Trump’s election raises concerns over global trade and inflation, particularly impacting China’s economy with potential tariff increases; Eurozone struggles with contraction while the US sees mixed economic signals.
U.S. : Trump’s policies increase risk of rising inflation and may slow pace of Fed’s rate cut.
Donald Trump of the Republican Party won the presidential election on November 5, with a strong likelihood of securing a majority in both the US Senate and House of Representatives. Meanwhile, the Federal Reserve (Fed) decided to lower its benchmark rate by 25bps to 4.50-4.75% at its November 6-7 meeting, citing a resilient US economy and progress in inflation moving towards its 2% target. Additionally, the services PMI rose to 56 in October, the highest level since August 2022.
Trump’s presidential victory created a positive sentiment for US economic outlook, driven by expectations of economic reform policies, tax cuts, reduced aid to Ukraine, and efforts to lower inflation. However, his trade policies, including a proposed 60% tariff on imports from China and 10-20% tariffs on goods from other countries, could heighten risks to the US economy, particularly upstream industries heavily reliant on China. Also, middle- and low-income households could face increased prices of goods. Krungsri Research projects that implementing these tariffs could reduce US GDP by 0.97%. Under the baseline scenario, the Fed is expected to lower interest rates gradually, with one cut per quarter in 2025. However, rising inflation could alter this trajectory, potentially resulting in fewer or slower cuts than market expectations.
Eurozone
With inflation below 2% and the economy struggling, ECB rate cuts would continue. In October, the manufacturing PMI rose to 46 from 45 in September but remained in contraction for the 28th consecutive month. Meanwhile, the services sector PMI stood at 51.6, below the Q1 and Q2 averages of 53.1 and 52.0, respectively. October Producer Price Index (PPI) declined by -3.4% YoY and -0.6% MoM, compared to -2.3% and +0.6% in the previous month, respectively.
The Eurozone’s recovery continues to face challenges due to (i) a contracting manufacturing sector and weakening momentum in services, (ii) sluggish credit growth, and (iii) diminishing fiscal stimulus. A recovery of private consumption would be constrained by a weakening labor market. As a result, the European Central Bank (ECB) is likely to continue cutting the key interest rate to 3.00% by end-2024 and 2.00% by end-2025. Regarding heightened global economic and trade uncertainties following Trump’s victory, the proposed tariffs of 60% on imports from China and 10-20% on all goods imports could have negative impact on export-reliant countries. In this case, we expect EU exports to decline by -1.66% from baseline with negative effects on almost all key industrial sectors across the region.
China
Donald Trump’s election as president will intensify US-China trade tensions. China’s export growth jumped from 2.4% in September to an almost 2-year high of 12.7% YoY in October. Exports of high tech and mechanical and electrical products grew by respectively 9.1% and 13.7%. Likewise, exports to the US and Europe expanded by 8.1% and 12.7%. However, at 47.3, the new export orders component of the Manufacturing PMI has now been in contractionary territory for 6 months.
Growing exports but shrinking new orders may reflect the desire to accelerate deliveries of inventory ahead of possible tariff hikes. Our analysis shows that if the US imposes 60% tariffs on all Chinese goods, China’s exports will drop from the baseline by -5.8%. Because electronics & electrical equipment, rubber & plastics, and textiles, leatherware & footwear accounted for 35.4%, 11.8%, and 3.9% of 2023 Chinese exports, these industries would be most seriously impacted. Exports of these would thus decline from the baseline by -10.1%, -9.7%, and -7.4%. In case that the US also imposed 20% tariffs on imports from the rest of the world and China retaliated with 60% tariffs on US imports, exports of these three industries would decline from the baseline by -9.9%, -10.4%, and -9.8%, respectively. In this case, total Chinese exports would drop -7.2% relative to the baseline.
Inflation may rise back to target range by year-end; potential worsening of global trade tensions is on the horizon
Headline inflation rose gradually in October. MPC is expected to maintain the policy rate at its last meeting of 2024. In October, headline inflation increased from 0.61% YoY to 0.83%, largely as a result of higher prices for food, especially fresh fruit and vegetables, and more expensive diesel and electricity, which climbed relative to last year’s low base. Core inflation, which excludes prices for raw food and energy, remained steady at 0.77%, the same rate as in September. For the first 10 months of this year, the average headline and core inflation rates were 0.26% and 0.52%, respectively.
Inflation for the remainder of the year is expected to rise back to the official target range of 1-3%, partly due to the low-base effect of diesel price, which was THB30 per liter last year compared to the current cap of THB33 per liter. Additionally, tourism activities late in the year could drive up the prices of goods and services. However, the average headline inflation for the whole 2024 may be slightly below our forecast of 0.5%.
Regarding monetary policy, after the MPC surprised the market by cutting the policy rate to 2.25% at its October meeting, Krungsri Research anticipates that the MPC will maintain the rate at 2.25% at its final meeting on December 18, adopting a wait-and-see approach to assess the economic outlook and financial stability. On the government’s side, there are plans to implement year-end economic stimulus measures and introduce relief programs for retail borrowers to address household debt issues.
US trade policy may be positive for only some industries but negative for many industries. In light of US President-elect Trump’s declared intention to overhaul policy and the risk that this will drastically worsen international trade relations, we have analyzed three scenarios involving increases to US tariffs.
Former President Donald Trump’s policies have significantly contributed to uncertainty in global trade and the broader economy. His administration’s approach, characterized by tariffs and trade wars, has disrupted established supply chains and instilled fear among businesses. While intended to protect American industries, these measures have been met with retaliation from other countries, intensifying tensions and complicating international trade relationships.
China, as one of the largest players in global trade, remains particularly vulnerable to these escalating trade conflicts. The tariffs imposed by the Trump administration have strained China’s export-driven economy, leading to slower growth and increased costs for consumers. This vulnerability is amplified by an interconnected global market, where disruptions in trade can have far-reaching consequences, affecting not only China but also countries reliant on its manufacturing sector.
The ongoing uncertainty surrounding trade policies continues to affect investment decisions and economic predictions. Businesses are now more cautious, hesitant to commit to long-term plans amidst the shifting landscape. As nations grapple with the repercussions of these policies, the global economy remains at a crossroads, seeking stability in a period marked by trade tensions and economic fragility.
