Bruno Cavalier, Chief Economist ODDO BHF Asset Management.
KEY HIGHLIGHTS:
- Donald Trump launched a tariff war earlier and more aggressively than during his first term.
- This has led to economic instability which has lowered household and market confidence
- The US economy is likely to slow down even more sharply than initially anticipated
- Doubting the military support of the United States, European leaders are determined to rearm
- In Germany, the future chancellor wants to completely change the budgetary doctrine in order to implement a major recovery plan
‘There are decades where nothing happens; and there are weeks where decades happen.’ This quote from Lenin comes to mind in view of the recent upheavals in the world caused, directly or indirectly, by Donald Trump. In recent weeks, there have been changes not seen for decades.
Let’s look at a few examples. Firstly, by raising their tariff barriers, the United States has increased its average customs duty to a level not seen since the end of the 1940s. And this is certainly not the end of it, as other threats loom over world trade. Secondly, the obvious desire of the United States to disengage from the security of Europe calls into question the principles of a transatlantic alliance created in 1949. Thirdly, and in response to the previous risk, the future German Chancellor has made a U-turn on fiscal policy. The balanced budget that seemed an intangible dogma in Germany is no longer relevant. These are just a few of the events that will continue to have far-reaching effects.
Two months into his second term, Donald Trump has already done so much to impose his ‘America First’ policy that he has destabilised the global economic and geopolitical order. We can venture to make a provisional assessment of his actions by looking at what he has and has not done. During the election campaign, he promised significant tax cuts, which generated a great deal of optimism on the markets. To date, this issue has made almost no progress because the Republicans in the Senate and the House have to agree on how to implement these tax measures.
Another campaign promise was deregulation. This was also intended to reduce federal spending. This matter has been entrusted to Elon Musk, whose management practices are reputed to be rather harsh. The DOGE, the department responsible for cutting spending, has so far identified savings representing only 0.3% of GDP, a gold drop in the ocean of a deficit approaching 7%. Here again, more talk than action, but talk that is contributing to the recent anxiety in the markets.
Donald Trump had also announced a massive deportation of illegal workers, estimated at millions of people. Nothing has happened in this respect, which is good news for the economy as it could have destabilised the labour market. It should also be noted that the White House did not seek to put pressure on the central bank either, as had been suggested. To date, the Fed’s independence has been preserved; it is a pillar of the proper functioning of the markets and of investor confidence.
