Trump Presidency Raises Concerns About European Recession

A Trump presidency has raised concern in Europe that a new round of tariffs under his administration will cause a economic recession in Europe.

A trade war during Trump's four-year term would also increase the probability of the European Central Bank (ECB) cutting rates faster to spur growth. Analysts issued pessimistic outlooks for European economic growth after Trump won the election.

On election day, the US dollar rallied sharply, sending the euro to a four-month low and boosting Bitcoin by 10% to a record high.

European stocks exposed to the US have already shown their vulnerability. A Barclays basket of 28 European stocks sensitive to US tariffs has underperformed the broader STOXX600 index by 15% this year.

European stocks vulnerable to Trump tariffs, Source: Barclays Equity Research 

“Tariff concerns have been a drag on EU equities’ relative performance year-to-date,” Barclays analysts led by Emmanuel Cau wrote in a note on October 23. A basket of European stocks at risk of Trump tariffs declined compared to those geared toward Democrat policies. 

European stocks sensitive to Trump fall, Source: Bloomberg

Trump Presidency Could Impact Europe's GDP

The European Union (EU) will need to confront the reality of a much different relationship with its largest trading partner from January 20. Previous tariffs on 6.4 billion in EU steel and aluminum, alongside threats on automotive imports, have shown how US protectionism can reverberate through European economies. 

Trump’s potential trade policies in 2025, including a proposed 10% to 20% tariff on European goods, pose a substantial threat to European growth. Following Trump’s win, Goldman Sachs downgraded Europe's growth for 2025 from 1.1% to 0.8%, citing limited European auto exports.

The German economic institute IW believes the Eurozone’s GDP could decline by 1.5% in 2027 and 2028. Goldman Sachs expects a 1% reduction if a 10% universal tariff is implemented instead.

Historically, Trump’s tariffs have hampered European growth due to steep declines in exports, a trend that could repeat. Major exports to the US accounted for ~90% of all European transatlantic exports in 2023 to €502.3 billion, European Commission (EC) data showed. 

EU trade with the US by product, Source: European Commission

Trump Presidency Could Cause Eurozone GDP Loos

The blow to the Eurozone from a potential 1.5% GDP reduction could translate to a €260 billion loss on an estimated GDP of €17.4 trillion for 2024. This is over half the entire transatlantic exports registered in 2023.

"The direct effects and the indirect effects and the deviations of commerce will be huge, ECB Vice-President and French central bank head Francois Villeroy said on Wednesday.

Even the lower end of the proposed tariffs would compel ECB policymakers to cut rates more aggressively in 2025 if Trump implements his economic policies. Sven Jari Stehn of Goldman Sachs said in a note on Wednesday that he expects the ECB to cut an additional quarter-point in July.

“The American election must sound like a wakeup call for Europe,” Villeroy said. 

Germany At Greater Risk From Trump Presidency

Nations with large trade surpluses with the US face significant risks from policies that have strained transatlantic economic relationships in the past. 

“Half of Germany’s growth always comes from exports and if you look at what’s going on in the world, you have to say that this pillar is under attack,” Germany's Economy Minister Robert Habeck said in October. 

Germany exported over €157.7 billion of goods to the US in 2023. However, exports to the US contracted by 0.3% amid slowing demand and geopolitical escalation. 

Germany Exports to the US, 2012-2023, Source: Tradingeconomics

Dirk Schumacher, head of European macro research at Natixis Corporate & Investment Banking Germany, says a 10% tariff increase could reduce Germany’s GDP by approximately 0.5%. A study by the Hans Boeckler Foundation macroeconomic institute suggests a 1% GDP erosion by 2026 if Trump implemented a 20% tariff. 

Germany Is Only G7 Nation Without Growth For Two Years

Germany remains the only G7 nation that has failed to grow for two years due to higher energy prices, borrowing costs, and a slow rebound in China. Europe’s largest economy would suffer if its largest trading partner reduced output and imposed tariffs on China.

German Exports to China, 2020-2024, Source: CEIC

“Germany isn’t going to be bailed out by a restoration of growth in China," Jacob Funk Kirkegaard, senior fellow at Bruegel and the Peterson Institute for International Economics, told Reuters.

An Ifo study found that German exports to China and the US could fall by 9.6% and 14.9% in a full-scale trade war scenario in which the US imposes a 60% tariff on Chinese goods. Pharmaceutical and car exports would be hit the hardest, down 35% and 32%, the Ifo said.

Trump's tariffs would substantially trim European exports to the US, possibly creating a cycle of retaliation.

Swift Retaliatory Action From Europe

Nigel Green, CEO of deVere Group, believes that Trump's presidency would initiate a new trade war with Europe but sounded the alarm of swift retaliation. 

"The market is underestimating the risk of swift European retaliation and the pressure this could place on key American stocks," he said.

Retaliatory measures could hit US earnings in the S&P 500 by 1.5% next year. However, European stocks exposed to US tariffs could plunge as much as 7%, according to Barclays. 

“In the event of a full-blown trade war, we could see up to a high single-digit drag on EPS growth with Germany," Barclays' head of European equity strategy, Emmanuel Cau, said. However, Goldman Sachs believes that a 1% GDP loss, if transported, would erase EPS growth for 2025.

Certain European sectors could still gain from a Trump presidency. 

Defense Will Benefit From Trump Presidency 

In addition to the energy sector, defense companies could see increased demand from European nations under a Trump Presidency. He is likely to push them to increase their NATO defense spending. 

Earlier in 2024, he threatened to "not protect" any alliance members that failed to ramp up their defense spending to the 2% GDP target. 

Following the warning, NATO claimed that more than 18 members would surpass the 2% target this year. The number of allies meeting or exceeding the target soared to 23 this year, prompting Trump to raise the bar to 3% of GDP. 

NATO members’ defense expenditure as a share of GDP, 2024e, Source: NATO

After taking office, Mark Rutte, the new Secretary General of NATO, said, “thanks to Trump” NATO increased defense spending. In Europe, Poland doubled the defense spending target at 4.12% and Estonia by 3.43%, followed by Latvia and Greece.

European Stocks For Trump Presidency

Poland, Estonia, Latvia, and Greece have been increasing their defense spending and primarily source military equipment from a combination of US and European defense contractors. 

Poland agreed to buy 32 F-35 jets, Apache helicopters and Abrams tanks made by American companies Lockheed Martin LMT  and Boeing BA and signed a contract with Saab SAABF earlier in the year to supply ammunition, training equipment, and recoilless rifles. It also awaits delivery of Raytehon's RTX LTAMDS radars for its Patriot systems. 

Estonia has existing ties with Germany’s Rheinmetall RNMBY, Latvia with LMT and Greece with French manufacturer Dassault Aviation DUAVF, along with LMT, BAE Systems BAESY and repair leader VSE VSEC.

Disclaimer:

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