Now Trump is President again, how will it impact the global economy? We speak with AMP’s My Bui about the possible road ahead.
The inauguration of Donald Trump as President of the United States on 20 January 2025 did little to interrupt the rally of the S&P 500 that had begun a few days earlier.
But questions have been raised about the impact of Trump’s presidency on the US economy. Critics of his agenda argue many parts of it are likely to cause higher inflation on the back of trade wars and lower immigration.
With living costs already at a high point, increased inflation could prove to be quite disruptive to the health of the US, and in extension the global, economy.
These are not just overblown concerns from political opponents. My Bui, Economist with AMP, argues higher inflation is certainly a possibility.
“Higher tariffs would mean there will be less competition [in the US] because they are basically subsidies for domestic companies and that leads to a lower productivity rate,” Bui says in an interview with [i3] Insights.
Higher tariffs would mean there will be less competition [in the US] because they are basically subsidies for domestic companies and that leads to a lower productivity rate
“The theory is that the resources are not allocated to where they can be most effectively used. So lower productivity, less competition, that would lead to higher inflation over the medium term, not just the short term, from the higher cost [of imports].
“There should be some concerns about higher inflation, not just in the US, but globally as well.”
Besides inflation, many economists are concerned about the challenges facing the US labour force.
Trump has made it clear he will be tough on immigration and even sent a plane full of Colombian migrants back to the country, which resulted in a brief stand-off between the two countries. But Gustavo Petro, President of Columbia, backed down quickly after Trump threatened with a trade war.
“What most economists are worried about is that labour force growth will probably slow down a little bit through the border policies, with higher border arrests or entry suspension of refugees. Over the medium term [it has impact] as well because such a high number of deportations would take time to implement and would actually add cost to the government,” Bui says.
“What that means is that it lowers the labour supply capacity in the US and that will have the biggest impact in the agricultural and energy sector. Obviously that will push up commodity prices too. So no, I don’t think the concerns are overblown.”
Pro-market Policies
But it is not all doom and gloom, Bui says. Trump’s agenda contains a number of pro-market aspects, including tax cuts and deregulation, especially in the energy sector, which will be well received by markets.
“If you look at the market rally throughout late 2024, then it does seem like financial markets focus a little bit more on these tax cuts and deregulations rather than the immediate impact of tariffs and labour supply,” she says.
Trump also tends to measure his success by share market gains, she says.
He looks at the S&P 500 as a barometer of his success, basically. So if financial markets revolt, like they did in 2018 when he threatened with Chinese tariffs and markets did fall by about 20 per cent, he did pull back a little bit in 2019
“He looks at the S&P 500 as a barometer of his success, basically. So if financial markets revolt, like they did in 2018 when he threatened with Chinese tariffs and markets did fall by about 20 per cent, he did pull back a little bit in 2019,” she says.
She suspects Trump won the election due to concerns about the high cost of living among the US population and this might help in mitigating the risk of him implementing disruptive economic policies.
Any policy that leads to an even higher cost of living will be scrutinised by members of the Republican Party in the House of Representatives.
“The US unemployment rate is very, very low, about four per cent, so technically people should be happy. But people are not. People demanded a change in government because the cost of living has gone up and he was indeed elected based on this mandate,” Bui says.
“So if tariffs go up massively and that actually pushes up inflation for everyone, then people are not happy. The House Republicans would not be happy. And I think ultimately that aspect would actually keep some checks and balances on how much Donald Trump can do in terms of tariffs.”
Geopolitical Tension
Concerns have also been raised about Trump’s blunt approach to diplomacy and this could cause geopolitical tensions to escalate. China is a key example of this. If Trump aggravates the relationship with the country either through draconian tariffs or a conflict over Taiwan, then a clash is not out of the question.
But do geopolitical events really disrupt stock markets in any significant way?
Bui points to the work of Italian economists Dario Caldara and Matteo Iacoviello, who created the Geopolitical Risk Index. This index shows that throughout time, stock markets recover most of their losses due to a geopolitical event in the year after the event.
“What we see is that there’s usually always some initial market pullback, for example, the market freaks out about the possibility of a full-blown war. But on average, like 90 per cent of the time, markets have recovered 12 months later,” Bui says.
Higher tariffs would mean there will be less competition [in the US] because they are basically subsidies for domestic companies and that leads to a lower productivity rate
“So if you’re a medium to long-term [investor], then you should actually look through the noise that these geopolitical risks bring. A lot of the time, markets do reflect the earning fundamentals rather than these initial freak-outs by market participants. That also makes it really, really hard to time the market using these geopolitical events.”
The Australian economy is unlikely to be impacted too much directly by US economic policy. But the impact US policies have on the Chinese economy will filter through to our shores. After all, 35 per cent of our goods are exported to China, while for iron ore this number climbs to 80 per cent.
Yet any trade war between the US and China is only likely to bring Australian inflation down, Bui says.
“The impact of higher tariffs on China would mean that there would probably be some sort of Chinese manufacturing slowdown and that would reduce their demand for our products,” she says.
“A Chinese slowdown will actually threaten a slowdown of the Australian economy and the RBA (Reserve Bank of Australia) will probably be more worried about a recession in that case, rather than a run-up in inflation.”
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.