US Macro Risks Under Trump: What We’re Thinking About

The resurgence of Donald Trump’s presidency has reignited discussions about its potential impact on the US economy and global markets. For investors in emerging markets, understanding the ripple effects of US policy shifts is critical. In our recent quarterly review, macroeconomics advisor Nick Stadtmiller presented a detailed analysis of the risks under Trump, breaking down how fiscal policies, geopolitical maneuvers, and trade strategies could impact global markets.

Fiscal Policy: Debt, Deficits, and the “3-3-3 Rule”

Trump’s administration is pursuing an ambitious fiscal agenda, encapsulated in the “3-3-3 Rule”:

• A 3% fiscal deficit, aiming to tighten the current deficit of about 6.5% of GDP through aggressive government efficiency measures and tax reforms.
• 3% GDP growth, targeting deregulation and investment incentives, though skeptics question the feasibility of sustained growth at this level.
• Increasing oil production by 3 million barrels per day, emphasising energy independence and bolstering industrial activity

However, fiscal sustainability remains questionable. Even drastic cuts to discretionary spending wouldn’t meaningfully reduce the deficit due to entrenched mandatory spending on Social Security, Medicare, and Medicaid. Persistent deficits will necessitate heavy borrowing, driving up Treasury yields and impacting dollar-denominated funding costs globally.

Trade and Tariffs: More Than a Negotiation Tactic?

Trump’s tariff policies could dramatically reshape global trade:

• Proposed broad-based tariffs (10–20%) on all imports, with additional measures targeting China (up to 60% tariffs), pose risks to global supply chains.
• Key trade partners like Mexico, Vietnam, and Canada are highly exposed, with exports to the US comprising significant portions of their GDP.
• While tariffs might strengthen the US trade balance in the short term, retaliatory measures could lead to a prolonged trade war, echoing the protectionist spiral of the 1930s.

The ambiguity surrounding Trump’s tariffs—whether they’re revenue-generating or strategic leverage—adds uncertainty. Investors are watching closely for how these measures could affect inflation and corporate margins, particularly in export-dependent industries.

The Dollar: Strength or Weakness on the Horizon?

In the short term, Trump’s growth-focused agenda is dollar-positive, bolstered by strong US economic performance and capital inflows. Long-term risks include a weaker dollar driven by wide fiscal deficits. As the US becomes increasingly reliant on foreign buyers for its debt, currency depreciation could undermine global confidence.

The interplay between fiscal policies and external accounts is critical. While the administration emphasises domestic economic strength, it must balance relationships with key creditor nations, including East Asia (Korea, Taiwan, and Singapore) and Europe.

Inflationary Risks: Spillovers Beyond the US

Trump’s policies, from fiscal expansion to immigration crackdowns and tariffs, carry inflationary potential:

• Tariffs could raise import prices, stoking inflation at home and exporting it abroad.
• Labor market disruptions from stricter immigration policies could tighten supply, further amplifying wage inflation pressures.
• The Federal Reserve may maintain high interest rates to counter inflation, increasing borrowing costs globally.

Emerging markets face compounded challenges from rising dollar rates and inflation spillovers. Countries reliant on dollar financing, particularly in Latin America and Southeast Asia, could see their borrowing costs soar, exacerbating debt sustainability concerns.

Geopolitical Pressure: Choosing Sides

The Trump administration’s confrontational stance is forcing emerging markets into difficult positions:

• Countries with strong trade ties to both the US and China may face increasing pressure to “pick a side”.
• This tension has broader implications for economic partnerships, security agreements, and investment flows in regions like Southeast Asia and Latin America.

Investor Implications

The Trump presidency’s policies create a dual-edged scenario: near-term optimism buoyed by growth expectations, and long-term risks tied to fiscal unsustainability and geopolitical tension. For emerging market investors, vigilance is paramount. Monitoring fiscal trends, trade developments, and currency movements will be essential in adapting to these shifting dynamics.