Donald Trump elected president | “It’s the inflation, stupid”

Analysts are lost in conjectures to explain the unequivocal victory of Donald Trump. For my part, I attribute it mainly to a factor, which paradoxically cannot be controlled by the government: inflation.

Of course, the very important issues have encouraged Americans to vote for one party or the other, whether we think of immigration, war, abortion, the role of the State and so on. quant. But on these subjects, the voting blocs have been firmly entrenched for a long time.

Let’s not forget that the two camps are separated by only 3.5 percentage points and that it is therefore enough for 1% or 2% of the population to change their tune to shift power.

However, in my opinion, it is the impact of inflation on household portfolios during the Biden-Harris era which was the key element of this change. The price at the pump, the price of hamburger steak, housing costs are elements that have a direct impact on average voters, every day.

And for these voters, it is the government that is responsible for these bills, as for the economy in general, no one else. The Democratic government will therefore have been heavily punished for this inflationary period.

Brief, « it’s the economy, stupid »as a former Bill Clinton strategist said, or rather « it’s the inflation, stupid ».

Paradoxically, the American government, like all governments of developed countries, bears little responsibility for the explosion in inflation that followed the COVID-19 pandemic period.

This widespread inflation across the planet was caused by central banks, essentially, by massively easing their monetary policies – particularly interest rates – in order to prevent their economies from falling into a depression.

This incentive to spend by central banks during this period of freezing of the economy made it possible to revive economic activity, but it subsequently caused inflation to rise to record levels in 40 years (8.1% in Canada and 9.1% in the United States).

However, these decisions by central banks are independent of political power. This independence, a guarantee of their credibility, is even one of the foundations of the efficient functioning of financial markets.

Was it really possible to debate this complex issue during the campaign? To convince the average voter that the government is ultimately not responsible for the boom in their grocery bills?

In short, the role of the American central bank – the Federal Reserve – was crucial in this election. And in Canada, that of the Bank of Canada will be almost as much when voters judge Justin Trudeau’s record. It is not for nothing that the conservative Pierre Poilievre so often speaks of “Justinflation”.

I am not the only one to think so: during his visit to Montreal a year ago, the former governor of the Bank of Canada Paul Beaudry agreed with me: the decisions of the Bank of Canada have an effect impacting the mood of voters, even if they are independent of political power.

Slowly, customs tariffs

That said, Canadian governments – federal and provincial – will have their work cut out for them over the next four years. They will have to deploy intense diplomatic efforts to convince Donald Trump to moderate his actions towards his Canadian partner and friend, at the risk of shooting himself in the foot.

Most changes won’t happen overnight. The most important is undoubtedly Trump’s desire to increase tariffs on imports to the United States by 10%.

According to three recent studies, such a gesture would have a major impact for Canada, since bilateral trade represents a very large share of our gross domestic product (23% for Quebec, 41% for Ontario and 42% for Alberta ).

Lumber, mining, aluminum, the automotive sector, aeronautics, energy and pharmaceuticals are all sectors that could be shaken. Some people talk about a recession.

Experts, however, doubt that in practice, Trump will fully implement his severe tariff plan. This is notably the opinion of analyst Angelo Katsoras, from the National Bank, as well as Jimmy Jean, chief economist of the Desjardins Movement.

“If he were to move forward with such a plan, he would likely face legal challenges, significant political opposition from both parties and the risk of retaliatory tariffs from other countries “, explains Mr. Katsoras.

According to the analyst, its threat of customs duties will serve to protect certain specific sectors and obtain trade concessions, among other things.

Jimmy Jean believes that tariffs targeting China “could be implemented quickly under the pretext of national security. This is less obvious for a general increase in tariffs on all American imports, particularly those from allied countries. [Canada et Mexique] ».

The abolition of part of the green plan – IRA – will certainly have economic effects, but they will be manageable, especially since Canada should react by canceling the same subsidies granted to electric car factories. And to hell with the environment, unfortunately.

For the rest, Trump’s desire to further reduce the corporate tax rate (from 21% to 15%) will increase tax competition with Canada, whose rate is 26.5%.

We will have to see to what extent Trump’s plan could boost the deficit and the American debt – to worrying levels – which should push the markets to maintain high interest rates, especially if inflation does not fall. more in the United States.

These higher rates could widen the gap with those of Canada and put downward pressure on the Canadian dollar, forcing the Bank of Canada to slow the pace of its own key rate cuts. With its effects on Canadian household mortgage payments…