Analysts at Natixis argued that Donald Trump will not like the coming developments in the United States.
"As a result of the return to full employment, growth will slow down and return to the level of potential growth, which is lower than 2% per year; As a result of the fiscal stimulation that is being implemented at full employment in the United States, the US external deficit will worsen. So there is a great risk that the Trump administration may blame the deterioration in foreign trade for the slowdown in US growth, and that this will increase the protectionist temptations in the United States. In reality, the slowdown in growth is due to the return to full employment and the deterioration in foreign trade is due to the Trump administration’s choice to implement fiscal stimulus in a situation of full employment.
Two developments in the US economy that are now more or less certain:
1) A slowdown in growth Given the return to full employment in the United States, growth will be determined by productivity gains and labour force growth and no longer by growth in demand for goods and services. US growth will, therefore, slow down and return to the level of potential growth, which is the only achievable level once full employment has been reached.
2) A deterioration in foreign trade At a time when the US economy is returning to full employment and domestic production, accordingly, is limited by the economy’s supply capacity, the Trump administration is implementing a significant fiscal stimulus programme, mainly with corporate tax cuts.
Fiscal stimulus (demand stimulus) at full employment inevitably leads to a deterioration in foreign trade since imports must be substituted for domestic production.
How will the Trump administration react?
Donald Trump will therefore be faced with a slowdown in growth and an increase in the US external deficit. The risk is therefore that he may blame the slowdown in growth on the deterioration in the foreign trade, and that he may want to amplify the protectionist measures, particularly against Europe and China.
The real causality is very different: the slowdown in growth is due to the situation of full employment, and the deterioration in foreign trade is due to the fiscal stimulus at a time when there is full employment."
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