Growth at risk if Donald Trump follows through on his stated agenda

Imagine a large country where national debt has grown from around 100 per cent of gross domestic product (GDP) in 2020 to 125 per cent of GDP in 2024. The budget deficit averages around 6 per cent per annum, and a new government plans to cut taxes in 2025, which will probably lead to acceleration in the growth rate of the debt-to-GDP ratio.

 

The government intends to impose massive Customs duties on many goods. It’s possible trade partners will retaliate with counter-duties, triggering a trade war. All this will lead to inflation. The nation in question already has a large trade deficit, and importers will pass these imposts on to consumers. Any manufacturer who gets into import substitution would also markup goods to keep a fat margin.

 

The government also intends to forcibly cut the workforce by around 5 per cent. That 5 per cent contributes a fair amount in taxes and generates 6-7 per cent of GDP, with critical inputs for the agro and food processing industries. Moreover, there is near full employment, so there aren’t substitutes to pick up jobs that will become vacant.

 

Further, the government plans to tighten visa regulations that allow the induction of highly-skilled workers from overseas. This will impact the high-tech segments of the economy and research & development (R&D) across Stem-oriented industries.

 

The government also intends to sack, or replace, a large chunk of the bureaucracy. It has toyed with the idea of imposing executive controls on statutory bodies that work independently to gather data, and oversee the financial system. It also wishes to eliminate some of these bodies.

 

There are plans to slice social security programmes, including health care, and the government will cease to take climate change mitigation measures. It is also thinking of easing controls on crypto currency.

 

I’m referring to the US, of course, and to multiple policy measures that the Trump campaign has stated it will implement. None of these seem healthy, and a combination of several unusual policies being implemented at once may cause “Black Swan” effects. Some of these policies would be unprecedented in the modern era, so modelling outcomes and scenario building is hard.

 

At the very least, there could be a two-year recession, according to an off-the-cuff guess by Elon Musk, who is one of the most influential members of the new Trump administration. This would be awkward since the US has been the key engine of global growth for three years. In the current geopolitical situation, there’s no other nation capable of picking up the slack.

 

The US is a $28 trillion economy, contributing about 25 per cent of global GDP. The dollar is the world’s reserve currency.

 

Radical changes in US economic policy could lead to a lot of knock-on effects, quite apart from causing a recession. Loss of faith in the dollar for instance, would affect every global market. A trade war could lead to massive supply chain disruptions.

 

None of this is guaranteed. Japan has survived decades with a debt-to-GDP ratio of over 250 per cent and no growth, for example.

 

The US is in an exceptional situation, as it can print greenbacks to cover deficits. But that will last only so long as faith in the US dollar isn’t shaken.

 

We may see disorderly price gyrations across markets, and disruptions of supply chains for the next few years, before new equilibria are reached.

 

Much is made of the wisdom of crowds, and markets do allow traders to discount unusual news flow. But markets also find it hard to discount unprecedented situations, and this could be one.

 

It would be logical for international trade to begin decoupling from the USD. Right now, if an Indian company strikes a deal with a South African entity, the pricing is likely to be in USD. That might change if the USD is swinging a lot.

 

Most international commodities — metals, rubber, crude, chips — tend to be USD- denominated. Again, this could change if the USD gyrates. These knock-on effects may not happen. But it’s hard to see a scenario where growth continues to be robust if Donald Trump follows through on his stated agenda. The past few years have been great for global markets. In 2025, we could see the bears back in business.