Quite a decisive week as the US have voted for President-elect Trump to return to office for a second term; expect new mandates for tariffs, tax policy and healthcare, which will have ramifications well beyond 2024. Our weekly publication focuses exclusively on the economic and market impact of the election of the 47th President of the US, and what it means for our macro-economic forecasts for the next two years. Sunset is still our favorite color and rainbow is second!
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- Inflation, GDP and Fed Funds outlook: President Trump’s victory at the US elections and the likely full Republican control of the Congress do not change our forecasts for US GDP much, with fiscal loosening likely to broadly offset growth-negative factors. But we now expect inflation to rise to 2.9% and 3.4% in 2025 and 2026. Fed Funds rates are expected to be stuck at 4.0% in 2025 and 4.25% in 2026. However, should Trump push for a full-fledged trade war (our downside scenario), GDP growth would be much lower (+0.7% in 2025 and +1.6% in 2026), while the Fed funds rates would sit at 3.75% by 2026 as inflation would remain elevated.
- Fiscal policy: We expect that President Trump will push through a fiscal package of around 0.5% of GDP by the end of 2025 (net of savings), as well as the full renewal of the Tax Cuts and Jobs Act of 2017 (TCJA, bringing the total fiscal package to 1.6% of GDP). The appetite for a larger fiscal stimulus will likely be limited, given the precarious state of US public finances. Nevertheless, the federal deficit will likely increase above -8% GDP in 2026.
- Trade policy: President Trump is expected to increase US import tariffs as early as Q2 2025 through an executive order, initially raising tariffs to 25% for Chinese imports and to 5% for imports from the rest of the world, excluding Canada, Mexico and critical goods. We estimate USD135bn worth of global exports would be at risk, equal to 4% of the projected global export gains for 2025-26. In a severe scenario, where the US increases tariffs on overall Chinese goods to 60% and on goods from the rest of the world to 10%, the impact would be significantly higher, with total exports at risk surging to USD510bn. The potential cost to global GDP growth could escalate to a reduction of -0.8pp over the course of a year under a full-fledged trade war scenario, meaning almost a third of global growth would be lost.
- Capital markets: Markets reacted swiftly, with the USD appreciating approximately 1.5% against the euro and strengthening against other major currencies like the Japanese yen and Chinese yuan. US government bond yields also rose significantly, driven by higher inflation expectations, while German yields fell, highlighting a transatlantic divergence. Global equity markets opened in the green but closed in the red in outside the US. Nevertheless, the overall market response was more muted than in 2016 as much of the "Trump trade" had already been priced. Looking ahead, we expect US long-term interest rates to remain high, influenced by rising inflation expectations, less monetary easing and persistent fiscal deficits. German yields are likely to stay low due to the ECB’s dovish stance and limited bond supply resulting from the German debt brake. We expect a small boost for US risky assets in 2024 as momentum gets some traction, followed by a structural overperformance in the mid run due to reshoring and fiscally advantageous conditions. Despite a slight upward revision in our year-end total return forecast, we foresee continued volatility moving forward.
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- Angola
: Rated D3 (sensitive risk for enterprises), as the oil output improves Angola's growth; yet risks prevail without a diversification drive.
- Ecuador
: Rated C4 (high risk for enterprises), with a path to stability through natural wealth and security crises.
- Tunisia
: Rated D4 (high risk for enterprises), an improved outlook amidst an isolating economy.