'An Impeachment Process Doesn't Necessarily Lead to an Impeachment' - Economist

Sputnik: What's your take on the statement made by Donald Trump on the market crashing if he's impeached?

Gregory Daco: I think that any type of impeachment process would certainly add to political uncertainty and that would not be good for stock markets, but if we look back at history and look back at prior episodes of impeachment or near impeachment, back in the early 1970s with Nixon, or in the late 1990s with Clinton, it's not certain that markets would react that negatively to the impeachment process overall.

Back in the Nixon era, the markets reacted very negatively but the context was very important. We were in the midst of rapidly rising inflation, oil price shocks and overall the economy wasn't doing that great. During the Clinton era we actually saw some negative headwinds for stock markets initially, but after the Starr report was released we actually saw some upward movement in stock prices.

So I think in this type of environment, where the economy is fairly strong, the impeachment process could potentially initially have a negative shock, but after that have a positive release shock if there were to be this type of impeachment process.

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Sputnik: What consequences will an impeachment of a US president have on the global economy?

Gregory Daco: I think we have to first realize that the impeachment process doesn't necessarily need to lead to an impeachment itself. I think that if the president were to be impeached that would require half of the House to start the process, but 2/3 of the Senate to actually impeach the president, which at this point is still highly unlikely. Now we need to see what further political developments happen.

In terms of the economy, the economy is quite strong, but we believe that the economy probably peaked in terms of growth in the second quarter of this year. What this means is that gradually momentum is going to be slowing and the global backdrop is not as strong as it was in 2017.

So in this type of an environment where you have global growth slowing, where you have rising trade tensions, rising trade protectionism which is weighing on growth, I think an impeachment process could further exacerbate political uncertainty; and we know that businesses do not like business uncertainty, they do not like political uncertainty, and that could lead to a little bit more cautious investment, even more cautious spending by the general public, and that could on the margin lead to some weaker economic activity during the impeachment process.

But there might be a relief rally right after the impeachment process, so overall I think we have to be very careful and pay close attention to the developments on the political front.

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Sputnik: What's your take on the economic progress in the country as a whole?

Gregory Daco: In general, we have to remember that Donald Trump inherited a fairly strong economy. If you look at job growth, if you look at economic momentum, it was already picking up under Obama, during the last few months of the Obama presidency, and Trump inherited that. In terms of policy developments in 2017, there really wasn't much until the very end of 2017 when we saw the passage of the massive tax cuts, as well as in early 2018 the passage of additional government spending at a time when the economy was already strong.

So we're adding fiscal stimulus to an economy that was already growing at a fairly decent pace, around 2.5%. That's why we see the economy this year growing close to 3%. That's a positive for the US economy, but at the same time, the president and the administration are implementing more protectionist measures on the trade front and that is going to be weighing on growth in the US and in the rest of the world.

That's why we think that going forward we see the momentum slowing in terms of growth in the United States and in the rest of the world, and we might have reached a peak at a time when increased political uncertainty could have more severe consequences on the US and on the global economy.

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Sputnik: What's your take on it, has Donald Trump been good for the American economy and the American country?

Gregory Daco: Well, I think we always have to abstract from what a president can or cannot do for the economy. A president signs bills that are passed, and in this case he signed two bills there are quite stimulative on the fiscal front. But we believe that the effect of that type of fiscal stimulus will be relatively short-lived, a little bit this year, a little bit in 2019, but then by 2020, we have less of a positive development.

At the same time, the Fed is tightening. We know the president has criticized the Fed for raising rates, but the Fed is doing what it feels is best in terms of the economy and is maintaining its independence, which is essential for any Central Bank around the world. We know from late 1970s experience that rapid inflation can be a big risk if the Central Bank is not independent.

I think overall if you look at the economic agenda of the president it's generally been favorable for the economy, but overall there's also been tremendous political uncertainty and enormous policy uncertainty on the trade front, both of which are detrimental to the economy. So if anything, a reduction in that type of uncertainty, calming down of trade tensions, could actually have an even more positive effect on the overall economy.

The views and opinions expressed in this article are those of Gregory Daco and do not necessarily reflect those of Sputnik.