Trade, Security, and Domestic Policy "Pose Significant Risks"
Goldman Sachs economists have forecast that if former U.S. President Donald Trump succeeds in his re-election bid in the upcoming November U.S. presidential election, the European economy could be significantly affected.
According to CNBC on the 15th (local time), Goldman Sachs economists Jari Stehn and James Moberly predicted that if former President Trump is elected, Europe would suffer a hit equivalent to about 1% of its Gross Domestic Product (GDP), and inflation would rise by 0.1 percentage points.
They stated, "A successful re-election of former President Trump would pose a significant downside risk to our constructive growth outlook for the Eurozone economy."
On the 13th, former President Trump was shot during a campaign event in Pennsylvania. Since then, there have been observations that his chances of winning this election have increased. Prior to the shooting incident, on the 12th, Goldman Sachs had predicted a roughly 60% probability of Trump’s victory in the betting markets.
According to economists Stehn and Moberly, Trump’s trade policies and the surrounding uncertainties could impact the European economy.
During the final period of Trump’s term, the U.S. imposed tariffs on European steel and aluminum, escalating trade tensions between the U.S. and Europe. Due to trade policy uncertainties in 2018?2019, Eurozone industrial production declined by about 2%.
Trump pledged in his re-election campaign to impose a universal 10% tariff on all imports. Wall Street views this as likely to cause a sharp increase in policy uncertainty similar to 2018?2019. Economists Stehn and Moberly foresee that some countries with high dependence on industrial production, such as Germany, would be more severely affected.
If Trump is elected, pressure on Europe’s defense and security sectors is also expected to intensify. Trump is anticipated to fully cut support for Ukraine and has stated that he will not support NATO member countries that do not meet the 2% of GDP defense spending requirement.
Goldman Sachs forecasts that meeting the 2% spending requirement and supplementing U.S. support for Ukraine could impact the European economy. During a second Trump term, Europe might need to increase spending by an additional 0.5% of GDP annually.
U.S. domestic policies such as tax cuts and deregulation could also affect the Eurozone economy. Economists Stehn and Moberly said, "Changes in U.S. macroeconomic policy during Trump’s first term had a significant impact on Europe through increased U.S. demand and tighter financial conditions." They added, "While expected U.S. tax cuts could stimulate European economic activity, considering other anticipated market changes, the overall impact is likely to be limited. We expect the rise in long-term interest rates to be offset by a significantly weaker euro, so the net financial spillover effect is likely to be weaker than the movements seen after the November 2016 election."
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