• After eight years of expansion, the US economy has limited spare resources. Hence policy changes that can create room for higher growth in the medium term are needed.
• Given political gridlock in Congress and repeated personnel changes in the administration, uncertainty about the path of policy is very high. Amid the stop-go on healthcare reform in Congress, there are growing doubts whether important items of Donald Trump’s pro-growth agenda will ever be implemented.
• While deregulation is put in train, infrastructure plans are not yet sorted out. Accordingly, most eyes are now on Trump’s tax reform plans.
• With the 2018 mid-term elections drawing closer, we believe that the Republicans will be determined to make at least some progress on their core project of tax reform. So far we assume that tax cuts will not be fiscally neutral in the short term, delivering a fiscal stimulus of around 1.2% to the US economy.
• On this assumption, we leave our 2018 GDP forecast of 2.3% unchanged, for now. The risks to the reform agenda are high, however, and entail a downside for the growth forecast. If progress on tax reform and other items that require congressional approval proves elusive, President Trump might resort to trade restrictions to restore a semblance of control.
