A potential failure by the Trump administration to deliver on election pledges to cut taxes is one of the biggest single risks facing financial markets, according to a new report from Societe Generale.
In its latest “black swan” report, the banks´ economics team warns that without the promised tax cuts the US economy could slow down during the second half of 2018.
A black swan is generally defined as an event that causes meltdown in financial markets.
Potential black swans
While Societe Generale ranks a Chinese hard landing as the biggest risk for the global outlook, the investment bank rates a potential failure of Donald Trump´s administration to cut taxes as being the second most significant risk.
Assigning a 30% probability to this latter outcome, it also believes such a Trump failure to be twice as likely as a Chinese hard landing.
Global stock markets rallied strongly following Trump´s win in the US presidential election on hopes that the result would mean less regulation, increased spending and lower taxes.
However, his failure to get healthcare reform through Congress in March raised concerns over his ability to implement a pro-growth, fiscal stimulus agenda.
Although Trump won another Congressional vote on healthcare reform in early May that included some watering down of his earlier proposals, it´s still uncertain whether he will be able to get the new policy approved by the Senate.
Societe Generale warns that US fiscal policy has become especially critical to the global outlook given the tightening of monetary policy currently underway in China.
The question becomes whether US fiscal expansion can be strong enough to offset the negative impact of a slowing Chinese economy.
Long in the tooth
The report highlights how the current US expansion already appears to be long in the tooth by historic standards. Societe Generale points out that the current US economic expansion that began in June 2009 is already the third longest US upturn on record. If the economy remains in expansion mode until February 2018, it would be the second longest positive run. To make it the longest ever on record, the expansion would need to last until May 2019.