Republican presidential candidate Donald Trump waves to the audience exiting a campaign rallyRepublican presidential candidate Donald Trump waves to the audience exiting a campaign rally. Paul Sancya AP/Press Association Images
HSBC believes Donald Trump's economic policies "would likely put the economy into a recession after a year or two" if fully enacted.
The bank's chief US economist Kevin Logan makes the predictions in a note sent to clients early Wednesday morning, after Donald Trump pulled off a shock victory to become President-elect.
Logan argues that, while policies like tax breaks might give the economy a short-term boost, mass deportation of illegal immigrants and aggressive trade policies aimed at reducing trade deficits will likely have a negative effect pretty quickly.
Here's the key paragraph from Logan (emphasis ours):
"While tax cuts that were implemented in the first year of a Trump administration might give GDP a substantial boost for a year or so, the combined supply shock from a contraction in the labor force and from a disruption to international trade would likely put the economy into a recession after a year or two.
"In our view, the full implementation of Trump’s policy proposals would increase the volatility of aggregate economic activity, with potential repercussions for the volatility of financial markets as well, and lead to tighter monetary policy."
Logan says he expects a Trump presidency to lead to "lower taxes, higher deficits, restrictions on trade and the international flow of capital, and potentially a sizable reduction in the labor force" brought about by the mass deportation of illegal immigrants.
Logan says the key question for financial markets is "how quickly he will follow through on a number of his campaign promises." These are, broadly:
  • a renegotiation of treaties such as NAFTA and trade deals with China and Mexico, with the aim of driving down trade deficits;
  • possible restrictions on international capital flows;
  • cutting income tax;
  • repealing the Affordable Care Act (Obamacare);
  • restricting immigration based on religion and national origin;
  • deporting illegal immigrants, which could be as many as 11 million people.
Logan believes that the deportation drive "would be costly and would also lead to a sizable reduction in the country's labor force. That is turn could lead to a reduction in both actual and potential GDP growth."
Cutting income tax and a planned cut of repatriation of overseas cash by companies from 35% to 10% would likely increase the deficit as there would be less tax receipts collected.
However, the USA could avoid Logan's gloomy forecast as: "Whether his proposals will actually be implemented depends on the willingness of Congress to enact legislation to put his proposals into law."
Stock markets are diving around the world as Trump closes in on the White House and global currencies are rising against the dollar, suggesting an anti-Trump sentiment in financial markets.

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