Between status quo and ambitions, the future Secretary of State for the Treasury faces the economic challenges of 2025.
Following the US presidential election, one of the many questions from investors concerned the succession of the veteran Janet Yellen to the post of Secretary of State of the Treasury. An eminently strategic position because, as we recall, it is this official who is the main advisor to the president on economic and budgetary issues. Donald Trump answered this question by recruiting Scott Bessent.
A treasurer for the status quo
This decision is undoubtedly not to the taste of disruptor Elon Musk, who declared ahead of the announcement: “the appointment of Scott Bessent would be a disappointment because it would amount to a status quo”. But the markets seem to appreciate the status quo if we refer to the reaction of the yield on the 10-year government bond. This barometer of creditors’ confidence in the government’s budgetary policy fell by 13bp on the day of the announcement.
Increase in domestic oil production by 3 million barrels/day, lower the budget deficit to 3% of GDP and achieve an annual GDP growth rate of 3%. Just that!
This plebiscite is explained by the profile of the former manager of the hedge fund Key Square Capital, who is seen as a pragmatic actor favoring a reduction in the deficit and a gradual implementation of customs tariffs. He also summarized the guideline of his economic agenda by the formula 3/3/3″, including: increase in domestic oil production by 3 million barrels/day, lowering of the budget deficit to 3% of GDP and obtaining an annual GDP growth rate of 3%. Just that!
Donald Trump was elected in part because of Americans’ dissatisfaction with the level of inflation. Increasing the supply of oil to lower the price at the pump is therefore a rational strategy to satisfy voters. But national production has already reached a record level of 13.4 mbd under Biden and even if certain deregulation initiatives will aim to stimulate supply, this remains mainly dictated by geological constraints, the costs of hydraulic fracturing and the price of WTI (according to Goldman Sachs, 80% of American wells are profitable between $30 and $70 per barrel). We can therefore question the ability of the new President to cause a 20% increase in American oil production. While awaiting the first deregulation measures in the sector, Chevron decided in December to reduce its spending plan (capex).
Economic and geopolitical challenges
When we approach the subject of the budget deficit, the best thing is to look at the broad masses: expenditures for the 2024 fiscal year amount to 6.8 trillion dollars, of which approximately 60% is made up of compulsory expenditure, mainly made up of social spending (correlated with population aging). To which must be added almost 900 billion dollars of debt burden, also on an upward slope due to new issues and the level of rates. Finally, there remains discretionary spending, almost half of which is linked to defense. If we add to this the promises of tax cuts (1 to 2 points of GDP per year), it seems obvious that the transition to the figure of 3% will be an arduous, if not impossible, task (even with the help of the Great Elon Musk at the head of DOGE), except to work on the denominator which is GDP growth.
Economics textbooks define potential GDP growth as the evolution of the active population coupled with its productivity. According to this definition, the CBO1 estimated the GDP growth potential at 1.9% over the period 2008/2023 (0.6% population and 1.3% productivity). If we are to believe UBS, we will have to wait until 2028 for generative AI to have a positive impact on the latter. As for the active population, its growth has slowed since the 90s (below 1% since 2010) and the migration policy of the new tenant of the White House does not really move in the direction of a recovery. Aiming for a potential of 3% therefore sets the bar very high!
Before being appointed, Scott Bessent had argued in an interview with Financial Times a watered-down variant of the tariff policy desired by Trump. For him, the threat of customs duties is a negotiation tactic to obtain a rebalancing of trade (“It’s escalate to de-escalate”). It will take time to know whether Donald Trump adopted this strategy by announcing his desire to impose additional duties of 10% for China, 25% for Mexico and Canada before in turn threatening the European Union.
The response was not long in coming, but did not come from where we expected it: Madame Lagarde urged, through the media, European leaders to buy more American goods to rebalance the trade balance (surplus of 173 billion dollars over the first 9 months of 2024) and thus avoid such customs sanctions. This is going a bit hastily and forgetting that the United States is dependent on Europe for 32 strategic products, particularly for chemicals and pharmaceuticals.2. In this context, it is not surprising to see that investors consider a trade war to be the biggest risk of 2025 (according to the latest BofA survey).
Between announcement effect and realpolitik, managers will have to adapt their software to decipher geopolitical issues and not fall into the trap of “headlines roulette” on social networks. To use one of their favorite expressions during this time: it’s going to be a long year.
1 Congressional Budget Office, an American federal agency created in 1974 whose mission is to provide Congress with non-partisan analyzes concerning federal economic and budgetary decisions.
2 According to the Center for Prospective Studies and International Information
