By: George Brown, Senior US Economist at Schroders

As Biden withdraws, Schroders Senior US Economist George Brown examines the economic impact of a Trump presidency.

After weeks of speculation, President Biden announced over the weekend that he would withdraw from this year’s presidential race and endorsed Vice President Kamala Harris as the Democratic nominee instead. While her nomination as the official candidate is yet to be confirmed, the cards are stacked in her favour and she appears the likeliest candidate based on betting odds (see chart below).

Source: Schroders Economics Group, PredictIt, Macrobond. 22 July 2024

Attention is now turning to Harris’s potential running mate. Governors of battleground and deep red states are among the likeliest candidates. Meanwhile, the odds of the Democrats retaining the White House have improved slightly, not least as Harris has a clean slate to change the narrative around the election.

Source: Schroders Economics Group, PredictIt, RealClearPolitics, Macrobond. 22 July 2024

In terms of the market reaction, we have seen yield curves steepen over recent weeks as expectations of a Trump victory rose. This was because a Republican “clean sweep” would allow Trump a freer hand on fiscal stimulus. By contrast, a Democrat president would face a divided government. It may therefore be that the recent steepening of yield curves will reverse if Harris, or another Democrat candidate, narrows the gap in the polls.

Nonetheless, Donald Trump still appears to be the likelier winner. The recent assassination attempt has given his campaign considerable momentum that could carry him through to the November election. Given Trump’s lead in the polls, we set out our key economic expectations if there were to be a Trump victory.

Protectionist measures could pose inflationary risks

The central plank of Trump’s economic agenda is protectionism. As president, he cited national security concerns to raise tariffs under so-called Section 232 powers. Beijing was the most common target, with the average tariff levied on imports from China climbing from 3% to nearly 20% during his term. If re-elected, Trump has proposed to hike this to 60% as well as phasing out all imports of essential goods from China. In addition to this, imports from the rest of the world would be subjected to a 10% baseline tariff.

If implemented, these proposals would present a significant inflationary shock. However, we suspect Trump does not intend to fully follow through with these but instead leverage them in a targeted manner in order to extract trade concessions.

Three factors should help to blunt the inflationary impact of tariffs. Firstly, the dollar would likely appreciate, especially against the renminbi, as Beijing would probably pursue a devaluation. Secondly, the widening in corporate profit margins since the pandemic should serve to absorb higher import costs. Thirdly and finally, goods might be routed via countries that are on more favourable trade terms with the US, as China appears to have done since the start of the trade war.

Immigration may prove bigger challenge

An immigration clampdown would likely be more disruptive this time than it was during Trump’s previous stint in the White House. Job growth in recent years has been almost entirely driven by foreign-born workers. Lower immigration is therefore likely to exacerbate worker scarcity, particularly in sectors heavily reliant on foreign labour such as agriculture and construction. This could then lead to a resurgence in wage growth that further stokes inflationary pressures.

In isolation, higher inflation and lower job creation would act as a headwind to the economy. But our expectation is that this will be more than offset by various growth promoting policies. Of these, the biggest will be Trump’s promise to extend the provisions from his 2017 Tax Cuts and Jobs Act (TCJA) that are due to expire next year.

Growth should also be supported by Trump’s deregulatory agenda. One of the biggest beneficiaries would be the energy sector. Trump has pledged to end delays in federal drilling permits and leases, remove limits on natural gas exports and roll back car emissions rules set to come into force in 2032.

Trump win likely to mean stronger growth and higher inflation

If Trump were to win the election, our expectation is that US growth would be stronger and inflation firmer. However, the Trump campaign has been light on detail and so it is difficult to make assumptions about economic policy.

One thing that we are confident about is that most of the macroeconomic impact won’t be felt until 2026 onwards. Not only due to the time it will take to legislate and implement his agenda, but also because of the lags associated with the policy transmission mechanism eventually feeding through to activity and prices.

In terms of growth, our analysis suggests the US economy would expand by 2.2% in 2025 under a second Trump presidency. It would then accelerate to 2.7% in 2026 as the administration’s growth promoting policies kick in, before easing back to 2.3% in 2027 as higher inflation weighs on consumer spending.