The US takes it all – truer than ever under Donald Trump? - 11 november 2024
The global stock markets have welcomed Donald Trump’s election with a mixture of excitement and concern. The election result has disrupted markets – to the advantage of the US and the detriment of the rest of the world – but it may not be that simple.
Donald Trump’s victory in the US election has strengthened investors’ already deeply entrenched belief that the US “takes it all”; its economy is a cut above the rest and its equity market now accounts for the vast majority of the world’s total market capitalisation (cf. chart 1). At the other end of the spectrum, Europe appears even weaker, near powerless, ensnared as it is in contradictions and caught in a vice between an open enemy in the east and a decreasingly kindly ally in the west. The recent collapse of the coalition government in Germany is one of the many signs of Europe’s powerlessness.
If taken literally, however, Donald Trump’s plan to cut taxes, implement sweeping tariff hikes and deport huge numbers of immigrants would be bad for both the world and the US economy. In its latest issue, from October, the IMF predicted that this type of scenario, if accompanied by tariff hikes in other countries, would result in a -1.6% decrease in GDP in both the US and Europe by 2026, with less of an impact on China (cf. chart 2). It’s important to remember that import taxes are paid by the businesses and households of the importing countries, and that Trump’s policy could lead to a rapidly appreciating dollar and high real interest rates, which would slow growth.
Of course, any attempt at quantifying the effects of Trump’s agenda is to be taken with a pinch of salt. For example, economic models are often based on the only contemporary reference point available, the 2018–2019 period when the trade war, albeit focussed on China, is said to have weighed heavily on European growth via the channel of uncertainty. The fact that there is only one example from recent history for forecasters to chew over makes this exercise uncertain by its very nature. As for the extent to which Donald Trump will stick to his agenda, not to mention the how and when of it all, who could possibly say? And who knows how the United States’ trade partners will react ?
Finally, what 2025–2026 have in store for the global economy obviously depends on many factors, not just the Trump agenda. In particular, the global economy is still feeling the benefits of disinflation, with its positive impact on both purchasing power and central bank interest rates. The lower fossil fuel prices that may result from Trump’s policy would only reinforce this trend. Moreover, China is rolling out a plan to stabilise its real estate sector and stimulate its economy. It will likely adjust this depending on the levels of aggression from the US administration.
At first glance, Europe seems worse off, but a number of factors are expected to support its growth. The abundant savings of Europeans, the gains in purchasing power thanks to disinflation and the ECB’s rate cuts are creating an environment that will be more conducive to household and business spending in 2025. After a disappointing spring, consumption seems to be picking back up slightly in the eurozone, as indicated by the latest retail sales figures (cf. chart 3). Mortgages are also starting to recover in some countries. Lastly, we can hope (though it may be wishful thinking?) that the shock of Trump and the pressure of Putin will limit European fiscal consolidation – particularly tax hikes – and allow Germany to spend more, which is clearly what Chancellor Scholz wanted. Against this backdrop, even though the threat of a trade war with the United States cannot be underestimated, the scenario of an outright recession in Europe still seems unlikely at this point, especially since the ECB remains vigilant.
The global financial markets have priced in the election result. Wall Street prices soared to new highs, driven by expectations of tax cuts and deregulation, while the dollar and US long-term rates have risen. On the other side of the coin, investors have naturally factored in risk premiums linked to fears of a trade war (European export stocks, Spanish banks with a strong presence in Mexico, emerging market indices etc.) and the threat to environmental policies (renewable energy stocks). However, all these types of stocks are already heavily discounted for the most part.