World Geostrategic Insights interview with Brunello Rosa on the current state of the U.S. economy, the economic policy agenda of Joe Biden and Donald Trump, how the outcome of the 2024 U,S. Presidential election may affect global markets, the reasons for the economic growth gap between the U.S. and Europe, and whether the results of the recent European Parliament elections, or rather the outcome of the U.S. presidential elections in November will be more important for Europe.
Brunello Rosa is the CEO and head of research at Rosa & Roubini Associates, an independent macrofinancial and geopolitical consulting firm he co-founded with economist Nouriel Roubini. He is Visiting Professor at Bocconi University (Italy) and at City, University of London. He is an Associate of the Centre for Macroeconomics at the London School of Economics and Political Science, where he is the leader of the executive education course “Global Macroeconomic Challenges”. Brunello is also an advisor to the UK Parliament’s All-Party Parliamentary Group on Central Banks and Digital Currencies, to the chief economist of the European Investment Bank, and to the ambassador of Italy to the UK.
Q1 – According to recent data, U.S. GDP growth in the first quarter of 2024 was 1.3 percent year-on-year, the lowest since 2022. Consumer spending increased but at a slower pace, signalling that high interest rates and persistent inflation are putting pressure on household budgets. There are signs of a slowdown, such as rising credit card defaults and companies offering discounts to attract consumers on tight budgets. Inflation increased in the first quarter, with consumer prices rising 3.3 percent year-on-year, and as a result the Fed has postponed interest rate cuts because of inflation above the 2 percent target. How would you rate the current state of the U.S. economy?
A1 – Recently, there has been a slowdown in U.S. gross domestic product growth, which fell from 3.4 percent to 1.4 percent between the fourth quarter of 2023 and the first quarter of 2024, a figure even lower than the projected rate of 1.6 percent.
However, this figure comes amidst a backdrop in which the U.S. economy still remains resilient. It has withstood very well the numerous interest rate hikes by the Federal Reserve and is only now showing some subsidence in growth rates. Sagging, however, much less than in Europe, where the slowdown in economic growth has instead been very strong.
Moreover, the slowdown in the U.S. economy is partly intentional. In fact, the Federal Reserve, which can impact – like all central banks – more aggregate demand than aggregate supply, has been trying to cause the slowdown in the economy that is taking place. A slowdown that, however, is not yet fully evident in the labour market, where job-creation growth continues to surprise on the upside, with increases of more than 200,000 jobs created each month.
Having said that, it is clear that against the backdrop of resilient growth, a still strong labour market and, as a result, a continued fairly active wage dynamic, inflation is struggling to come down, remaining around 3 percent. Fortunately, the past two or three months have seen declines in inflation rates, in contrast to increases in the first quarter of the year. The combination of these elements has forced the Federal Reserve to revise its monetary easing plan, which had been somewhat foretold. At this point there is even some talk of hikes in the second half, while we still expect one or two cuts between now and the end of the year.
Q2 – Both candidates in the upcoming U.S. presidential election in November, Joe Biden and Donald Trump, promise fiscal deficit reduction. Moreover, both Biden and Trump are using rhetoric focused on restoring U.S. economic supremacy of the world. What is your opinion on the economic policies proposed by the two candidates? Could the outcome of the election affect global markets and international economic outlook, including with potential stagflationary risks and tightening protectionist measures?
A2 – The economic policies of the election programs of the two contenders, Biden and Trump, do not differ substantially. Both say they want to move forward with more investments, especially in infrastructure. Trump had already promised them in his first presidential term, but then in reality implemented them only minimally, practically not at all, focusing on the issue of the wall against immigrants in the southern border. Biden, on the other hand, has promoted his Build Back Better Plan program, which was later reabsorbed by the Inflation Reduction Act (IRA).
Actually at the heart of both programs there is a strong public spending on infrastructure investment. Then follow policies designed to repatriate businesses, especially in the technology sector, called friend-shoring or, in the past, reshoring, of which Biden’s IRA is a very concrete example. Protectionism used to be one of the differentiating factors between the two candidates, but with Biden’s enactment of 100 percent tariffs on Chinese electric cars, somehow even this major differentiator between two candidates has almost vanished.
It seems obvious, however, that this is not an election about economic programs.
It is an election about worldview. On one side is Biden, who makes it clear that America remains the beacon of freedom and democracy and will never give an inch on the war in Ukraine. On the other hand, Trump has already made it clear that a compromise solution must be reached as soon as possible, which unfortunately will probably mean less support for Ukraine.
In domestic politics, of course, there are diriment issues, such as those on civil rights, abortion and so on, on which fundamental differences remain. Not to mention the issue of the rule of law. For the first time we have as a candidate a former president convicted of a number of crimes. The question then arises whether America will remain a liberal democracy even in the event of a Trump return to the White House.
So this election is about all such issues, and not about economic ones. In terms of market reactions, I believe that a Trump victory will initially have a rather negative impact for the reasons just mentioned. However, if he proves to act in a much less extreme way than he announced on the campaign trail, Trump could also somehow foster, with his programs for American economic growth, a recovery and, with tax cuts and so on, probably also a recovery in stock prices. We have seen this before during his past presidency, but I see it as less likely at the moment than the previous time.
Q3 – It is usually pointed out that the European Union faces declining competitiveness and stagnant productivity, exacerbated by an ageing population, ineffective government policies, underinvestment, and bureaucracy, while the U.S. enjoys strong governance, efficient decision-making, and high-growth sectors. What is your opinion? Is this the cause of the gap in economics and growth prospects between the U.S. and Europe? Or are there other reasons?
A3 – The gap between the United States and Europe persists because the U.S. economy has been an accomplished federal economy for 150 years. It went through a civil war to solve a key economic issue, which was slavery, and has been equipped with relevant federal instruments that have enabled it to grow in many respects, including technological innovation, in which it now leads the way along with China. One example is NVIDIA, which has become the most capitalised company in the world.
The European continent, on the other hand, has remained halfway to integration. Many competencies have remained in the hands of nation states. The division of power at the European level is unclear. At the decision-making level, it is uncertain how decisive the nation states are and how decisive the leadership at the European level is. This prevents Europe from focusing on activities such as investment in high-tech sectors, artificial intelligence, robotics in general, which would enable it to make a competitive leap, which it clearly cannot do.
Over the past 10 years, there has been a very large gap in the gross domestic product per capita differential between the United States and Europe, a gap that Europe will struggle to close if it cannot quickly resolve the issue of institutional reforms.
European economic growth, however, does not seem to be the goal of the moment; on the contrary, the results of the European elections gave the opposite indication, and considering the results obtained by the most Eurosceptic parties, it seems that people want less Europe and not more Europe. This makes crossing the ford even longer and more complex, and perhaps complete integration at the European level will never be achieved. A victory of Le Pen’s party in France would tend to bring about the end of the European integration process and a return to much stronger and stricter national policies.
Q4 – Will the results of the past 6-9 June European Parliament elections, or rather the results of the U.S. presidential elections in November be more important for Europe?
A4 – Both matter. The European ones were important in determining the direction of march. It is true that the three-party majority that already governed Europe will remain, but now there is a strong growth of right-wing populists that could hold back the integration process. On the other hand, Europe is fighting a war at home because of Russia’s aggressiveness, a war that without U.S. support cannot be won. Since support for Ukraine is the strong discriminator between a Biden presidency and an eventual Trump presidency, it seems clear to me that the U.S. election matters a great deal for Europe. Without the NATO umbrella, in order for Europe to bear the full cost of its security alone, it would be necessary for Europe to spend trillions of euros in defence investments, sum it may not be able to make available.
Brunello Rosa – CEO and head of research at Rosa & Roubini Associates.