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  January 2nd, 2017 | Written by

Lifting the Veil on a Trump Economy

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  • Trump will press hard on the fiscal accelerator, less so on the trade brake pedal.
  • Congress will increase infrastructure spending by $200 billion.
  • Oxford Economics foresees actions to curb illegal and legal immigration under Trump.

Gazing into the future of a Trump economy, Oxford Economics sees U.S. growth gradually firming from 1.6 percent this year to 2.5 percent in 2018 with Trump’s pro-growth fiscal agenda outweighing an isolationist and protectionist trade policy. But the one-percentage point boost to the United States economy will come at a cost with the federal deficit expected to increase by more than 50 percent.

In this pro-growth, pro-inflation environment, Oxford sees the Federal Reserve raising interest rates by 1.25 percent over the next two years. Reflecting the higher short-term rates, higher inflation, and an increasing federal deficit, the 10-year Treasury yield will reach 2.8 percent by the end of 2017 and breach three percent in 2018.

Recent Treasury Secretary and Commerce Secretary nominations indicate a desire to press hard on the fiscal accelerator while using the trade brake pedal with parsimony, according to Oxford.

Oxford believes the U.S. Congress will reduce corporate and income taxes by $1 trillion over the next decade, increasing infrastructure spending by $200 billion, and modest and back-loaded spending cuts and revenues offsets. Out of $1.2 trillion fiscal package, nearly $200 billion, or about one percent of GDP, would come through during President Trump’s first eighteen months in office. Factoring in offsetting spending cuts in the later part of the decade as well as offsetting revenues, the proposal would have a price tag of nearly $700 billion. This would bring the federal deficit from just under three percent of GDP to nearly 4.5 percent of GDP in late 2018.

Oxford Economics foresees an assertive, though less aggressive, trade stance, putting China on the currency watch list and pressing for fewer trade distortions, but resorting mostly to non-tariff trade barriers.

Oxford assumes a cautious immigration stance with actions to curb illegal and legal immigration. The economists believe the Trump administration will deregulate the finance and energy sectors, repeal parts of Obamacare, but not raise the federal minimum wage.

One major risk is that Trump has continued to push for some of the nationalist, isolationist, and government interventionist measures he had advocated for as a campaigner. This raises the risk of a trial-and-error presidency.