Opinion polls conducted since the weekend suggest Donald Trump’s narrow escape from the attempt on his life in Pennsylvania has made his return to the White House more likely. Until now, little attention has been paid to what Trump 2.0 would mean for the US and wider global economy. That will now change.
What the world needs is a period of stability after the repeated blows of recent years. Were Trump to avenge his 2020 defeat at Joe Biden’s hands come November, it would mean the opposite.
Sure, there are other reasons for being anxious about a second Trump presidency, but anybody wondering what the next big economic shock might be after the pandemic and the war in Ukraine need look no further than the frontrunner to be in charge of the world’s biggest economy in six months’ time.
In its latest health check on the global economy on Tuesday, the IMF highlighted the risks of big swings in economic policy as a result of elections this year. It did not mention the US by name but the implication was clear enough. Unaffordable tax cuts could lead to bigger debt problems, push up long-term interest rates and ratchet up protectionism.
The IMF said: “Trade tariffs, alongside a scaling up of industrial policies worldwide, can generate damaging cross-border spillovers, as well as trigger retaliation, resulting in a costly race to the bottom.”
Trump’s economic strategy is highly protectionist, it is also incoherent and dangerous. It is incoherent because he appears to think the tariffs he intends to impose on goods entering the US from China (and other countries) will pay for cuts in income tax. In reality, tariffs mean higher prices for US consumers, which will hurt those on low and middle incomes the most. The tax cuts will mostly benefit corporations and better-off individuals.
It is dangerous in a number of ways. For a start, there is the risk of prompting a full-blown trade war with China. Then there is the threat that higher prices for imports will drive up US inflation, leading to higher interest rates. Tough curbs on immigration are promised, and these will have the effect of reducing labour supply and adding to the upward pressure on wages.
Finally, there are likely to be consequences should Trump go ahead with his isolationist diplomatic policy: more expensive commodities and more jittery financial markets. Trump likes a weak dollar, but in the past the dollar has strengthened in times of heightened global instability, something a Trump presidency makes far more likely.
The possible consequences of all this are obvious: stagflation; attempts to strong arm the Federal Reserve into cuts in interest rates; an even bigger crisis for the heavily indebted poor countries that have borrowed in dollars; the further retreat of globalisation. And that’s not even taking into account the risk that the cold war with China could turn hot.
Pressure was already mounting on Biden to withdraw from the race before the Pennsylvania shooting and he was already facing a tougher struggle than looked likely six months ago. Then the US was booming, but it is now slowing down and unemployment is on the rise. That’s never a good sign for incumbents in the Oval Office.
That said, the US has been by far the best performing economy in the G7 since the end of the Covid pandemic. Inflation rose – as it did across the developed world – in 2021 and 2022, but not to the levels seen in Europe. Biden has delivered on infrastructure and provided a boost to manufacturing, and the subsidies contained in the Inflation Reduction Act represent a more interventionist industrial strategy designed to stimulate green growth. He has delivered for working Americans.
However, Biden has the same problem that Rishi Sunak had during the UK general election: voters feel poorer even though they are better off. In the half-dozen or so swing states that will decide who wins in November Trump is ahead.
These are not insurmountable leads and in normal circumstances a sitting president would still be reasonably confident of victory at this stage of the campaign. These, though, are not normal times.
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Trump has been successful in convincing large numbers of voters that the US is doing worse than it actually is. Indeed, he spotted the potential to tap into the discontent of hollowed-out middle America long before his political opponents did. That sense of decline lives on, especially among Republicans.
Americans are far more positive about the state of their own finances than they are about the economy in general. The fact that growth is now slowing under the weight of higher interest rates makes it far harder for Biden to counter Trump’s narrative that things have taken a turn for the worse since he was defeated in 2020. The Fed now appears to be gearing up to cut interest rates in September but by then it may be too little, too late for Biden.
The state of the economy is no longer Biden’s biggest problem. Sure, the latest unemployment figures showed the US jobless rate rising from 4% to 4.1% in June but by historical standards that is still low.
What concerns voters is whether Biden is fit to be president right now, let alone for another four years, and the indications are that he is not. Mistaking Volodymyr Zelenskiy for Vladimir Putin at last week’s Nato summit was merely the latest damaging gaffe. Trump is not exactly a model of cogency either but that’s not the point. He appears to many Americans to be more capable than Biden, particularly after last month’s disastrous head-to-head debate.
It boils down to this: would an alternative Democrat candidate be able to flip the campaign so that it focuses on the economic successes of the past four years rather than Biden’s frailty? Would it mean more attention was paid to Trump’s character and his policies? Would it give the Democrats a better chance of winning? The answers to those three questions are yes, yes and yes.