Goldman Sees Stagflation Under Trump

Short-term gain for long-term pain?

That’s the view of economists at Goldman Sachs Group Inc., who argue that while some of President-elect Donald Trump’s proposals could boost U.S. economic growth in the near future, his other policies would offset those positive impacts over the long-run.

Trump’s surprise victory in the presidential elections has spurred a rally in stocks and upped market-based expectations of inflation as the President-elect is expected to enact a host of tax cuts and boost infrastructure and defense spending that he says will jump start growth by 3.5 percent per year, on average. Still, the prospect of tighter trade and lower immigration under Trump’s presidency could raise the thorny prospect of “stagflation,” a scenario in which prices rise alongside unemployment while the economy slows.

“The positive fiscal impulse from his tax reform and infrastructure proposals could provide a near-term boost to growth and, depending on the specifics, could have positive longer-run supply side effects,” the Goldman team, led by economists Alec Phillips and Sven Jari Stehn, write. “However, other proposals could lead to new restrictions on foreign trade and immigration, which could have negative implications for growth, particularly over the longer term.”

Faced with lingering uncertainty over Trump’s policy proposals, the Goldman economists run through three different scenarios for the U.S. economy. The first is a “full” enactment of Trump’s campaign promises with everything from increased fiscal spending to trade restrictions included. The second is a “benign scenario” in which only Trump’s fiscal proposals are enacted. Lastly, there’s an “adverse scenario” in which trade and immigration are curbed while the Federal Reserve grows more hawkish.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell