Although a soft landing for global growth has materialised and inflation pressures are slowly retreating, the legacy of recent economic turbulence resonates with political developments worldwide.
Political turbulence
The prospect of political turbulence is one of the ten key themes in our Outlook for 2024.1 It is fair to say that this has proved apposite (see Figure 1) so far, even before the US presidential election on 5 November. In European parliamentary elections, the surge in support for France’s right-wing party, the National Rally, led President Macron to call a snap parliamentary election. In that election, the National Rally was pushed into third place, behind an alliance of left-wing parties and President Macron’s centrists. In the UK, the election of a Labour government after almost 14 years of Conservative rule reflected a general desire for change. Even so, no radical change in the direction of economic policy is planned, not least because the new government has ruled out (for now) any major changes in government revenue or spending. In particular, unchanged rates of individual, corporate and value added taxes have been promised. Such stability from the opposition party is not the case in the US, where President Trump’s agenda includes potentially large changes.
Tariffs and trade
Most significantly, Trump plans either a 10% tariff on all US imports or a 60% tariff on imports from China or, indeed, both. That could partly finance a move to make the individual income tax cuts from the 2017 Tax Cuts and Jobs Act permanent. It remains to be seen whether he is elected (the chance is currently seen as almost 60%2) and whether such plans materialise. Almost certainly, they would prove to be inflationary. One estimate is that a 10% across-the-board tariff, with full retaliation, would raise the US price level by 1.1%.3 It would therefore compound the difficulty of getting closer to the US’s 2% inflation target.
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