How Trump 2.0 Will Affect the Global Economy

Donald Trump’s return to the White House brings a mix of short-term economic growth and long-term volatility to the global economy. Industry experts project an initial boost to global GDP, driven by US fiscal stimulus, yet tempered by the onset of targeted tariffs and elevated interest rates. The ripple effects of these policies will reach both advanced and emerging economies, with protectionism and regionalism reshaping global trade.

Donald Trump’s re-election in 2024 will reshape the global economy, with both short-term boosts and long-term uncertainties. Supported by Republican control of Congress, Trump’s policy agenda could implement both fiscal stimuli and higher tariffs on global trade partners, including China, the European Union, Mexico, and Canada. While this new phase could see initial economic growth, it may ultimately lead to volatility in international markets and potential regional destabilisation.

Initial Boost to Global Growth

Economic Consultancy Oxford Economics (OE) forecasts a short-term increase in US GDP, driven primarily by expected fiscal policy expansions. This growth is anticipated to marginally boost global GDP, with increased demand for imports potentially benefiting US trade partners. The global market may experience a “sugar high,” as firms rush to capitalise on heightened demand before anticipated tariffs take effect.

The positive impact may, however, be limited and uneven. The boost to global demand will likely be short-lived, as other economies may struggle with the repercussions of higher interest rates and inflationary pressures in the United States. The fiscal stimulus in the US could also put pressure on other advanced economies as they contend with currency fluctuations, an appreciation of the dollar, and potentially increased borrowing costs.

Trade Implications: Targeted Tariffs on Key Partners

Trump’s tariff policy may cause lasting shifts in global trade. OE projects an increase in effective tariff rates by an average 2–5percentage points, targeting specific sectors in China (where he has called for tariffs as high as 60%), the EU, Mexico, and Canada. While a more restrained approach compared to Trump’s earlier tariff policies are expected by many, sectors such as automotive and steel may still face significant disruptions.

NPR reports that Trump’s return may push countries like China to strengthen their own trade alliances, reducing dependency on the US and diversifying trade flows to other regions. This diversification could help mitigate the impact of tariffs in the long run, but in the immediate future, sectors affected by US tariffs may experience reduced exports, job losses, and economic downturns. Oxford Economics warns that the timing of these tariffs – potentially taking around a year to implement – will determine when the global impact truly hits, likely around 2026.

The impact on China could be particularly profound. While China has endured previous tariff regimes, further tariffs might spur even greater reliance on internal growth strategies, such as industrial policy and technological advancement. A focus on self-reliance could accelerate China’s ambition to decouple from US technology and markets, potentially reshaping global supply chains.

Monetary Policy and Interest Rates: Ripple Effects on Emerging Markets

As the US ramps up its fiscal stimulus, inflationary pressures are expected to rise, which could prompt the Federal Reserve to keep policy rates elevated longer than anticipated. The Fed might adjust its rate normalisation path to accommodate these inflationary effects, leading to fewer cuts than previously expected and possibly more tightening in 2027. This conservative approach will have ripple effects on emerging markets, many of which are sensitive to fluctuations in US policy rates.

Emerging economies, especially those with dollar-denominated debt, may feel the strain as US interest rates rise and the dollar strengthens. With capital outflows becoming a risk, these economies may have to hike their own rates to maintain stability. While many advanced economies may not see major policy shifts in response to Trump’s return, emerging markets could face substantial capital market challenges, further exacerbated by trade disruptions from US tariffs.

Shifts in Global Policy: Regionalism and Protectionism on the Rise

One of the most significant implications of Trump’s presidency may be the acceleration of regionalism and protectionism. According to OE, this trend is a natural response to increased global trade uncertainty, as countries seek to safeguard critical industries and reduce dependency on unpredictable trade partners.

In the European Union, the potential for US-imposed tariffs could lead to a greater emphasis on internal economic integration, fostering stronger intra-EU trade partnerships. Similarly, Asia-Pacific countries may lean towards forming tighter regional trade agreements to insulate themselves from US policy volatility. This shift toward regionalism will likely slow the growth of global trade and redirect investment flows, potentially diminishing the interconnectedness of the global economy.

This emphasis on regionalism may also manifest as a resurgence in industrial policy across various nations, as governments seek to fortify strategic industries like semiconductors and clean energy. Protectionist policies may arise not just as a defensive measure but as a proactive strategy to build domestic capacity in sectors historically dependent on global supply chains.

Geopolitical Instability: Middle East and Europe in Focus

Trump’s stance on international conflicts, particularly in the Middle East and Europe, introduces additional uncertainties. Concerns over reduced US support for Ukraine, which could have adverse effects on Europe’s already fragile recovery. If the US pulls back from NATO commitments, European nations may need to allocate more resources to defence, diverting funds from other economic priorities and straining public finances.

In the Middle East, a potential increase in US oil production, coupled with Trump’s unpredictable foreign policy, could disrupt oil markets. A decrease in support for allies or engagement in regional conflicts could contribute to oil price volatility, impacting global inflation and economic growth. While increased US oil output could alleviate short-term price hikes, the long-term stability of energy markets may be jeopardised.

The consequences of these geopolitical shifts extend beyond immediate economic impacts. Reduced stability in these regions could create refugee crises, increase defence spending, and disrupt global supply chains, further complicating an already challenging economic environment.

Rising Fiscal Uncertainty and Debt Concerns

The fiscal policies under Trump’s administration could lead to heightened concerns over the US debt trajectory. OE argues that the absence of strict fiscal rules could exacerbate fiscal imbalances, leading to higher borrowing costs over time. While fears of a major debt surge may be overstated, there remains considerable uncertainty about the impact of a loose fiscal policy coupled with a high deficit. Higher US bond yields could indirectly influence global markets, especially in advanced economies like Japan and Europe, where lower yields have become the norm. For countries still recovering from the economic challenges of the last decade, any upward pressure on bond yields could disrupt fiscal planning and strain public sector budgets.