How the outcome of the US election could affect the global economy

As the new leader of the free world, what does a Republican Donald Trump or Democratic Hillary Clinton presidency mean for the global economy? The unconventional, anti-establishment and highly polarising US election takes place on 8 November and in addition to revealing the country’s choice of President will also unveil a new House of Representatives and one-third of the Senate.

It’s important to understand how much power the US President really has

The President has broad constitutional powers to manage national affairs but is not part of the law-making Congress. The US Constitution divides the country’s federal government into three branches to ensure no individual or group gains too much control. These branches are the Legislative that make laws (two chambers of Congress – Senate and House of Representatives), the Executive that carry out laws (President, Vice-President, 15 departments and numerous agencies), and Judicial  who evaluate laws (Supreme Court and lower federal courts).1 Each branch can change acts of the others through a system of checks and balances. For example, the President can veto laws passed by Congress, who confirm or reject the President's appointments, while the Supreme Court (appointed by the President and confirmed by the Senate) can overturn unconstitutional laws.2

Economists believe the new White House occupant will have little effect on the domestic economy

Both candidates have vowed to generate jobs and agree that infrastructure investment will kick start growth. In the short-term, fiscal stimulus is potentially positive but only helpful longer-term if funded projects are productive. To complicate matters, it appears unlikely that either side will gain control of both the Oval Office and Congress, effectively blocking radical policy initiatives.

As members generally vote to their own preference rather than party line, most polls predict the Republicans will comfortably maintain lower house control (they currently hold the highest majority since 1928) but would likely refuse to implement (or even vote on) a number of Trump’s more outlandish policies. Additionally, polls point to a likely Democratic majority in the Senate and are almost certain to win at least the 41 seats necessary to effectively filibuster legislation. 

The trade and export stance of both candidates could impact Australia

The US is one of Australia’s largest trading partners. We currently export AUD $22.1 billion3 annually under a two-way free trade agreement providing significant inroads for Australian businesses into the world’s largest consumer market. Clinton was once seen as an advocate of free trade – as Secretary of State she negotiated the controversial Trans-Pacific Partnership Agreement (for 12 Pacific Rim nations excluding China) that Obama wishes to pass before his term ends. But now, like Trump, Clinton opposes it, which could signify a US retreat and bolster the regional influence of China.

As the world deals with a humanitarian crisis, Trump is planning to clamp down on immigration

Immigration is one of Trump’s signature issues. He has notoriously threatened to build a giant wall across the US-Mexico border but in the September Presidential Debate he backed away from (but didn’t drop) calls for the forced deportation of undocumented migrants and temporary closure of US borders to Muslims (to her end, Clinton has pledged immigration reform and a pathway to citizenship).

And there are also concerns that historic global climate change plans could unravel

Climate change is one of the biggest global and economic challenges of our generation yet Trump tweeted: “The concept of global warming was created by and for the Chinese in order to make US manufacturing non-competitive."4 He openly opposes progress made at the 2015 United Nations climate change summit ratified by Obama last month, whereas Clinton says she will deliver on that pledge “without relying on climate deniers in Congress to pass new legislation.”5

Clinton’s commitment to “making America the world’s clean energy superpower"6 is part of her policy on the issue she says is “a defining challenge of our time” and “threatens our economy, our national security, and our children’s health and futures”. And despite believing there “is still much that needs to be investigated in the field of climate change”, Trump is more focused on clean water, which he believes may be the “most important issue we face as a nation for the next generation”7 and will be a “top priority”8  for his administration.

Uncertainty preceding elections can cause increased market volatility

Despite monetary policy being run by the US Federal Reserve (Fed), decisions made by the new President will affect political and economic stability. For instance, Trump has repeatedly claimed he’ll “most likely” replace Fed Chairwoman Janet Yellen if elected9, though legally the Fed chief can only be removed mid-term for cause and with Congressional approval.

As we witnessed in Australia, it’s difficult for investors and businesses to make decisions when economic policies are being considered during an election. Uncertainty due to the tight race and risk that if Trump wins some of his more disruptive policies may be realised could dampen investment and reduce growth. The Fed may also keep interest rates static until post-election, particularly if economic data remains only moderately positive.

A Trump victory also poses potential short-term volatility in global investment markets

But we also note the resilience of the unprecedented levels of quantitative easing and liquidity (for some assets) during recent major geopolitical events. It’s important to consider that notwithstanding the initial shock of Brexit, markets recovered in remarkable fashion, despite its ramifications having arguably far greater implications than a Trump presidency.

Any increase in volatility could see a rush to safe haven assets such as the USD and gold

If Trump is elected and implements promised protectionist-based policies, we could see a sell-off of companies with multi-national earnings. Conversely, a Clinton win may see financial stocks suffer due to her calls for increased regulation on big banks and may also impact medical stocks given her stance against big pharmaceuticals. However, given the likely divided make-up of the government, it’s difficult to estimate these consequences with any certainty. For now, we generally recommend maintaining a broadly diversified portfolio of assets spread across a number of different economic regions to help mitigate risk, and focus on the broader economic trends reshaping US and global markets over the longer term.

Any strategies or recommendations are general in nature and do not take into account your objectives, financial situation or needs. As always, your personal circumstances are critical when considering any financial strategy and seeking professional personal advice is highly recommended. Further any forward looking statements are based on current expectations at the time of writing. No assurance can be given that these statements will prove to be correct.
 

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Lyle Meaney

Managing Director, Family Wealth Management

In his primary role as Managing Director, Family Wealth Management, Lyle ensures all Investment Advisors and Analysts deliver the highest level of proactive service and advice in line with Dixon Advisory’s Investment Committee’s views on market conditions. All Investment Advisory clients have a dedicated Investment Advisor, who works closely with Dixon Advisory’s Superannuation Specialists, Financial Advisors, Estate Planners and Property Investment Specialists to deliver the best possible financial outcome. 

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