Given the economic, financial, and political constraints that Donald Trump is likely to face if he pursues his most radical and ill-advised economic policy proposals, the near-term outlook for the US economy heading into 2025 is relatively benign. Overall, the good ideas should offset the effects of the bad ones.
NEW YORK – What impact will the next US administration have on economic growth and inflation? The answer is not yet clear, because while some of President-elect Donald Trump’s proposed policies would boost growth and reduce inflation over time, others will have the opposite effect.
On the positive side of the ledger, Trump will be pro-business overall, and this fact alone could stimulate economic activity by unleashing the “animal spirits” that drive business investment, innovation, and growth. Growth should also benefit if he and congressional Republicans succeed in permanently extending the corporate and personal income tax cuts that will expire in 2025. Equally, if the potential excesses of his deregulatory agenda are kept in check, a reduction of bureaucratic red tape could promote growth and encourage competition, reducing prices over the longer term.
Trump also wants to boost America’s oil and gas production by the equivalent of three million barrels per day, which could reduce energy prices and make domestic energy-intensive sectors more competitive. But one hopes this can be done without phasing out most of the previous administration’s subsidies to green energy.
The “Department of Government Efficiency,” an external advisory committee led by Elon Musk and Vivek Ramaswamy (two major Trump campaign donors), will come nowhere close to cutting the federal budget by $2 trillion, as originally promised. But if DOGE can identify even $200 billion worth of cuts, that could reduce inefficiencies in the public sector.
Finally, Trump’s growing support among tech leaders suggests that we could see a turbo-charging of America’s comparative advantage in many industries of the future, starting with artificial intelligence, robotics, automation, and biomedical research. Not only is the new administration unlikely to stand in these industries’ way, but it will take pains to eliminate any resistance they face from regulators or civil society.
But faster growth and lower inflation from tax policies, deregulation, and other pro-business measures will take time to materialize and, crucially, depend on the impact of the negative side of the Trump ledger. In particular, several policies Trump has promised could lead to higher inflation, either through negative supply shocks or by stoking excessive demand. There is no denying that high tariffs, trade wars, and a decoupling from China will be inflationary and harmful to growth. The extent of the damage, however, will depend on the size and scope of the tariffs and other protectionist policies.
Similarly, draconian restrictions on immigration – not to mention mass deportations – will further undercut growth and drive inflation by increasing labor costs and heightening the risk of labor shortages in key sectors. Moreover, if tax cuts are made permanent and other fiscal promises are implemented without ways to pay for them, the public debt could increase by almost $8 trillion over the next decade. That, too, would stoke inflation, which would increase long-term interest rates and crowd out future investment, undermining growth.
A disorderly attempt to strengthen domestic competitiveness by weakening the dollar also could lead to higher inflation and rattle financial markets. And any real or threatened effort to challenge the US Federal Reserve’s independence would increase both expected and actual inflation.
The impact of geopolitical factors is similarly uncertain. Trump may contain and reduce some geopolitical risks affecting economies and markets – such as the Russia-Ukraine war and the Middle East conflicts – but he may also trigger a broader economic war with China that could fragment the global economy further.
Thus, the Trump administration’s effects on growth and inflation will depend on the relative balance of positive and negative policies. Fortunately, several factors may militate against Trump’s more damaging proposals. The first, and perhaps most important, is market discipline: policies that increase inflation and deficits will rouse bond market “vigilantes,” raise nominal and real (inflation-adjusted) long-term interest rates, and possibly cause a stock-market correction (a decline of at least 10%). Since Trump sees the stock market as a gauge of presidential performance, this signal alone could pour cold water on his most febrile ideas.
Moreover, since the Fed is still independent, it would almost certainly curtail or halt its rate cuts if inflation starts spiking again. The mere possibility of this outcome should serve as an additional constraint on bad policymaking, as should the influence of Trump’s nominees to fill top economic policy positions, who do generally understand the economy and markets. Lastly, the thin Republican majority in the House of Representatives means that Trump cannot necessarily count on his party’s full support for all his policies, especially those that would add substantially to the public debt.
These are all important guardrails. If we confine our outlook to 2025, the net impact of Trump’s economic agenda may be a wash for growth, though the pace of the economy’s return to the Fed’s 2% inflation target is likely to slow. Growth may remain above potential – given strong tailwinds – but it will be lower than in 2024. As long as Trump’s most radical policies are contained – and barring some unexpected development, such as a geopolitical shock – the coming year should be relatively benign for the US economy.
By Nouriel Roubini - Project-Syndicate
