Goldman Sachs Group Inc. economists see a short-term gain for a long-term pain under the administration of President-elect Donald Trump. The new President’s proposals are directed towards boosting the economic growth of the United States in the near future. Nonetheless, it was observed that the other policies would countervail the positive effects to the country in the long run.
Stocks rallied and inflation expectations climbed after the unexpected win of the Republican. This is in line with the new President’s plan of cutting host of taxes, boosting infrastructure, and increasing defense compensation. Consequently, Trump stated that the growth will increase to 3.5 percent per year on the average. Stagflation, the economy slows down while unemployment rate increases, is still projected due to the new President’s stricter immigration and trade policies.
The economists ran through different U.S. economic scenarios while facing an uncertainty over the proposals of the new President. The first situation includes the proposals of Trump to restrict free trade and augment fiscal spending. The second pertains to a “benign scenario”, which encompasses only the fiscal proposals. The last is called “adverse scenario”, which explains how it will become when curbing of trade and immigration are pushed through. The third situation is set amid Federal Reserve’s development of hard-line policies.
The annual GDP growth is expected to boost growth by around 0.2 percentage points if the entire policy package of Trump is applied in the country during the second half of next year. This is irrespective of the economists’ baseline forecast reduction by 0.5 percentage points in 2018 to 2019. This will occur in line of the aim of a Fed rate hike to offset core inflation increasing to 2.3 percent.
The second situation is anticipated to boost the growth of economy by 0.5 percentage points between 2017 and 2019. Nonetheless, it is anticipated to bring marginally amplified inflation.
The last scenario will end up with stagflation as the GDP growth will decrease by 0.8 percentage points in 2018 and 2019. The expected rise of inflation at 2.3 percent is forecasted in early 2019 and unemployment will climb up to 5.3 percent.
During the third scenario, Fed would likely respond by increasing rates to countermand the inflation, but would put a halt in 2019. This is due to the fact it will focus on solving job losses and staggering growth of the economy.
Goldman is not the first bank who has warned regarding stagflation. Last week, Kevin Logan, HSBC Holdings Plc Chief U.S. Economist, stated that if Trump applies his entire package of proposals, there will be a short-term GDP growth and stagflation will immediately follow.