Opinion | From Trump to Fed, US will have outsize impact on global economy in 2024
The world’s largest and most open economy, its biggest and most liquid capital market and the country with the dominant reserve currency has always been a key determinant of the global outlook. The United States’ position, moreover, as the world’s pre-eminent superpower, most important democracy and crucial upholder of the Western liberal order has amplified its influence greatly.
However, next year, the prospects for the world economy and the liberal order hinge even more decisively on what happens in the US. It is no exaggeration to say that the fate of the global economy, sentiment in financial markets, the future of liberal democracy and the scope for further geopolitical tensions and shocks will be almost entirely determined by events in the US.
The confluence of highly consequential factors – the Federal Reserve’s ability to complete the “last mile” of bringing inflation down to 2 per cent without making a policy mistake, whether the hitherto resilient US economy finally succumbs to a recession and the extent to which “Trumpism” will inflict further harm on US democracy and the country’s response to global threats even if Donald Trump himself does not return to the White House – will have a huge bearing on the outlook for 2024 and beyond.
First, the Fed and markets face a moment of truth. Bond investors are betting on aggressive cuts in borrowing costs despite the Fed’s insistence that the fight against inflation is not yet won. Futures markets are pricing in a reduction of nearly 1.5 per cent by the end of 2024, with the first cut potentially coming as early as March.
A showdown looms between investors – many of whom believe policymakers are underestimating both the pace of disinflation and the adverse impact of monetary tightening on growth – and the Fed, whose inflation-fighting credibility is at stake. The risk of a policy mistake, either because the Fed cuts rates prematurely or keeps them too high for too long, has never been more acute.
The nightmare scenario is that the Fed jumps the gun and is forced to resume tightening because inflation does not ease fast enough or reaccelerates. Conversely, it could put off rate cuts for too long, making a recession more likely. Given the Fed’s position as the world’s most influential central bank, a major policy blunder would not only roil markets but also make it more difficult for other central banks to appear credible.
US Federal Reserve Board Chair Jerome Powell speaks during a news conference about the US central bank’s monetary policy in Washington on December 13. The Fed held interest rates steady and signalled in new economic projections that the historic tightening of US monetary policy engineered over the last two years is at an end and lower borrowing costs are coming in 2024. Photo: AP
Second, the US can only dodge a recession for so long if rates remain at high levels. Signs that the economy is slowing are increasingly apparent. The formidable US consumer – whose spending power has been underpinned by a resilient labour market – is coming under mounting strain. Bloomberg data indicates it requires about US$119 to buy the same goods and services a family could afford with US$100 just before pandemic.
Price increases have also eroded the value of savings built up during the pandemic, particularly for those on lower incomes. JPMorgan said “fading post-pandemic tailwinds” and “building monetary headwinds” increase the risk of a downturn next year. While the rest of the world needs the US economy to weaken further to increase the scope for rate cuts, a recession would be hugely damaging to market confidence.
Moreover, the economy, like most things in the US, has become deeply politicised. Consumer sentiment is much more negative among self-identified Republicans than it is among Democrats. According to a monthly survey conducted by the University of Michigan, there was a more than 30-point gap between Democrats and Republicans in an index of consumer expectations. This is partly why US politics has become so consequential.
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Trump gained over US$100 million through fraud, New York says as civil trial starts
Trump gained over US$100 million through fraud, New York says as civil trial starts
Third, even if Trump does not win a second term, the mounting threat that a man who has been indicted on felony charges for seeking to overturn the results of the 2020 presidential election will return to the White House could prove to be a trigger for all sorts of unpredictable events. Trumpism poses as much of a danger to American democracy as Trump himself, and perhaps more.
A second Trump term is the mother of all tail risks that is impossible to insure against. To be sure, plenty can happen between now and next November. Not only could the felony charges Trump faces land him in prison, there is pressure to replace US President Joe Biden with a more popular younger candidate. Yet, the fact that Trump is ahead of Biden in several polls is worrying enough.
A second term in office would give Trump and his loyalists carte blanche to dismantle the federal government by replacing the civil service with Trump sycophants. Trump would then be free to seek revenge and retribution. Robert Kagan, a senior fellow at the Brookings Institution, said in a column in The Washington Post on November 30 that “there is a path to dictatorship in the United States, and it is getting shorter every day.”
Wreaths and other holiday decor adorn the White House, in Washington, on November 27. Trump is ahead of Biden in several opinion polls. Photo: Reuters
Fourth, US foreign policy is also on trial. The appeal of isolationism and economic nationalism has been growing for some time. With many voters convinced the US is spending too much on Ukraine, and Republicans shamefully tying extra funding for Kyiv to new curbs on immigration, there are grave doubts about Washington’s ability and willingness to face down threats from Russia and China.
A second Trump term would turbocharge isolationist and protectionist policies, eviscerating US security commitments around the world. The US would cease to be the main defender of the liberal order, to the delight of Beijing and Moscow.
Many of these risks might not materialise. But whatever happens, the US economy and politics are the overriding determinant of the outlook for 2024.
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