Former U.S. President Donald Trump during a campaign rally at Trump National Doral Golf Club in Miami, Florida, U.S., on Tuesday, July 9, 2024.
Eva Marie Uzcategui | Bloomberg |
In recent weeks, markets have increased their bets on a Donald Trump victory in the presidential election. Now economists at Goldman Sachs are warning that another term for the former US president could have “profound implications” for the eurozone economy.
“Our baseline estimates indicate a significant GDP [gross domestic product] A decline of around 1% with a modest 0.1 percentage points [percentage point] “Inflation will be positive for inflation,” said Jari Stehn and James Moberly of Goldman Sachs in a note released on Friday before Saturday's attack.
“A re-election of Trump would therefore pose a significant downside risk to our otherwise constructive growth forecast for the euro area.”
They explained that uncertainty in trade policy, increased pressure in the defense and security sectors, and the knock-on effects of U.S. domestic policy, for example on tax issues, could have an impact on Europe.
Trump said he was grazed by a bullet during an attempted assassination at a rally in Pennsylvania on Saturday. The shooting killed one attendee and the gunman, and two other attendees are in critical but stable condition.
Some analysts say the events could boost Trump's chances of winning the White House again in the US elections later this year, and certain assets have already rallied on Monday as markets have priced in that possibility.
Even before Saturday, the likelihood of a second Trump presidency had risen after President Joe Biden's poor performance in a presidential debate a few weeks ago. Goldman Sachs said in its note Friday that betting markets gave a Trump victory in November a roughly 60% chance, and some reports over the weekend said that number had risen again.
Trade tensions
Trump's trade policies and the uncertainty they create could be a factor affecting the European economy, as was the case during his last presidency, say analysts Stehn and Moberly.
Trade tensions between the US government and the European Union have increased during Trump's last term in office. The US imposed tariffs on European steel and aluminium, and the EU responded with tariffs on US goods. For months, there were concerns that other sectors, such as the automotive industry, would also face higher tariffs, unsettling market sentiment.
“Trump has promised to impose a flat 10% tariff on all U.S. imports (including from Europe), which would likely lead to a sharp increase in trade uncertainty, as was the case in 2018-19,” the Wall Street bank's research note said.
This uncertainty has historically had a significant and persistent impact on economic activity in the euro area, the economists said. In 2018 and 2019, uncertainty about trade policy reduced industrial production in the euro area by around 2 percent, they estimated.
According to Stehn and Moberly, some countries such as Germany are likely to be more severely affected because they are more dependent on industrial production.
Trade tensions could also lead to a decline in gross domestic product in the eurozone. While uncertainty about trade policy could lead to falling prices, higher tariffs could push them up again, according to economists.
Defence and security pressure
Trump is also expected to cut or cut off US aid to Ukraine and has indicated that he will not help NATO countries that do not meet the two percent defense spending requirement.
According to Goldman Sachs, meeting both the two percent target and the potential recovery of at least part of the US financial aid to Ukraine could have an impact on the European economy.
“European countries could therefore be forced to finance additional defense spending of 0.5 percent of their GDP each year during a second Trump term,” the research note says. However, growth from additional military spending is likely to be modest.
Geopolitical uncertainties and risks could also arise from Trump's defense policy toward Europe and his stance toward NATO, especially if it raises questions about the U.S.'s commitment to the military alliance, Stehn and Moberly explain.
Impact of national policy
Third, Trump's actions could impact the euro area economy through US domestic policy measures, such as tax cuts and less regulation.
“The changes in US macro policy during Trump's first term had a significant impact on Europe, in the form of stronger US demand and tighter US financial conditions,” said Goldman Sachs economists.
The expected tax cuts in the US could stimulate the economy in Europe. However, in combination with other expected market changes, the overall impact is likely to remain limited, say Stehn and Moberly.
“However, the net financial effects are likely to be muted as we expect the impact of higher long-term interest rates to be offset by a significantly weaker Euroin line with the measures taken after the November 2016 elections,” they said.
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