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Politics

Three scenarios for Trump's second term

We expect Donald Trump to deliver important shifts in trade, fiscal, regulatory and immigration policy. But the precise scale and composition of these changes will shape the growth, inflation and interest rate outlooks in different ways.

Authors
James McCann
James McCann
Deputy Chief Economist
Lizzy Galbraith, Political Economist, abrdn
Lizzy Galbraith
Political Economist

Duration: 1 Min

Date: 18 Nov 2024

Key Takeaways

  • Our new ‘Trump 2.0’ base case envisages the incoming president following through on a pared-back version of his campaign pledges across fiscal, trade, immigration and regulatory policy. 
  • We expect some loosening in fiscal policy, large tariff increases on China but a case-by-case approach elsewhere, increased deportations and looser regulation.
  • Our new forecasts therefore see inflation treading water at uncomfortably firm rates, while the Fed will cut rates more gradually and to a higher terminal rate in coming years.
  • But we have also sketched out a ‘Trump unleashed’ scenario, which envisages more aggressive policy changes facilitated by a supportive Congress. 
  • Large tax cuts and higher defence spending in this scenario push the deficit much wider, despite larger and broader tariff increases. Deportations rise significantly, generating a sharp labour force shock.
  • These policies would drive a reacceleration in inflation and make it hard for the Fed to cut at all, causing the president to threaten the central bank’s independence.
  • Finally, we’ve specified a ‘Trump delivers for markets’ scenario, in which the president focusses on the market friendly aspects of his agenda. 
  • This would involve a more measured tax bill, smaller tariff increases, less aggressive immigration policy, and a supply-side boost from deregulation. These policies would boost growth while still allowing inflation to normalise and interest rates to come down.
     
    Read the full article. 

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