite Trump's rhetoric that "protection will lead to greater prosperity and strength", economics would suggest otherwise.

Harmful barriers

Stepping away from the TPP may have a minor impact, but erecting new trade barriers would do more harm than good to the US economy.

Indeed, if the US were to impose direct tariffs or a "border adjustment tax" on imported goods to protect American jobs, the biggest losers would be America's consumers, who would end up paying more for imported goods and have less money to spend elsewhere.

It is too early to tell what economic policies Trump will ultimately pursue.

Many commentators have ended up with egg on their faces by underestimating Trump. And his mandate remains firmly to "make America great again".

But it's likely the strengthening already under way in the US economy will provide Trump the cover to retreat from some of his more ambitious promises to stimulate the economy.

And if that turns out to be the case, the exuberance of recent weeks may prove hard to sustain.

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