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MIAMI — With the growing likelihood that Donald Trump will win the 2024 presidential election, Goldman Sachs economists are warning that another term for the former president could have “profound implications” for the euro area economy.
“Our baseline estimates point to a significant decline in GDP (gross domestic product) of around 1% with a modest increase in inflation of 0.1 percentage points,” Goldman Sachs’ Jari Stehn and James Moberly noted in a report released Friday, before Saturday’s assassination attempt.
“Trump’s re-election would therefore pose a significant downside risk to our otherwise constructive growth forecast for the euro area.”
Uncertainty over trade policies, growing pressures on defense and security, and the side effects of US domestic policies such as taxation could have repercussions on Europe, economists say.
Trump said he was grazed by a bullet during an assassination attempt at a rally in Pennsylvania on Saturday. The shooting left one attendee and the gunman dead, and two others were seriously but permanently injured.
Some analysts have speculated that these events could increase the chances of Trump reclaiming the White House in this year’s US election, with some assets already rallying on Monday as markets priced in that possibility.
Even before Saturday, the likelihood of a second Trump presidency had increased after President Joe Biden’s poor showing in a presidential debate a few weeks ago. Goldman Sachs mentioned in its note Friday that betting markets were giving Trump a roughly 60% chance of a November win, with reports over the weekend suggesting that figure had risen further.
Trade tensions
According to analysts Stehn and Moberly, Trump’s trade policy and the resulting uncertainty could have a significant impact on the European economy, just as it did during his previous presidency.
Trade tensions between the U.S. administration and the European Union have increased during Trump’s last term. The U.S. imposed tariffs on European steel and aluminum, prompting the EU to retaliate with duties on U.S. goods. There have been ongoing concerns that other sectors, such as the auto industry, could face higher tariffs, destabilizing market sentiment.
“Trump has pledged to impose a 10% across-the-board tariff on all US imports (including those from Europe), which would likely lead to a sharp increase in trade policy uncertainty, as it did in 2018-19,” the bank’s research note reads.
Such uncertainty has historically had a significant and persistent impact on economic activity in the euro area, economists noted. In 2018 and 2019, uncertainty over trade policy reduced euro area industrial production by around 2%, they estimated.
Pressure on defense and security
Trump is also expected to reduce or completely cut US aid to Ukraine and has hinted that he will not support NATO countries that fail to meet the 2% defense spending requirement.
According to Goldman Sachs, both compliance with the 2% requirement and the partial offsetting of US financial support to Ukraine could have an impact on the European economy.
“European countries could therefore be required to fund an additional 0.5% of GDP in defense spending per year during a second Trump term,” the research note said, adding that growth from additional military spending is likely to be modest.
Geopolitical uncertainty and risks could also arise from Trump’s defense policy toward Europe and his stance on NATO, especially if this raises doubts about the United States’ commitment to the military alliance, Stehn and Moberly explained.
Side effects of domestic policies
The third way Trump’s policies could impact the euro area economy is through US domestic plans, such as tax cuts and deregulation.
“The changes in US macroeconomic policy during Trump’s first term have had significant spillovers to Europe through stronger US demand and tighter US financial conditions,” Goldman Sachs economists noted.
According to Stehn and Moberly, the expected tax cuts in the United States could boost economic activity in Europe, but when combined with other expected changes in the market, the overall impact is likely to be limited.
“However, the net financial spillovers are likely to be limited, as we expect the effect of higher long-term rates to be offset by a significantly weaker EUR interest rate, in line with the actions taken after the November 2016 elections,” they said.
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