Donald Trump will either be remembered for cementing US economic dominance or undermining it through his trade war – Jim Lo Scalzo/EPA-EFE/Shutterstock
From this side of the Atlantic, the US economic situation looks enviable. Stock markets are defying gravity, confidence is riding high, and real GDP – after a 2.8pc gain in 2024 – is some 12pc above its pre-pandemic level.
Over the same five-year period, economic activity in the UK has grown by a paltry 3pc. With only a 4pc increase in France, momentum is scarcely better than in the UK. But both are in less bad shape than Germany. Hampered by a massive wave of de-industrialisation, Europe’s biggest economy has not managed any overall growth since late 2019.
Over the past three years, the US has defied worries that a slump may be imminent – most notably during 2022 and 2023 as the US Federal Reserve aggressively tightened the monetary screws to curb surging inflation.
After consistently surprising to the upside, the risk of a US recession is low on financial markets’ list of concerns.
So maybe now is the time to be worried. When confidence exceeds fundamentals, the risk of downside surprises increases.
Of course, it does not necessarily follow that a period of fast growth needs to give way to a slump. But a close examination of fundamentals suggests some cause for concern.
Last year, US federal government borrowing reached close to 7pc of GDP while the unemployment rate was around 4pc. In the US’s entire post-Second World War history, there has never seen such a large differential between government borrowing and the unemployment rate.
Recessionary levels of borrowing at full employment are helping to pump up domestic economic activity and fuel a bubble in stocks. Driven by the exceptional performance of top tech companies like Apple and Tesla, US market capitalisation has grown from 150pc of GDP in 2019 to a massive 210pc.
As surging stocks push US household net worth to an all-time high, consumers are spending almost every dollar they earn. In 2024, the US household savings rate declined from 5.5pc to 3.8pc. From 2010 to 2019 the saving rate averaged 6.1pc.
Rapid US growth is underpinned a self-reinforcing cycle of massive government borrowing, rising stock prices, and increased consumer spending.
Between the fourth quarter of 2019 and the same period of 2024, personal consumption jumped by 15pc, government spending increased by 9pc, and intellectual property investment gained an enormous 38pc.
In contrast, exports of goods and services rose just 6pc, housing investment expanded by a meagre 3pc, and industrial production barely grew at all. In the parts of the US economy that are weak, performance is almost as bad as in Europe.
The US economy resembles a textbook government debt-fuelled bubble, where the strong GDP gains and outsized financial returns distort the perceived risk of handing piles of money to the government to finance an unsustainable borrowing binge.
For now, exuberant markets, businesses, and consumers are not asking how long the growth can last or whether the optimism is fully justified. When animal spirits are in full force, it is hard to sense the underlying danger.
The risk comes if this process unravels, which is what makes Donald Trump’s trade antics such a risky gamble.
Financial market commenters are wrong to assume that the situation today is the same as in 2018 when Trump turned protectionist during his first term. From a position of strength, the US could sustain a long, drawn-out trade war. So too could the EU and China.
Back then, US price pressures were modest after a long period of inflation weakness, the federal deficit was below 4pc of GDP, and interest rates were low across the curve.
In 2018, leaders in Brussels were united in the wake of the 2016 Brexit vote, Russian gas still flowed cheaply, and still-strong Chinese demand for European exports had helped to push production to an all-time high. On the other side of the world, China was enjoying its last burst of rapid, feel-good growth.
The escalating tit-for-tat tariff war that started in early 2018 only eased up in early 2020 because the pandemic shifted the attention of governments.
Fast forward to 2025, and disenchanted voters across Europe are railing at anaemic economic growth caused by expensive energy costs following the Russian invasion of Ukraine, as well as misguided energy policies and weak global demand. Eurozone exports and production have declined precipitously since 2018.
In China, consumers are chronically pessimistic following the collapse in real estate activity, while steps to ease credit and reduce borrowing costs seem to be failing.
And unlike in 2018, when government debt markets were heavily tranquillised after years of massive global quantitative easing, today’s creditors are no longer so sedate. Instead, they are skittish and attuned to the potential inflation and growth risks coming from trade wars.
The bond market wobbles at the start of the year were a sign that things could turn ugly if trade wars get out of hand.
In a worst-case scenario, escalating tariffs could once again stoke US inflation and trigger a surge in interest rates that pricks the US equity market bubble. The need to pursue a less expansionary fiscal policy to shore up confidence could further jolt stock markets, make consumers cautious, and even upend the US upswing.
Because the US economy appears so far ahead, warnings like this may fall on deaf ears. But the recent surprise of DeepSeek, developed by a small Chinese AI lab and offering cheaper and less capital-intensive cutting-edge technology, serves as a reminder that the gap between the US and the rest should not be taken as given.
With any luck, Trump’s recent shock and awe tactics on trade may stem from a realisation that the US economy cannot withstand another long and drawn-out trade war. He may hope to frighten his foes into coming to terms fast.
If he manages to pull this off, he will be remembered as an unconventional maverick who revitalised the US economy.
But make no mistake, if he fails, he will go down as the president who ignored the warning signs and ended a US boom with a misguided trade war.
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