The US is the UK’s largest trading partner after the EU - what are the implications of Donald trump’s presidential victory on that partnership, and indeed Sterling?
Donald Trump’s victory in the US presidential election is unlikely to adversely impact on growth in the UK, according to a leading economic research house.
“While it is hard to see the US election result as a positive outcome for the UK, we see no reason to alter our still above consensus forecasts that the UK economy will expand by about 1.5% next year and 2.5% in 2018,” said Capital Economics’
Jonathan Loynes in a note on the morning after the election.
Whilst a fifth of UK exports are bound for the US – the second largest export destination after the EU – and there is a threat of Trump tariffs harming that flow, the weak pound should offset any negativity.
“For a start, as far as market consequences are concerned, the small rise in the pound seen so far today, and any likely further increase in the coming days, will do little to reverse the substantial improvement in competitiveness bestowed on UK exporters by the depreciation of the pound seen since the Brexit vote.”
Any trade tariffs brought in by Donald Trump would have to be high to offset the competitive advantage from the post-Brexit more than 10% fall in the Pound.
Whilst we should take politicians promises with a pinch of salt, Trump has also, interestingly, stated that the UK would be at the front of the queue in any future trade deal negotiations.
Loynes also argues that the increased uncertainty engendered by Trump’s win will reduce the chances that the Federal Reserve will increase interest rates in December, as was previously expected
A lower outlook for US interest rates is likely to keep a cap on UK interest rates, which may be beneficial for encouraging an increase in fiscal stimulus by the UK government, who have already ditched the previous administration’s budget goals and are hinting at more largesse.
An increase in fiscal stimulus will produce a net positive for UK growth and GDP.
So as a result of this, Capital Economics’ Loynes sees less chance of a negative reaction in the UK, than, for example, the Eurozone.
In the UK, the protectionist, nationalist popular ‘revolution’ came in the form of Brexit, whilst in the EU it has not yet happened.
Given a major risk for the EU is the high number of EU elections in 2017 and the possibility they could produce an upset, the Trump win – coming after Brexit - will increase fears that the anti-EU non-mainstream parties could win in Europe too, keeling the EU ‘galley’ starboard and risking the future of the European project.
The Currency Perspective
Although initially bucking higher against the Dollar, the Pound and the Euro quickly lost momentum.
The initial pop was more from a diminishment of Fed interest rate hike expectations, given there is a good chance the Fed will wait before raising interest rates.
Trump’s economic policies are riddled with lacunae, causing much uncertainty as to what he will in fact do, and although his initial speech softened expectations, increasing hopes of a more generous fiscal strategy, nothing is certain.
One thing seems quite clear, however, and that is that foreign imports into the US are likely to fall due to the president’s avowed protectionist pro-homegrown agenda.
Given this will probably help to rebalance the US’s gaping trade deficit it is likely to be positive for the Dollar and lead to traders betting on its rise.
For the Pound, there is even more uncertainty in relation to export trade which makes an appreciation of the pound unlikely at this juncture.
The Euro may be facing even greater headwinds than the Pound since it is about to embark on an election intensive year, in which Italy, France, and Germany will be going to the polls, as well as a host of other smaller countries.
Political uncertainty is a new source of currency risk and with so much on the horizon for the Eurozone, and even the possibility that the Euro itself could steadily be dropped if the union shrinks, may be a headwind for Euro pairs.