Roubini: Trump's policies pose the risk of higher inflation, slower growth and lower stock and bond prices

By Nouriel Roubini

The possibility of a second Trump presidency has not yet affected financial markets – but that could soon change

Trump's proposed economic policy agenda is now the greatest threat to economies and markets around the world.

We have entered a time of increasing geopolitical rivalries and conflicts. Russia's war against Ukraine is now in its third year, the Israel-Hamas conflict could still develop into a regional war, and the intensifying Cold War between the United States and China could still heat up in Taiwan sometime this decade.

If Donald Trump wins the US presidential election in November, the world will be further destabilized. However, these risks have so far had only a limited impact on economies and markets. Could that change soon?

Although the war between Russia and Ukraine remains as brutal as ever, its global impact is likely to be more modest. The risks of direct NATO involvement or the use of tactical nuclear weapons by Russia are lower today than at earlier points in the war. Although the war initially led to a rise in energy, food, fertilizer and industrial metal prices, even Europe – the hardest hit region – absorbed the shock with only a minor slowdown in growth (or in some cases a halt), not that severe Recession that many analysts had feared.

Russian hydrocarbons have been replaced by increased imports from the United States and Middle Eastern countries. The impact on food prices has been reduced since Ukraine managed to reopen a Black Sea corridor for its grain exports.

The Israel-Hamas war has also had limited regional and global economic impact. Israel's GDP contracted sharply in the fourth quarter of 2023 and is likely to remain weak as long as the conflict continues. The economic damage to Gaza is clearly more severe, and Egypt's revenue from the Suez Canal – a major source of foreign currency revenue – has declined due to Yemen's Houthi attacks on cargo shipping through the Red Sea. However, if the conflict remains contained in its current form, the impact on the global economy and markets will also remain limited.

Finally, it will take a major regional escalation – such as an outright war between Israel and Hezbollah in Lebanon, or signs that Israel (and possibly the US) is headed for war with Iran – to lower expectations of a tougher global one Able to wake up fail. An all-out war between Israel and Iran would dramatically reduce energy production and exports from the Gulf and lead to energy price increases comparable to the global stagflationary shocks following the 1973 Yom Kippur War and the 1979 Iranian Revolution. Fortunately, the likelihood of a strong regional escalation remains low for the time being.

While the Cold War – or strategic competition – between the US and China is likely to continue to intensify over time, relations may not deteriorate significantly this year. U.S. President Joe Biden and his Chinese counterpart Xi Jinping agreed to a tactical thaw late last year, and China's response to an adverse outcome in Taiwan's presidential election has been relatively muted. Although the Taiwan issue could come to a boil later this decade, it is unlikely to do so this year or next. China's economic weaknesses and fragilities could make it less confrontational towards the US and the West.

Read: Are you nervous about the US market hitting an all-time high? Buy China stocks.

At the same time, de-risking, reshoring, friendshoring and restrictions on trade in goods, services, capital and technologies in the West will not increase significantly in the short term. As long as strategic competition remains managed, the global economic impact will be modest.

The biggest geopolitical risk to growth and markets is the US elections. But here it is important to recognize that Trump and Biden share some foreign policy priorities. Both Democrats and Republicans are and will remain hawkish on China. Both Biden and Trump are strong supporters of Israel, but they also recognize that the desired normalization of relations between Israel and Saudi Arabia may require some recognition of a possible two-state solution.

The biggest impact of a second Trump administration on markets would be its economic policies.

The biggest difference between Trump and Biden is on the issues of NATO, Europe and the Russia-Ukraine conflict. Some fear Trump would abandon Ukraine and let Russia win the war. But since he is likely to continue to adopt a hawkish stance toward China, he may be concerned about what signal China would send (regarding Taiwan) to allow Russia to take over Ukraine. Furthermore, Trump really wants European NATO members to spend more on defense. If they do, he might see the value of the alliance focusing on Asia to deter China.

The biggest impact of a second Trump administration on markets would be its economic policies. There is no doubt that US protectionist policies would become tougher. Trump has already announced that he would impose a 10% tariff on all imports coming into the US (the average tariff rate is currently around 2%), and likely even higher tariffs on imports from China. This would trigger new trade wars, not only with strategic rivals such as China, but also with America's allies in Europe and Asia such as Japan and South Korea.

A global trade war would reduce growth and increase inflation, making it the biggest geopolitical risk that markets should consider in the coming months. In this scenario, deglobalization, decoupling, fragmentation, protectionism, the balkanization of global supply chains and dedollarization would become even greater risks to economic growth and financial markets.

Other stagflationary risks associated with Trump include his climate change denialism and the likelihood that he would seek to replace Federal Reserve Chairman Jerome Powell with a more dovish, dovish figure.

Trump's fiscal policy would further increase the already too high deficits.

Ultimately, Trump's fiscal policy would increase the already high deficits. Expiring tax cuts would be extended, as would increased spending on defense and social services. The risk that bond watchdogs would ultimately shock bond markets with much higher yields would increase. Given the high and rising levels of private and public debt, this would raise the specter of a financial crisis.

As the saying goes, “It’s the economy, stupid.” Trump’s proposed economic policy agenda is now the greatest threat to economies and markets around the world.

Nouriel Roubini is Professor Emeritus of Economics at New York University's Stern School of Business and Chief Economist and co-founder of the Atlas Capital Team. He is the author of Megathreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them (Little, Brown and Company, 2022).

This commentary was published with permission from Project Syndicate – Trump and the Global Economic Risk Picture

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-Nouriel Roubini

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03-06-24 1641ET

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