What impact will the US election have on emerging markets?
A Trump victory would likely provide a bigger boost to the US economy, benefiting emerging market economic growth more than a Harris presidency.
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Given the huge uncertainty about the outcome of the US presidential election in November we have created two forecast scenarios for the economy, one of which will become our baseline after the election. In short, whereas we think US economic growth would slow more or less in line with our current baseline under Kamala Harris (or another potential Democratic candidate), we believe that a Trump victory would tilt the US economy in a reflationary direction.
Additional fiscal spending, deregulation of parts of the economy such as fossil fuels and eventual aggressive cuts by the Federal Reserve (Fed) once Powell is replaced in 2026 would likely boost activity. Accordingly, whereas our Harris scenario envisages US GDP growth of 2.0%, 2.1% and 1.9% across 2025-27, our Trump scenario has faster growth of 2.2%, 2.7% and 2.3% respectively.
Viewed from the top down, there is some relationship between GDP growth in the US and emerging markets (EM). The relationship has tended to vary over time, with EM growth decoupling during the late-1990s during the Asian Financial Crisis and also during the emergence of China during the 2000s.
Notwithstanding these issues, a simple regression of EM GDP growth against our two scenarios implies that stronger US growth under a Trump presidency would give a slight lift to EM growth of 0.1-0.2%-pts in 2026 and 2027, to 4.4% and 4.3% respectively.
In reality, however, the impact on EM growth would be uneven across regions and individual economies. While some economies such as Mexico show a very strong correlation with growth in the US, others such as Indonesia and parts of the Gulf Cooperation Council (GCC) have shown no correlation whatsoever.
Part of that may be due to data quality issues, for example GDP growth in Indonesia is very stable and shows almost no cyclicality. But the variation also reflects the different direct and indirect linkages between the US and the rest of the world through three key channels: trade, commodities, and capital flows. We will look at these in turn.
Trade
Trade policy will again be front and centre of the US election campaign. Trump started the trade war shortly after coming to office in 2017, and Joe Biden has remained hawkish on trade with China.
Our Harris scenario assumes a further, gradual tightening of trade policy towards China, using additional tariffs on specific products along with outright bans on exports of certain goods that are thought to be national security risks to China.
It is difficult to judge how much more aggressive Trump would be on trade. Trump has spoken on the campaign trail about imposing a blanket 10% tariff on all US imports, and a 60% tariff on Chinese goods. However, the experience of Trump’s first term suggests that he is more likely to use targeted tariffs and bans to extract concessions out of trade partners such as China.
There is also a question about whether Trump would target Mexico again, which is perceived to have become a backdoor for Chinese goods to enter the US. And Chinese firms have begun to invest in productive capacity south of the border in order to benefit from Mexico’s free trade deal with the US.
More hawkish policy towards Mexico, combined with anti-immigration measures, are clearly a risk. However, the United States-Mexico-Canada Agreement (USMCA) trade deal was already renegotiated during Trump’s first term and isn’t due to for review until 2026, so it is not obvious that there would be an immediate focus on ratcheting up protectionism on Mexican trade.
Concern about trade policy has the potential to cause volatility in local markets. After all, the Mexican peso was highly volatile ahead of Trump’s 2016 election victory as markets priced in his likelihood of victory. And the imposition of Trump’s tariffs also caused Chinese markets to underperform in 2018/19.
Beyond market volatility, though, Trump’s trade policies were largely ineffective from an economic perspective. While tariffs have caused China’s direct share of exports to the US to fall, its share of world exports has remained high as goods have been re-routed through third parties.
The upshot of all of this is that, while fears of tariffs may cause some market volatility, stronger US growth in the Trump scenario is likely to suck in more imports that the Harris scenario. That would be good news for those EM market exporters across Asia and Mexico that are already benefitting from an upturn in the global manufacturing cycle.
Commodities
Turning to the second channel, the reflationary Trump scenario would be likely to lift commodity prices versus the Harris scenario. However, any boost to commodity prices might not last long given that we assume Trump would relax regulation around the fossil fuel sector, resulting in higher output that would ultimately push down global energy prices.
In our Trump scenario we assume that, after initially rising to around $90 per barrel in 2025, oil prices ultimately end up at around $60 per barrel in 2027 – the same level we expect oil prices to trend down to in the Harris scenario.
Movements in commodity prices impact EM economies through two keys channels: terms of trade and inflation. With regards to terms of trade – that is the price of exports relative to imports –the initial boost to commodity prices would obviously be positive for those EM that export natural resources. However, our view that higher energy prices would then unwind would ultimately end up being positive for commodity importers.
Our Harris scenario implies that EM energy inflation would be fairly flat through to 2027 while a near-term rebound in food inflation would quickly subside. By contrast, energy and food inflation would be higher in the Trump scenario, while slightly faster economic growth would add to core price pressures.
It is unlikely that such an increase in inflation would, in isolation, force EM central banks to start raising interest rates. But with the EM easing cycle already fizzling out as the global business cycle picks up, a rebound in commodity prices in 2025 could delay any additional rate cuts until 2026 once energy and food inflation start to drop away again.
Capital flows
The third and final broad channel that developments in the US could impact the emerging world is through capital flows. Neither Harris nor Trump seem likely to deal with the US’s dreadful fiscal position, meaning that there is likely to be upward pressure on long-term interest rates in either scenario. At the margin, though, we think that fiscal policy would be looser under Trump and therefore more of a risk to the Treasury market. That matters for EM given that in the past rising US Treasury yields have been associated with outflows of short-term capital from the emerging world.
Assuming that there would not be a “sudden stop” in capital flows, few major EM are at risk of severe dislocation in the event that Treasury yields drift higher. Beyond the usual suspects such as Turkey, few EM have large current account deficits funded by short-term capital flows, while reserves coverage of external debt and imports is generally good.
But outflows would be likely to put additional pressure on EM currencies at a time when concern about trade policy could also be creating volatility in FX markets. That, along with initial upward pressure on commodity prices and inflation in our Trump scenario, would be another reason for EM central banks to tread more cautiously in the first months of a Republican government in 2025.
Further down the line, if Trump replaced Fed chair Powell in 2026 with someone more amenable to aggressively cutting interest rates, there could eventually be a turn in the US dollar cycle. As in the past, deteriorating dollar fundamentals – notably the twin budget and current account deficits – ought to result in a multi-year dollar depreciation at some point down the line. That would be a useful tailwind for returns from EM assets in common currency terms if it happened.
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