Trumponomics – an inevitable consequence of the crisis?

12th December 2016

Trumponomics: An inevitable consequence of the crisis? Stéphane Monier, Head of Investments at Lombard Odier comments on Donald Trump’s victory in the US elections

Trumponomics! As markets speculate on what this might mean for the global economy, we can – at least – begin the process of understanding how exactly we got here.

In the late hours of election night, Donald Trump stumped all forecasts and expectations by winning the White House. However, if we look back over the chequered road that took Trump to Capitol Hill, it is littered with tell-tale signs that may render his success not so much of a surprise.

Short-circuiting the status quo

While it may have been a bolt from the blue, Trump’s victory was no black swan. It was, ironically, Bill Clinton who, in 1998, coined the phrase “it’s the economy, Stupid.” But the acrimony and personality politics of the 2016 campaign, overshadowed the economic backdrop that – in our opinion – ultimately decided the outcome.

With a large part of the US electorate still waiting for the recovery to arrive, some USD 4.5 trillion of central bank stimulus is seen by many to have disappeared into a cloud of corporate smoke. This has left a segment of Americans with a sense of inequality, disenfranchisement – and a hunger for someone to blame.

The recession of 2009 proved to be a recession like no other, flouting the classical business cycle and confounding most forecasts. Seven years on, interest rates still languish at all-time lows, inflation is far short of target, and the US government is grappling with a debt load in excess of USD 19.8 trillion. Economic growth is stuck in neutral, and this illustrates a new paradigm to which global growth is tied: low, slow but stable.

This backdrop has given steam to a frustrated and often overlooked electorate – incidentally, the very voters that even the polls forgot. These are the people who blame the establishment, immigration and globalisation for their woes. And if this scenario is starting to sound in any way familiar – it should!

In 1938, economist Alvin Hansen coined the phrase ‘secular stagnation’ to describe a condition of sustained negligible, or zero, economic growth in a market-based economy. Such an economic environment has form in giving rise to erratic electoral behaviour. It is no coincidence that the Great Depression of the 1930s coincided with a political turmoil that wiped out the middle ground and ultimately that took the western world in war.

Politics of discontent

Donald Trump, for all the bluster of his campaign, tapped into the quiet remnants of the global financial crisis; the forgotten catastrophe that still lingers at household level. Here, he found a meaningful-enough proportion of Americans that felt left behind by a recovery that never quite was. These are the people whom the stimulus never reached; who have seen little or no wage growth since the crisis happened; a group for whom the forces of globalisation have swept away the industrial and manufacturing industries around which their communities were built.

In November, this group vented their frustration with a force that short-circuited America’s political status quo. Coupled with Brexit, it seems that protectionist politics has, indeed, gone global, and all eyes are now shifting to mainland Europe. With pivotal elections in Germany, Italy, France, the Netherlands and Austria over the coming two years, Europe will be the next ideological battlefield; and only time – not necessarily the polls – will tell if this nationalist trend is truly on the march.

Similarly, following a presidential campaign that was short on detail, time may be the market’s only answer to the question of what Trumponomics truly means. Elected on a ‘spend, spend, spend’ platform, the president-elect has pledged tax cuts, significant investment in infrastructure and a doubling of US GDP growth.

Should he succeed, Donald Trump would leave office as one of the US’s most economically successful presidents. But, although he may have a knack for confounding expectations, we see little prospect of President Trump doubling economic growth within his first term. After all, the new low-growth paradigm is bound by secular factors that are, ultimately, outside his control.

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