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BoA-ML lowers growth forecast on Trump election

|By Arabian Post Staff|Bank of America-Merrill Lynch has made moderate downward adjustments to its near-term growth forecasts in the light of the election of Trump as the next US President.
“Given the high level of uncertainty about the exact policy changes at this stage, we are assuming that trade tensions and fiscal stimulus have offsetting impacts on growth in the medium term,” it said.
While a wide range of outcomes is possible, the risks to the economy seem to be skewed more to the downside.
The investment bank has shaved 0.5pp from first and second quarter GDP growth, thereby lowering the annual number from 2.1% to 1.8%. It also foreasts a more cautious Fed and expects 1 rather than 3 Fed rate hikes between now and the end of next year with the probability of a December hike falling to 1-in-3.
It says that the outcome of the election has differential impacts in the short and long run. In the short-run, it creates elevated uncertainty about the policy outlook, which threatens despair in the financial markets. This is already reflected in sharp drop in global markets overnight. It is also reflected in a surge in the VIX index of stock market volatility.
“In our view, these market gauges are reasonable proxies for the increased uncertainty in the economy, which we expect will serve as a near-term drag to GDP growth. Accordingly we have penciled in 0.5% lower growth in both 1Q and 2Q next year. In particular, we are assuming even weaker capital spending and have lowered job and consumption growth modestly. Given the risk-off trade in markets and the likely slower growth profile, we now only see a 1-in-3 probability of a December Fed hike”.
According to BoA-ML, the longer-term impact of Trump’s victory is much more complicatedn. The Trump campaign has suggested a number of possible policy changes.
Arguably the centerpiece of Trump’s economic platform is reversing free trade. This includes declaring some countries currency manipulators, putting tariffs on Mexico (35%) and China (45%), renegotiating the North American Free Trade Agreement (NAFTA) and exiting from the World Trade Organization (WTO).
A second stated priority is immigration. This includes building a wall with Mexico and deporting some or all undocumented workers. According to Pew Research, there are 11.3 million undocumented immigrants, including about 8.1 million workers.