In light of Trump's impending return to the presidency, how are global economies responding?
Investors and economists anticipate that Donald Trump's second term as president will have a number of profound and far-reaching effects. This week has already seen notable volatility in a number of financial areas, including corporate share prices, commodities, and currencies.
Here are some possible financial and economic repercussions of what some analysts and academics are calling "Trumponomics 2.0."
The stock market
Since Tuesday, the share prices of numerous significant American firms have reflected the potential for businesses to increase their profits through the promise of reduced taxes and less regulation. Investors purchase shares of a company that offers the possibility of increased future profits, which raises the stock's price. For people working in the banking, cryptocurrency, technology, defense, and fossil fuel sectors, this tendency may persist.
According to Goldman Sachs, lowering corporate tax rates might result in a 4% increase in profits for the biggest American corporations. However, there may be corporate winners and losers worldwide, especially for businesses that depend on imported goods or resources, sell to foreign customers, or are involved in international supply chains.
In a research note, Emmanuel Cau of the British bank Barclays warned that a significant amount of the profits made by European businesses might be lost the next year. He explained that industries that make chemicals, autos, and drinks could be particularly affected due to their reliance on trade with the United States.
According to Stephen Woolcock, a specialist in international trade policy at the London School of Economics, "those companies are suffering in terms of their share prices." This is a very intricate web of supply chains, and the United States' higher tariffs, which are likely to provoke retaliation from other powerful trade nations, would upset those supply chains, creating uncertainty and raising costs, which would then have an impact on businesses.
Unless they boost their consumer pricing, companies that wind up with higher costs as a result of tariffs may see lower earnings, which could translate into lower share prices. However, increased inflation may result from higher prices.
Incomes, inflation, and trade
In Chicago last month, Trump declared, "To me, tariff is the most beautiful word in the dictionary." Many analysts believe that investors are already expecting tariffs ranging from 10% on products from certain nations to up to 60% on commodities from China, based on Trump's last tenure in the White House and campaign statements such as these.
Sebastian Jean, an associate director at the French Institute of International Relations and a professor of economics at CNAM university in Paris, states that if tariffs are imposed universally, consumers will be affected by higher prices.
Restoring the expired 2017 tax cuts that primarily benefited wealthy Americans and raising import tariffs, as Trump suggested during the campaign, could lower post-tax incomes for lower-income Americans by about 3.5% and "cost a typical household in the middle of the income distribution about $1,700 in increased taxes each year," according to estimates made this summer by economic experts at the nonpartisan Peterson Institute for International Economics in Washington, D.C.
Strengthening American production was a widely reported goal of Trump's prior tariff proposals. Trump's tariffs on China, however, simply moved manufacturing abroad rather than bringing much of it to the United States.
Federica Ghiretti, an economic security expert at Rand, claims that during the so-called "trade war" that raged in 2018, consumers in the US and China were the only ones who lost out.
According to her, "the impact on the world has been relatively limited." "There have even been opportunities in certain cases for third countries to enter and occupy those parts of the supply chains that were restricted or left empty by the United States or China."
"Unpredictability is something that global financial markets don't like, but they should now expect it," Jean argues. He claims that Trump's administration will usher in a period of greater unpredictability, which is typically detrimental to commerce.
Debt
The U.S. government's total debt increased during the previous Trump administration, partly due to tax cuts and emergency spending associated with the COVID-19 pandemic. The fiscal deficit, which is a measure of the gap between the amount of money the U.S. Treasury receives from taxes and other sources and the amount it spends on government programs, also widened.
Following Trump's victory on Tuesday, investors are concerned about future U.S. deficits and, consequently, the country's debt load due to the possibility of new, "unfunded" expenditure that would rely on borrowing more money from the financial markets rather than raising taxes. The additional deficit over the next ten years is estimated to be above $7 trillion.
Investors who are concerned about a nation's debt sustainability effectively demand higher interest rates on loans they make to the government of that nation. Additionally, even prior to the election, worries about the nation's public debt resulted in higher yields on existing loans, a sign that the U.S. government would have to pay more to borrow money.
According to economist Ulrike Malmendier of the University of California, Berkeley, "there seems to be a continued desire to go ahead with the economic program without any regard towards reining in the deficit spending — the ever-increasing debt quota of the U.S., which will get the U.S. into trouble at some point."
Furthermore, it will be challenging for the Federal Reserve to cut interest rates if inflation is predicted to increase as a result of Trump's policies once in office. Additionally, that reality would probably encourage government debt yields to stay high, making future deficit reductions even more costly.
Climate-related investments
In addition to working to prevent additional spending associated with President Biden's Inflation Reduction Act, the president-elect has stated time and again that he will remove regulatory limits on coal mining, oil drilling, and gas exploration. According to experts, the act has encouraged large amounts of private capital to invest in "green tech," such as solar, wind power, carbon capture, and electric battery storage, in addition to promoting initiatives, companies, and technology intended to combat climate change.
With all of the resulting effects on global carbon emissions, Trump will attempt to keep America the world's largest producer of petroleum by promoting more domestic fossil fuel projects. However, experts caution that this could ultimately hurt sustainability-focused financial funds that have supported a large portion of the energy transition and the ongoing efforts to meet previously agreed global climate goals.
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