The U.S. economy could face a boom-bust scenario if Donald Trump is re-elected. Conversely the economy could face fierce headwinds from higher taxes and protectionism if a populist Democrat becomes president, according to a new report from ING, a Dutch multinational bank and global financial services firm.
“I think it’s really important for people to start tuning in on this, because it’s so consequential,” says ING Chief Economist Mark Cliffe, who authored the report with research from Oxford Analytica. ING clients are hungry for information about the 2020 U.S. presidential election that can help guide their investment choices, Cliffe says. “As we’ve seen in markets around the world, politics are now really very formative in terms of market performance.”
The report titled “US Politics Watch: Four scenarios for 2020 and beyond” examines the economic and market implications for the following election results: A Trump re-election, a different Republican wins, a centrist Democrat wins or a populist Democrat wins.
The Trump re-election scenario assumes a U.S. economy, leading up to the election, with strong growth, stable interest rates and a rising stock market. But post election, the report says, “We see a potential boom-bust economic scenario particularly if Republicans also win control of Congress,” because the single party unified government would add fiscal stimulus to boost economic growth. The boom would give way to a bust because added fiscal stimulus would generate inflation and result in a more aggressive response from the Federal Reserve. The increase in interest rates would cause the economy to slow down. Cliffe says it’s likely to be “a recipe for more friction with the Fed.”
Another scenario, in which a populist Democrat is elected, assumes a U.S. economy in meltdown. “In our view, a victory for Democrats would partly stem from a weaker pre-election economy, creating pressure for a policy stimulus from the incoming administration,” the report says,
The report’s authors predict a populist Democratic administration would also rely on “massive stimulus” to lift the economy but at a price which includes, “trade protectionism, higher wealth, income and corporate taxes, and market interventions” that would pose challenges to the financial markets.
“I think investors really owe it to themselves to start thinking about this,” says Cliffe, adding that ING’s clients are devouring the report. Cliffe admits it is still early in the election cycle but adds ING wants to track how it evolves over the next year and a half.
“A lot of foreigners are really quite surprised about the idea that Trump is actually the favorite to get re-elected,” he says. “A lot of them think, can this really happen again.”
Adam Shapiro is the co-anchor of Yahoo Finance’s On the Move.