By Eric Van Enk on October 26, 2024.

As an economist and portfolio manager, I have spent a lot of time analyzing the potential impact on the economy and specific sectors of a Trump or Harris victory in the upcoming US elections. There are effectively six potential outcomes for the November 5 U.S. election: Harris wins the presidency with a Democratic House and Senate, a Republican House and Senate, or a divided House and Senate; or Trump wins the presidency with the Democratic House and Senate, the Republican House and Senate, or the House and Senate divided. Each sector of the economy is expected to be affected differently based on the six potential outcomes. For example, the best-case scenario for U.S. oil companies could be a Trump victory with a Republican House and Senate expected to cut regulations and remove barriers to growth. Conversely, the auto industry could be a big loser if Trump wins, as he is expected to severely limit auto production in Mexico, which would negatively impact the profits of companies like GM. What bothers me is that neither presidential candidate seems to have a plan for balancing the U.S. budget. As this week’s chart shows, the percentage of U.S. GDP now spent on interest payments (maintaining U.S. government debt; red line) has increased significantly in recent years to the current level of 3%. Note that the percentage of GDP spent on interest costs is now at levels similar to those of the 1980s and 1990s, when interest rates were significantly higher than they are today. This is because the absolute and relative debt levels of the United States are much higher today than they were then. Also note that the US federal budget balance as a percentage of GDP (blue line) has been moving in the wrong direction since the late 1990s – the last US president to run a budget surplus was Bill Clinton. Note that the size of the US deficit is much smaller today than it was at the height of the COVID crisis. However, at 7.2% of GDP, it remains at a high level, especially since the United States is not currently in recession. Typically, government spending increases to offset the negative impact of recessions, then decreases as the economy emerges from recession and begins to grow. In this way, deficits can serve as a shock absorber in times of economic weakness. However, since the late 1990s, we have seen a phenomenon known as structural deficits: successive US governments run deficits regardless of the strength of the economy. Structural deficits contribute to inflation and increase the amount of the budget allocated to debt service compared to spending on other government priorities (social programs, etc.). Just like individuals, countries can go bankrupt. Many countries have declared bankruptcy over the years, countries like Argentina have done so more than once by taking on too much debt. As the world’s largest economy and reserve currency, a US debt default could upend the global order and would undoubtedly have a significant negative impact on the global economy. In Canada, fortunately, we have been more cautious and have not had such large deficits for as long as the United States. However, the concern is that we could be heading down a path similar to that of the United States if the federal government does not have a plan to generate budget surpluses for the foreseeable future. National Bank Financial – Wealth Management (FNBF) is a division of National Bank Financial Inc. (FBN), as well as a trademark belonging to the National Bank of Canada (NBC) used under license by FBN. NBF is a member of the Canadian Investment Regulatory Organization (CISB) and the Canadian Investor Protection Fund (CIPF), and is a wholly owned subsidiary of BNC, a public company listed on the Toronto Stock Exchange (TSX: NA ). The information contained herein was prepared by Eric Van Enk, Associate Portfolio Manager and Wealth Advisor at FBN. I have prepared this article to the best of my judgment and professional experience to share with you my thoughts on various financial aspects and considerations. The opinions expressed represent my informed opinions only and may not reflect the views of FBN. The information contained herein has been obtained from sources we believe to be reliable, but is not guaranteed by us and may be incomplete. The opinions expressed are based on our analysis and interpretation of this information and should not be construed as a solicitation or offer to buy or sell any securities mentioned herein. The opinions expressed do not necessarily reflect those of FBN. Eric Van Enk is a wealth advisor and associate portfolio manager at National Bank Financial in Medicine Hat. He is a graduate of the University of Calgary and a CFA designator with 20 years of experience in financial markets in New York, Toronto and Calgary. He can be reached at [email protected] 10
-9