A large shadow loomed over the annual meetings of the International Monetary Fund and World Bank in Washington DC last week. The outlook for the global economy has suddenly become almost cheerful: inflation is ebbing, growth appears resilient and markets are buoyant despite geopolitical risks. But delegates worried about what would happen if Donald Trump were re-elected as US president. Informal polls showed that most expected Trump to win on 5 November. The fear of that outcome echoed in almost every conversation in Washington.
Many unresolved problems are lurking in the background. Perhaps financial markets are short-sighted in not regarding them as more of a short-term peril. Quite apart from the wars in Ukraine and the Middle East, we should be anxious about the real estate crisis in China, the structural problems in Germany’s manufacturing sector, rising public debt in the US and, above all, unabated climate change. But they do not appear to have the potential to become acute crises for the global economy.
In the US today, the divide in politics runs along the education level: college graduates tend to vote Democrat, while most blue-collar workers have flocked to Trump’s ‘Make America Great Again’ camp. Even die-hard Democrats pointed out that lower-middle-class white men in particular were turning against the Democratic Party. In addition, Kamala Harris’ pro-Israel stance could cost her votes in key states.
Pollsters argue that the election will see the widest gender gap in party preferences since the introduction of women’s suffrage. Whether women’s anger will be enough to carry Harris to the White House remains to be seen. Most pollsters and political consultants are predicting a very close election.
Trump’s economic ideas are cause for concern
For the first time in decades the IMF-World Bank annual meetings focused more on industrial policy than on monetary policy. At the heart of Trump’s economic ideas is the introduction of punitive tariffs on imported goods, particularly against China, and the deportation of millions of foreign workers. This would lead to a decline in US economic output, a rise in inflation and an early end to the Federal Reserve’s interest rate cuts.
Almost all mainstream economic research institutes in Washington have reached this conclusion. The Peterson Institute for International Economics is particularly vocal about the dangers. The Brookings Institution and American Enterprise Institute, two think tanks from different political camps, come to the same conclusion: Trump’s deportation plans would have a significantly greater negative impact on the US economy than the economic policies of a Harris administration. The IMF’s analysis is a little more cryptic, but its conclusion is unequivocal: higher tariffs and lower immigration would drag US gross domestic product down by around 1.6 points over the next two years. Trump’s economic policy, if implemented, would be stagflationary.
Trump has been able to attract outsiders to the Washington political scene and the economic debate – men such as Elon Musk and Scott Bessent, a former hedge fund manager who is being touted as a possible Treasury secretary. Speaking on a panel in Washington, Bessent was comparatively moderate: he wants to reduce the US budget deficit to 3% of GDP by 2028, achieve 3% economic growth and produce 3m more barrels of oil a day in the US – by firing government workers, deregulating the economy and reducing environmental regulations. But even if this programme does not rely on tariffs and deportations, few at the annual meetings expected Trump to be dissuaded from his extremist ideas if he won the election.
Central banks around the world are bracing for the spectre of higher tariffs, higher US interest rates and a stronger US dollar. Investors cited the continued flight to gold as another impact of a possible Trump election.
The question is: how could it be possible for such a candidate to get into the White House again? Ultimately, the key factor seems to be a failure of economic policy, pursuing the efficiency gains of globalisation and technological change, without paying sufficient attention to the distributional effects. The 2024 US presidential election should be a warning to many countries, whatever the outcome.
Christian Kopf is Head of Fixed Income and FX, Union Investment.
