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With odds of a Trump win rising, here’s what it could mean for Europe’s economy

  • If Donald Trump were to become U.S. president again, there could be “profound implications” for the euro area’s economy, according to Goldman Sachs economists.
  • The euro zone’s gross domestic product could take a hit, while inflation could increase, they said in a research note.
  • Trade policy uncertainty, added defense and security pressures and spillover effects from U.S. domestic policies could affect Europe, the economists said.

With markets in recent weeks cranking up their bets that Donald Trump will win the presidential election, Goldman Sachs economists say that another term for the former U.S. leader could have “profound implications” for the euro area’s economy.

“Our baseline estimates point to a sizeable GDP [gross domestic product] hit of around 1% with a modest 0.1pp [percentage point] lift to inflation,” Goldman Sachs’ Jari Stehn and James Moberly said in a note published Friday before the Saturday assassination attempt.

“Trump’s re-election would thus pose a significant downside risk to our otherwise constructive growth forecast for the Euro area.”

Trade policy uncertainty, added defense and security pressures and spillover effects from U.S. domestic policies on, for example, taxes could impact Europe, they explained.

Trump says he was grazed by a bullet Saturday during an attempted assassination at a rally in Pennsylvania. The shooting left one attendee and the gunman dead, and two more attendees still in critical but stable condition.

Some analysts have suggested the events could boost Trump’s chances of taking back the White House in the U.S. election later this year, and certain assets have already rallied Monday with markets pricing in that possibility.

Even before Saturday, the likelihood of a second Trump presidency had risen following a poor performance from President Joe Biden in a presidential debate a few weeks ago. Goldman Sachs said in its note Friday that betting markets were assigning a probability of around 60% for a Trump win in November, with some reports over the weekend that this figure had risen again.

Trade tensions

Trump’s trade policy, and the uncertainty around it, could be one factor that impacts Europe’s economy, just as it did during his last presidency, analysts Stehn and Moberly said.

Trade tensions between the U.S. administration and the European Union surged during Trump’s last term. Tariffs on European steel and aluminum were introduced by the U.S., which led the EU to counter with duties on U.S. goods. There were months-long concerns about whether other sectors like autos would see higher duties which rattled market sentiment.

“Trump has pledged to impose an across-the-board 10% tariff on all U.S. imports (including from Europe), which would likely lead to a sharp increase in trade policy uncertainty, as it did in 2018-19,” the research note from the Wall Street bank said.

Such uncertainty historically has a significant, persistent impact on economic activity in the euro area, the economists explained. In 2018 and 2019, uncertainty about trade policy reduced industrial production in the euro area by around 2%, they estimated.

Some countries like Germany are expected to be more heavily impacted as they rely more on industrial production, according to Stehn and Moberly.

Trade tensions could also lead to the euro area’s gross domestic product (GDP) taking a hit, and while uncertainty about trade policy could see prices fall, higher tariffs could push them back up, according to the economists.

Defense and security pressures

Trump is also expected to lower, or entirely cut, U.S. aid for Ukraine and has suggested that he would not help the countries in the NATO military alliance that do not meet the 2% defense spending requirement.

Meeting both the 2% requirement and potentially making up for at least some of the U.S.’ financial support for Ukraine could impact Europe’s economy, according to Goldman Sachs.

“European countries could therefore be required to fund an additional 0.5% of GDP of defence spending per year during a second Trump term,” the research note said, adding that growth from additional military spending is set to be modest.

Geopolitical uncertainty and risks could also emerge as a result of Trump’s defense policy toward Europe, and his stance on NATO, particularly if it raises questions about how committed the U.S. is to the military alliance, Stehn and Moberly explained.

Spillover from domestic policies

The third way in which Trump’s policies could impact the euro area economy is through U.S. domestic plans, such as tax cuts and less regulation.

“U.S. macro policy shifts during the first Trump term entailed significant spillovers into Europe via stronger U.S. demand and tighter U.S. financial conditions,” Goldman Sachs economists said.

Anticipated tax cuts in the U.S. could boost economic activity in Europe — but paired with other expected market shifts, the overall impact is likely to be limited, according to Stehn and Moberly.

“The net financial spillover, however, would likely be muted as we would expect the effect of higher long-term rates to be offset by a notably weaker euro, consistent with the post-election moves in November 2016,” they said.

Source: Economy - cnbc.com

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