Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

Table: 2024 was a remarkable year for global equities, which mostly means US equities, as the latter make up as much as 70% of the MSCI World index. This is an incredibly concentrated index now with so much of its exposure to the US mega-caps: the top 20 US stocks by market cap are now some 40% of this index. Elsewhere, the strong US dollar limited emerging market gains in 2024, but Europe was the real laggard despite a respectable performance in EUR terms for the year for the MSCI Europe index.

The Trump plan: sounds too easy?
The Trump agenda is to reindustrialize the US to both bring back manufacturing jobs and improve national security, which the pandemic made clear includes critical industrial supply chains. At the same time, the aim is to improve the country’s massive trade and budget deficits and overall spiraling debt trajectory while keeping inflation low – all without any market pain, of course. These goals are inherently contradictory outside of some miraculous productivity- and real growth miracle. Trump hopes that most of the above agenda is achievable and paid for by tariffs and economic growth.

US Treasury Secretary nominee Scott Bessent has touted a “3-3-3 plan” to deliver the Trump agenda: to include a chop to the fiscal deficit of 3% of GDP (from more than twice that in recent years), real GDP growth of 3% delivered via deregulation and tax cuts, and low inflation via an additional 3 million barrels a day “equivalent” growth in US oil/gas production. Good luck! More likely, we’ll see half that amount of growth or less because any fiscal slowdown by definition will subtract from overall GDP growth. After all, it was the Biden deficits that drove much of the US growth out-performance relative to the rest of the world in the last two years, preventing that pandemic-hangover US recession that just never seemed to arrive.

Besides the risk from fiscal drag, the size of which will be highly dependent on the ability of the Musk/Ramaswamy “DOGE” to make its mark, other drivers of a 2025 growth slowdown could be dislocations from tariff uncertainty. A final wildcard is the status of the AI investment boom. Consensus US GDP growth forecasts for 2025 are at +2.1%, a rosy forecast given the risks.

US treasury market: the reality check?
US Treasury yields rose all along the yield curve ahead of Trump’s inauguration as the market makes the general assessment that the new president will bring some combination of sticky inflation and still very large budget deficits, and even solid economic growth as well. But can the US treasury market hold up without intervention, given the blitz of issuance in the year ahead and the vertiginous rise in the US debt servicing bill – much of it going to foreigners who aren’t even taxed on their income on US public debt? Current forecasts put the 2025 US treasury debt service bill at a net USD 1 trillion, up from less than USD 900 billion in 2024 and USD 650 billion in 2023. The only scenario that can cap longer US treasury yields via organic market forces might be an ugly recession amidst massive DOGE fiscal spending cuts and a flight out of risky assets. Even so, such a recession would eventually worsen the deficit/debt trajectory and inevitably spark a fresh combination of new Fed QE and politically obligatory fiscal stimulus to come hot on its heels. Either way, all paths require that over the medium to longer term, nominal US GDP rises faster than the average interest rate at which the US treasury issues debt.

Additionally, there are ways that some of Trump’s team are discussing dealing with both the long term stability of the US treasury market and while maintaining the use of the US dollar as the preferred global reserve and transaction currency. This is covered in our Q1 outlook for currencies.

And then there is the rest of the world.
Let’s remember as we look ahead that the US is not the only actor on the global stage and we can expect a response from all global players large and small to the US agenda on top of ongoing pressing matters at home.

China in a G2 or G-Zero world?
For the US-China relationship under Presidents Trump and Xi, the potential outcomes are incredibly diverse, from Trump’s “G2” idea that the US and China can sit down and solve the world’s problems to Eurasia Group Ian Bremmer’s “G-Zero” world, in which we have chaos, because no one is fully in charge any more in a multi-polar world.

We suspect Trump will open with targeted tariffs with the promise of more to come but with an invitation for deal-making. At the same time, with or without some grand bargain on US-China trade- and currency policies, perhaps even a full “Mar-a-lago accord”, China needs to reflate its economy. All of this and much more on China covered in Charu’s piece in our Q1 outlook for China.

Europe – the view from the bottom
Europe has one distinct advantage relative to most of the rest of the world: things are already so bad for core Europe that they may have a hard time getting any worse, at least for the two key large core Eurozone powers, France and Germany. France is the Eurozone’s softest spot and at best, the outlook is for a “muddling through” due to intractable political problems and ugly debt dynamics. The French fiscal stability concerns are sufficiently stark that in the first trading days of 2025, French 10-year yields rose above Greek 10-year yields for the first time ever.

Germany, meanwhile, offers considerable upside potential after the coming February 23 election, with the chief question only the degree to which it will realize that potential. Likely new Chancellor, the CDU leader Friedrich Merz, has made all of the right noises on lowering taxes and non-wage cost overhead for corporations, as well as discussing exceptions to the country’s “debt-brake” rules that have traditionally prevented large-scale fiscal stimulus outside of dire emergencies like the pandemic.

Germany has under-invested domestically in digital and other infrastructure and its mostly heavy-industry industrial export model is challenged by high energy input prices after Russia’s cheap natural gas is no longer available, increasingly stiff direct competition from China and the prospect for steep Trump tariffs to boot. Productivity growth (especially via lower energy prices), deregulation and increased investment in infrastructure and opening up for innovation are the call-phrases here, not doubling down to keep the creaking old industrial model turning over, as outgoing Chancellor Scholz would have Germany do.

Still, a German comeback risks under-whelming in its early phases as Merz will have to find an awkward coalition partner post-election given that the likely second-largest party in the election, the AfD, are still considered untouchable politically for the mainstream parties. A lash-up with the SPD or Greens would likely see half-measures and modest brightening of the outlook rather than sweeping new policies that trigger a boom.

The one big wild-card for Europe is the potential for euro-bond issuance at the Eurozone level to fund massive new national security investments, at first chiefly military, but possibly also to secure long-term cheaper energy supplies and better trans-European infrastructure and supply chains.  Eurozone leaders would do well to consult Mario Draghi’s The Future of European Competitiveness, which outlines much of the European playbook needed.