What a Trump presidency could mean for Europe’s economy

With markets raising their bets that Donald Trump will win the presidential election in recent weeks, economists at Goldman Sachs say another term for the former US leader could have “profound implications” for the eurozone economy.

“Our baseline estimates point to a significant GDP [gross domestic product] hit about 1% with a modest 0.1pp [percentage point] rise in inflation,” Jari Stehn and James Moberly of Goldman Sachs said in a note published Friday before Saturday’s attack.

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

Trade policy uncertainty, increased defense and security pressures and spillover effects from US domestic policies, for example on taxes, could affect Europe, they explained.

Trump says he was hit by a bullet Saturday during an assassination attempt at a rally in Pennsylvania. The shooting left one attendee and the gunman dead, and two bystanders remain in critical but stable condition.

Some analysts have suggested the events could boost Trump’s chances of retaking the White House in US elections later this year, and some assets already rose on Monday as markets priced in the possibility.

Even before Saturday, the likelihood of a second Trump presidency had increased after a poor performance by President Joe Biden in a presidential debate a few weeks ago. Goldman Sachs said in its note on Friday that betting markets were assigning a probability of about 60% to a Trump victory in November, with some reports over the weekend that the figure had risen again.

Trump’s trade policy, and the uncertainty surrounding it, could be a factor affecting Europe’s economy, just as it did during his last presidency, analysts Stehn and Moberly said.

Trade tensions between the US administration and the European Union rose during Trump’s final term. Tariffs on European steel and aluminum were imposed by the US, prompting the EU to retaliate with tariffs on US goods. There had been concerns for months about whether other sectors such as autos would see higher tariffs, which rattled market sentiment.

“Trump has pledged to impose a blanket tariff of 10% on all US imports (including from Europe), which is likely to lead to a sharp increase in trade policy uncertainty, as happened in 2018-19, ” study note. said the Wall Street bank.

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

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

Trade tensions could also lead to a hit to the eurozone’s gross domestic product, and while uncertainty about trade policy could push prices down, higher tariffs could push them up, according to economists.

Trump is also expected to reduce, or completely cut, US aid to Ukraine and has suggested that he will not help countries in the NATO military alliance that do not meet the 2% defense spending requirement.

According to Goldman Sachs, meeting the 2% requirement and potentially compensating for at least part of the US financial support for Ukraine could affect Europe’s economy.

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

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

The third way in which Trump’s policies could affect the eurozone economy is through US domestic plans, such as tax cuts and less regulation.

“US macro policy changes during Trump’s first term brought significant spillovers to Europe through stronger US demand and tighter US financial conditions,” Goldman Sachs economists said.

Anticipated US tax cuts could boost economic activity in Europe – but coupled with other expected market changes, the overall impact is likely to be limited, according to Stehn and Moberly.

“The net financial spread, however, is likely to be muted as we would expect the effect of higher long-term rates to be offset by a significantly weaker eurosin line with post-election movements in November 2016,” they said.