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The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and Gramercy
In his journey to reclaim the White House, president-elect Donald Trump benefited politically from a dispersion of domestic economic outcomes.
Left to fester, the forces behind this, as well as those driving the divergence between overall US economic performance and its global peers, are set to strengthen. This risks economic, financial and social breakages in the next few years. Resolving them in an orderly and consistent fashion could well have a material impact on how the president’s second term is remembered.
The US has maintained an enviable growth and employment record in recent years. But this “economic exceptionalism” was not widely appreciated by the American electorate. The benefits were seen to accrue to just a narrow segment of society, with too little appreciation for the pain of the more vulnerable, many of whom felt that they weren’t being heard.
This undermined overall household confidence in the Democrats’ ability to manage the economy and, thus, contrasted strongly with the positive sentiment about economic developments during Trump’s first term. The resulting “K shaped” economy of differing outcomes for the richer and poorer ends of the demographic spectrum also means that the incoming president inherits significant vulnerabilities at the lower end of the household income distribution.
The financial insecurity — amplified by the evaporation of pandemic savings, higher debt and maxed-out credit cards — will take time to overcome through the current growth rate in wages and job opportunities. And if it worsens, it does more than undermine the social fabric. It risks endangering consumption, the most important driver of US growth at a time when the country is best placed to unleash a significant improvement in productivity and growth potential.
The dispersion phenomenon has not been limited to domestic developments, given how much the US has outperformed. As noted recently by Goldman Sachs, the gain in the Eurozone’s nominal GDP since the last quarter of 2019 — that is, just before the pandemic — was only 39 per cent that of the US. The UK’s stands at a measly 10 per cent and, in the emerging economies, China’s amounts to 55 per cent. Looking forward, the IMF has just revised up its US growth projections for 2025 by a considerable 0.5 percentage points to 2.7 per cent, while lowering that for Europe.
The outperformance of the US has resulted in financial market developments that can aggravate the challenges facing countries with lagging growth, investment and productivity. US bond yields have surged higher because of the country’s stronger than expected growth, sticky inflation, and greater market sensitivity to debt and deficits. This has caused other countries’ yields to also increase given that they compete with the US for funding. The negative spillovers have been particularly consequential in countries with structural vulnerabilities and cyclical headwinds.
The UK is a case in point. Not only did it see the yield on its 10-year government bonds rise faster than America and to a higher absolute level, it also suffered a material depreciation in its currency. The resulting stagflationary winds complicate an already difficult economic outlook while limiting the room for manoeuvre for both fiscal and monetary policies. While not as pronounced as the UK, the spillovers in the Eurozone go in the same direction. The same is true for emerging economies where some, particularly China, are excessively inclined to offset domestic weaknesses by devaluing their currency and pushing exports even harder.
Like its domestic counterpart, a widening of this external dispersion risks complicating the economic management challenges facing the new Trump administration. After all, it is hard to remain the good house in a continuously deteriorating neighbourhood.
The more the rest of the world lags behind the US, the higher the value of the dollar. Given the structural problems in China and Europe, this will not allow for a global adjustment in which slower growth countries converge up to the US. Instead, it risks undermining America where, according to Apollo’s Torsten Slok, 41 per cent of revenues in the S&P 500 come from abroad. It also raises the risk of greater protectionism, given the impact on US competitiveness.
While economic dispersion helped Trump return to the White House, he now faces the task of reorienting this phenomenon to lower the risk to the wellbeing of the US economy. From tax policy to tariff implementation, the incoming president should bear that in mind during what promises to be a slew of policy announcements in the next few weeks and months. Otherwise, promising initiatives risk being derailed.
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