During the International Monetary Fund and World Bank annual meetings, discussions primarily focused on low growth, high debt, and escalating conflicts. However, finance leaders were notably preoccupied with the implications of a possible return of Donald Trump in the upcoming U.S. presidential election.
Trump’s rising poll numbers, which have narrowed the early lead of his Democratic opponent, Vice President Kamala Harris, dominated conversations among finance officials, central bankers, and civil society representatives at the meetings in Washington this past week.
Concerns centered on Trump’s potential to disrupt the global financial system through substantial tariff increases, significant debt expansion, and a rollback of climate change initiatives in favor of increased fossil fuel production.
“Everyone expressed concern over the high level of uncertainty regarding the next president and the policies that could be implemented,” remarked Kazuo Ueda, Governor of the Bank of Japan.
An anonymous central banker expressed growing concerns, stating, “It’s beginning to look like Trump could win.” Trump has promised a 10% tariff on imports from all countries and 60% duties on imports from China. Such measures could disrupt global supply chains, likely prompting retaliatory actions and increasing costs.
German Finance Minister Christian Lindner warned Reuters that a trade war between the U.S. and EU would result in negative consequences for all involved.
Additionally, Trump is attempting to attract U.S. voters with various tax incentives, including extending all 2017 individual tax cuts and exempting income from tips, overtime, and Social Security retirement benefits. Budget analysts project that these policies could add at least $7.5 trillion to the national debt over the next decade, on top of the previously estimated $22 trillion increase in debt projected by the Congressional Budget Office through 2034.
A Harris victory is seen by finance officials as a continuation of President Joe Biden’s renewed focus on multilateral cooperation over the past four years, particularly regarding climate change, corporate taxes, debt relief, and reforms of development banks. While her proposals may lead to increased debt, it is expected to be significantly lower than under Trump.
Biden maintained Trump’s tariffs on steel, aluminum, and Chinese goods, notably increasing them for new sectors like electric vehicles and solar energy. Harris supports this “targeted” strategy and has criticized Trump’s sweeping tariff plans as imposing a $4,000 burden on American families.
Financial markets are witnessing a resurgence of “Trump trades,” with investors favoring assets like stocks, bitcoin, and the Mexican peso based on improved polling numbers for Trump.
The dollar has experienced its largest monthly gain in over two and a half years, rising 3.6% in October, as measured by an index against major currencies. Standard Chartered analyst Steve Englander noted that approximately 60% of this dollar increase is linked to Trump’s enhanced prospects in betting markets.
Brazil’s central bank chief, Roberto Campos Neto, mentioned that the market’s pro-Trump bets are already exerting inflationary pressure on long-term interest rate futures in a dollar-sensitive economy. He added that both Trump’s and Harris’ fiscal strategies have inflationary implications.
Concerns are growing about potential shifts in Trump’s trade and spending policies, especially as the IMF stated that the global fight against inflation has largely succeeded without significant job losses, with U.S. strength counterbalancing weaknesses in China and Europe.
IMF Managing Director Kristalina Georgieva emphasized the need for policymakers to begin reducing the significant COVID-induced debt or risk facing a future of low growth and rising public dissatisfaction.
When asked about the potential implications of a Trump return on the meetings and IMF policy guidance, Georgieva stated that the focus remained on addressing current economic challenges.
“The sentiment among our members is that elections are a matter for the American people,” she said at a news conference. “Our role is to identify the challenges and determine how the IMF can effectively address them.”
EMERGING STRAINS
Typically, the Federal Reserve’s substantial half-point rate cut would indicate a favorable “Goldilocks” period for emerging-market growth, as it eases financing conditions and alleviates inflationary pressures on currencies.
Some are already concerned that larger U.S. deficits under a Trump presidency could lead to a swift end for the party.
“An increasing deficit translates to rising debt, and higher debt can lead to elevated long-term interest rates, potentially resulting in a stronger U.S. dollar,” noted Turkish Finance Minister Mehmet Simsek at a recent event. “High long-term rates in the U.S. and a strong dollar are not beneficial for emerging markets.”
There are widespread fears that a tit-for-tat global trade war could hinder efforts to ease inflationary pressures. Lesetja Kganyago, South Africa’s central bank governor, remarked, “When one country imposes tariffs, it assumes that others won’t retaliate. However, if they do impose tariffs, it could lead to higher prices globally, making it difficult for central banks to manage disinflation.”
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