Schroders Perspective: What if Trump isn’t bluffing?

We recently revised up our forecast for the US economy on the basis that President-elect Trump will ultimately pursue a pro-growth policy mix when he enters office on 20 January. However, there is a clear risk that we are far too sanguine, and that Trump will do exactly what he has promised.This is something we have modelled in our “Aggressive Trump” scenario, where we make four key assumptions. Firstly, a tariff of 60% is applied to Chinese goods, with a 10-20% tariff on the rest of the world. Secondly, border controls significantly limit immigration, with one million undocumented migrants deported annually. In addition, fiscal loosening of US$10 trillion over the next decade, mainly through lower taxes for individuals and businesses. Lastly, widespread and rapid deregulation, particularly of the fossil fuel and financial sectors.Our work indicates that these factors would have a deflationary impact on the global economy relative to our baseline forecast. China would probably suffer the most from aggressive Trump policies, although they could prompt a large fiscal stimulus to boost domestic demand.Disruptions to global trade and supply chains means that the hit to growth is more pronounced than in our “US Consumer Recession” scenario. But the downside to inflation is estimated to be more limited because of large fiscal stimulus, along with the tit-for-tat retaliation in tariffs and the depreciation of local currencies versus the US dollar.There are important distinctions to be made on the impact of an aggressive Trump policy mix on the US economy relative to the rest of the world. Weaker trade, a pause in investment decisions and a general shock to confidence would be likely to tip most economies towards recession and lead to aggressive interest rate cuts. But this mix would have more of a stagflationary impact for the US. In other words, while the US’s growth outlook is also diminished under an aggressive Trump scenario, slower growth would be accompanied by more, rather than less inflation.

Constrained supply would leave the US mired in stagflation

While an aggressive Trump may try to deliver large fiscal stimulus, stronger demand would quickly run into a deteriorating supply side of the US economy. Despite being partially absorbed by the stronger US dollar and profit margins, substantially higher tariffs would be likely to increase goods inflation.But the greater threat to inflation probably comes from a crackdown on immigration, along with mass deportations, if it leads to labour shortages that would ultimately result in higher wages and services inflation.Analysis by the Peterson Institute estimates that while an additional 10% import tariff might temporarily add about one percentage point to US inflation, mass deportations could quickly add more than three percentage points and take several years to normalise. GDP growth would probably slump in the first instance due to huge disruption, before receiving some boost from stimulus measures heading into 2026.Pew Research Center estimates, based on the American Community Survey, suggest approximately 8.3 million US workers in 2022 were unauthorised immigrants.In this scenario, we estimate that destruction of the supply side of the US economy would lower its potential rate of growth to around 1.5% per year. In other words, a more supply-constrained economy due to aggressive Trump policies would skew the composition of nominal growth away from real growth and more towards inflation.All of this would leave the Federal Reserve (Fed) in a bind. While other central banks slash interest rates in 2025, stagflation would leave the Fed unable to loosen policy, causing the US dollar to strengthen even further. That would be likely to draw intense criticism from the Trump administration, such that at the end of his term in May 2026 chair Jerome Powell would be replaced with someone more amenable to loosen monetary policy.Our modelling then assumes that in a bid to raise growth, US rates are cut to 3% by the end of 2026. That, along with gaping twin deficits, would finally cause the US dollar to roll over.Want to search and invest in related funds?Open the WeLab Bank App and click【Featured Funds】to find out more!
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