Economy
The great unknown: how a Trump presidency could affect the world, in five charts
Summary
As 2024 comes to a close, uncertainty is once again the theme for the global economy. Policymakers face a host of dilemmas, and for every expected outcome, the opposite is just as likely to occur.
US President Harry S. Truman once famously asked for a “one-handed economist" because he was tired of economists who, instead of giving decisive answers, would say, “On the one hand, this, and on the other hand, that."
As 2024 ends, we can see why that’s so. Economists again have two-handed theories about what’s coming for the world economy. The trigger? The election of Donald Trump as US president, which threatens to push the world towards greater uncertainty.
This uncertainty is bad for India. Like all emerging markets, India pays a high penalty for unpredictability. The weeks since the US election have already seen the rupee slide and foreign money flow out. While it’s common for market volatility to send investors scrambling for shelter, the problem is that right now, for every expected outcome, the opposite is just as likely to occur.
This is the uncertainty that Truman would have been wary of and that policymakers will have to face in the coming months.
Exhibit 1: US dollar
Take the US dollar for example. The dollar index jumped by 1.6% the day Trump’s victory was confirmed. That was its largest one-day increase since September 2022. A plan to impose across-the-board tariffs on Mexico, Canada and China reinforced the view that tariffs would increase prices and keep US interest rates higher for longer. That explains the steep rise in the broad trade-weighted dollar index in the last quarter of 2024.
In response, as always, emerging currencies were beaten down more than the global average. The rupee-dollar rate dropped to 84.5 by the end of November, and is seen falling to 85.5 to 86 in the near term (Goldman Sachs).
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But not everyone buys this narrative. Trump is known to favour a weaker dollar. Indeed, the 5% gains in the trade-weighted real dollar index since January suggests that the dollar is overvalued, and needs to weaken to keep US exports competitive. In the medium term, America's ballooning debt and poor fiscal metrics could weaken the dollar. In the short term, there is speculation about a possible Mar-a-Lago accord to force dollar devaluation on the lines of the Plaza accord of 1985.
Which of these two scenarios pans out is anybody’s guess. The Reserve Bank of India (RBI) is perfectly capable of managing the exchange rate to keep markets calm. But that may result in India being labelled a currency manipulator, as was the case in the previous Trump administration.
Exhibit 2: Foreign inflows
Foreign portfolio inflows into debt are driven by higher yields on Indian bonds. Debt inflows surged in September when the US Federal Reserve cut rates by a larger-than-expected 50 basis points. Going forward, yields in both the US and India are expected to decline as monetary policy eases. So the yield gap is likely to be around the same or lower. The search-for-yield motive suggests that foreign portfolio inflows into Indian bonds will taper off.
An alternative view, put forward by investment firm PIMCO in a recent report, is that the role of emerging market debt has changed from a return booster to a risk diversifier. Each EM has unique economic features, resulting in distinct policy responses, and these idiosyncrasies reduce overall volatility of investors’ portfolios.
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For example, the 10-year Indian and US treasury yields were negatively correlated over the US tightening cycle (March 2022 to September 2024). This means that for foreign investors, the addition of Indian bonds reduces risk without compromising on returns. The progressive inclusion of Indian bonds into global indices has already added to their investable value. Together, these factors suggest foreign capital will be attracted to debt.
Exhibit 3: Growth and inflation
Rising economic uncertainty also complicates monetary policy. According to the International Monetary Fund, an all-out trade war with reciprocal tariff levies could reduce global GDP by up to 7%. Given India’s correlation with global growth, US-China trade tensions may hurt export and GDP growth as it did in during first Trump presidency. But it’s also possible — "on the other hand" — that India will benefit by diverting some exports from China and Mexico to itself, as Vietnam has done in recent years.
There are divergent views on inflation, too. Tariffs could damage supply chains and push up prices by creating shortages and forcing businesses to use alternative or more expensive suppliers. Or Chinese exporters may slash prices and flood non-US markets with their surplus, leading to a drop in prices.
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A sub-6% growth print in the July-September quarter and above-target inflation have added to policy uncertainty for India. On one hand, a rate cut would stimulate growth but create inflationary pressures; on the other, a rate hike would dampen inflation but flatten growth. By deciding to hold rates and infuse liquidity last week, the RBI has replaced the two-handed solution with a trade-off that fixes the most pressing problems.
The author is an independent writer in economics and finance.
