The Consequences of a Trump Shock

by Simon Johnson, Oct 29, 2016

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Trump promises to boost US growth immediately to 4-5%, but this is pure fantasy. It is far more likely that his anti-trade policies would cause a sharp slowdown, much like the British are experiencing.

In fact, the impact of a Trump victory on the US could well be worse. Whereas British Prime Minister Theresa May’s government wants to close the UK’s borders to immigrants from the EU, it does want trade with the world. Trump, on the other hand, is determined to curtail imports through a variety of policies, all of which are well within the power of a president. He would not need congressional approval to slam the brakes on the US economy.

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Even in the best of times, US policymakers often do not think enough about the impact of their actions on the rest of the world. Trump’s trade-led recession would tip Europe back into full-blown recession, which would likely precipitate a serious banking crisis. If this risk were not contained – and the probability of a European banking debacle is already disconcertingly high – there would be a further negative spiral. Either way, the effects on emerging markets and all lower-income countries would be dramatic.

Investors in the stock market currently regard a Trump presidency as a relatively low-probability development. But, while the precise consequences of bad policies are always hard to predict, if investors are wrong and Trump wins, we should expect a big markdown in expected future earnings for a wide range of stocks – and a likely crash in the broader market.