The development of the US economy in 2024 was envied by many other advanced (indeed also emerging and developing) economies. Growth was strong. The repeated concerns - from late 2022 onwards - about a recession proved unfounded. The labour market remained firm. The unemployment rate dropped to 4%. Inflation retreated steadily, albeit not as fast as many hoped. The Fed’s policy interest rate came down. And the stock market (S&P500) rose by 20%+ for the second year running. ‘US exceptionalism’ was envied.
From the perspective of President Trump, however, much was wrong. There was a need to Make America Great Again. The main problems; Trump’s solutions; and the implications for others are listed below.
US problems; Trump’s solutions; and implications for others | ||
Problem | Trump’s solution | Implications for ROW |
Government too big and inefficient | DOGE | Example for others to follow; eg UK ‘project chainsaw’ |
US defence spending protects the world | Other countries should spend more on defence | Pressures to raise spending – notably Germany. |
Immigration into US too high | Tighter border controls; forced repatriation | Lower immigration to US; workers diverted elsewhere? |
Drugs trade (notably fentanyl) | Restrictions/drug enforcement | Pressure on other countries to restrict use/exports to US |
US trade deficit too high | Tariffs on US imports | Retaliatory tariffs; reduced exports to the US; China dumping; South-South trade growth |
Inflation and rates/yields too high | Cut energy costs | Pressure on oil exporters/ Pressure on Fed |
Dollar to strong | Mar-a-Lago Accord. US SWF. | Stronger currencies against the US$ |
The big question for Trump’s second term is whether the policies which are being pursued – notably being implemented by Executive order – will help or hinder growth.
Far-reaching structural reforms have been seen around the world before. Two examples are instructive with regard to what to expect. Margaret Thatcher’s 1980s reforms in the UK; and the Hartz reforms in Germany in the early 2000s.
Thatcherism in the 1980s
After the election of Margaret Thatcher’s Conservative government in 1979, reforms centred on: bringing inflation under control with the implementation of tight monetary policy; ‘rolling back the frontiers of the state’ with a reduction in the government’s involvement in the economy; ‘freeing up’ of the economy, particularly through a process of privatisation of state assets; and making working practices more flexible. The antecedent of the reforms was weak growth throughout the early and mid-1970s, culminating in the UK’s bailout by the IMF in 1976. The growing feeling ahead of Thatcher’s victory was that ‘something needed to change’. The reform process had an initially adverse effect on UK economic. The impact of the reforms, especially tight monetary policy to curb inflation and sharp restraint on government expenditure and a reduction in the budget deficit, exacerbated the downturn already in place as a result of the second ‘oil shock’. There was a further sharp contraction in 1983 when the miners’ strike, in response to the Thatcher government’s plans for a widespread restructuring of that industry, adversely affected UK output.
Germany’s ‘Hartz’ reforms
The ‘Hartz’ reforms in Germany, named after the head of the commission looking into reform of the German labour market, followed reunification of east and west Germany in 1990. Germany’s competitiveness was undermined by higher wage costs and generous social welfare benefits which reduced incentives to work. German growth suffered during the 1990s and the country became widely described as the ‘sick man of Europe’.
To address the problem, the Hartz reforms reduced entitlements to unemployment benefits, integrated a range of different social benefits and launched ‘Job Centres’ (notably using the Anglo-Saxon description) to encourage employment, with social benefits restricted if a reasonable job offer was refused.
As with Thatcher’s reforms, the initial impact on growth was adverse, but this was followed by a marked improvement from the mid-2000s onwards.
Short-term pain for long-term gain.
In both cases the changes involved short-term pain (loss of GDP – marked in red) but long-term gain (GDP growth recovering relative to other advanced economies) (Figures 1 and 2).
US growth may well follow a similar pattern. Forecasts for growth in 2025 have been cut sharply. The IMF’s April forecast, for example, cut US growth prospects from 2.8% to 1.8%, the biggest downward revision o the IMF’s G7 forecasts.
Short-term pain for long-term gain? We will see.