Themen:
Insights
24 January 2025
The Trump presidency, AI and ageing populations will be the key factors in determining growth in the years and decades ahead.
The economies of the US and Europe will increasingly diverge under the presidency of Donald Trump, according to Jim Reid, Deutsche Bank’s Global Head of Macro Research. Speaking at the Deutsche Bank and Deutsche Numis UK & Ireland Conference, Reid said that Deutsche Bank economists had changed their economic forecasts as soon as the US election result was confirmed.
“On the day that Trump won, our economists upgraded their GDP forecast for the US this year to 2.5%. That would have been about 2% or 2.1% had Trump not won. But our European economists downgraded Europe from about 1.2% or 1.3% to 0.8%,” he said.
Reid then outlined four key policy areas of the Trump agenda of particular economic significance.
Two of those policies – lower taxes and a relaxation of regulation – would likely be positive for the US economy and markets, he said. However, the other two – tariffs and mass deportations – could be damaging.
Deutsche Bank Research analysis found that the sharp rise in immigration in the US during the Biden administration had helped reduce inflation in the US by half a percentage point, which, in turn, had kept interest rates from peaking at a higher level. While the scale and detail of Trump’s immigration and deportation plans remain unclear, Reid said he felt they posed inflation risks for the US.
Tariff levels are also uncertain, but Trump has specified that imports from Mexico and Canada could face tariffs of 25%. “Most of us thought it was a negotiating tactic, and I still think that's the base case,” said Reid. “But if he did put 25% on Mexico and Canadian goods in a tariff, we think it would add a percentage point to US inflation this year.”
Rising inflation risks would likely mean fewer interest rate cuts in the US in 2025, Reid continued, and Deutsche Bank Research is now forecasting no cuts by the Federal Reserve Bank in 2025, a marked difference from the market consensus for two quarter point cuts this year.
AI productivity promise is real
The boom in AI-related equities could be a bubble, Reid warned, but even if this was the case, there could be more gains to come, comparing the current market to the dotcom boom of 1998-99.
“If the AI boom continues, then it's possible we could have animal spirits really making a comeback. Related to that, M&A activity globally is pretty low, but if Trump comes in and slackens regulation, there could be a wave of M&A in the US,” he said.
But whatever the outlook for the equity market rally, Reid argued that AI potential to drive economic growth was genuine. “AI is probably the first thing I've seen in my career that I think could be productivity-enhancing,” he said, though such gains would likely take several years to materialise.
The significant question, he said, was whether the greatest beneficiaries of AI would be the companies leading the technology itself or whether other companies would reap the productivity benefits.
The long view
A key aspect of Reid’s presentation was to reflect on the first quarter of the 21st century and the outlook for the decades ahead. Equity returns between 2000 and 2025 have been lacklustre in comparison with the preceding 25 years, but were more in line with previous 25-year periods during the 20th century.
While it could be argued that developed markets were just reverting to the mean, Reid said the decline in working age populations in many developed markets did not bode well for their economic prospects. An analysis of demographics and GDP growth shows a clear pattern, Reid said, with lower working age populations correlating closely with lower GDP growth and higher working age populations correlating with higher growth.
“One of my concerns about long-term asset returns is that most of the developed world falls into the negative category. Out of 24 developed world countries in our analysis, 16 are going to see a fall in their working age population,”.
But it was not all doom and gloom. Reid said there were three developments that could help developed economies overcome this challenge. One of these was AI and the genuine productivity benefits it could offer. The others are potentially more politically contentious – a higher retirement age and higher immigration.
The idea that citizens of developed economies could retire at 65 was not sustainable, Reid argued, and he predicted that governments will eventually be forced to act decisively.
“I suspect there'll be a country that has a crisis, and a technocratic government comes in and says, ‘You've got to work until 75’. That could then become a template for others,” Reid said.
Immigration to boost working age populations is another politically fraught issue, but Reid said economic realities could again lead to a change in attitudes, albeit he felt that this was unlikely in the near future. “Maybe in 10 years' time, politics will move towards saying ‘Let’s have everybody come into our country to fill the gap’,” he concluded.
The Deutsche Bank and Deutsche Numis UK & Ireland Conference is part of a series of specialist events for corporates and investors delivered by the dbAccess team. For more information, contact dbaccess.ukconference@db.com