A $500bn programme of corporate and individual tax cuts and increased spending was labelled “completely unaffordable” by Drayson.
Trump’s promise to cut taxes by around $400bn and increase spending on infrastructure by $100bn is likely to risk the already growing US economy overheating, with a brief period of good GDP growth followed by a drop to below 0% by 2019.
Drayson warned the timing of the stimulus could “hardly be worse”, adding that the next person to enter the White House would have a big mess to clear up.
He said: “At this stage there is little clarity around the timing and magnitude of policy changes under Donald Trump, but the numbers are potentially large on both the tax cut and spending side. The timing of this stimulus could hardly be worse.
“In our view, the US economy is already close to full capacity and was set to grow above potential next year. Subject to overstimulation and accelerating Fed hikes, markets could be anticipating the next recession by end-2017.”
Even if only some of Trump’s policies make it through Congress and spending is scaled back, as LGIM has anticipated, growth would slow to below 1% by 2019, further dampened by regressive policies on immigration and a focus on protectionism.
Drayson also anticipated an explosive rise in debt to GDP levels, with debt rocketing to 120% of GDP by 2026 if “full Trump”, the full economic package, comes in as opposed the current CBO estimates for the same year of around 85%.
In the US equities markets, Drayson said that while they weathered the numerous macro shocks of 2016 with little fanfare, next year looks set to be anything but boring with 2017 shaping up to be a year of “+15%, -15%, or both”.
However, he warned a “fiscally induced bout of growth euphoria could end up with a nasty hangover by the end of 2017” with markets gearing up for another recession by the end of the year.
Not forgetting Trump’s propensity to Tweet in the middle of the night which, Drayson adds, could also lead to a few geo-political risks throughout 2017.
