Expectations for 2025 were for robust US growth and a fragile recovery in other nations. As Donald Trump settles into the White House, his unpredictable policies have the power to turbo-charge or upend these assumptions. Investors should prepare to capitalise on any market dislocations.
With the stroke of a pen, or an off-the-cuff remark, Trump’s words have the power to move markets, and he’s not afraid to use them. US equities rallied after the market assumed a softer stance given he failed to sign into law any tariffs on day one of his term, only to announce tariffs on Canada, Mexico and China on 1st Feb, and by Feb 3rd defer those tariffs on Mexico and Canada for a month.
His America First agenda is expected to boost US growth, likely at the expense of other economies. US GDP came in at 2.3% for the fourth quarter of 2024, which was below expectations, but mainly due to distortions from industrial action, such as the strike at Boeing. The positive news beneath the surface was extremely strong consumer spending, which came in at 4.2%, the highest since early 2023 and off the back of three consecutive quarters of above 3% growth. For the full year 2024, US GDP came in at a solid 2.8%. Our forecast is for US growth to continue to grow at 2.5% in 2025 and 2.7% in 2026, as Trump’s pro-growth policies have more of an impact in his second year.
US real average hourly earnings continue to grow above 1% and banks are easing lending standards to households, which coupled with Trump’s banking regulation, could signal the start of a new consumer credit cycle. US PMIs are accelerating, with services rising to 54.1 and manufacturing rebounding to 50.9, the first time above 50 since 2022. Inflation is moderating and corporate profits continue to come in strong.
Business expectations for future general business activity is picking up strongly, supplier delivery times have lengthened (more demand than can be met), manufacturing new orders have jumped higher and CEO confidence continues to climb. We remain bullish on the US economy.
Chart 1: US economy on a solid footing
Trump’s policies can either turbo-charge or upend growth assumptions
We’ve discussed for months the tension between his pro-growth policies (tax cuts & deregulation) and his protectionist policies (immigration & tariffs) which are inflationary. Many market participants assumed that Trump would be softer in his second term. While Trump is likely looking for a deal, his decisive win was premised on protecting the borders and protecting US industry, which means he is unlikely to go soft on his core promises.
Trump has now announced 25% tariffs on Mexico and Canada (although these have been delayed for a month), along with 10% tariffs on China. Unlike the last trade war which saw tariffs phased in, these will go into effect immediately and is likely to impact $1.4tn worth of goods, which is three times larger than the 2018 trade war. The US imports most of its goods from China, Mexico and Canada. However, Canada and Mexico are also the largest importers of US goods. This means not only do tariffs threaten higher inflation in the US but potentially lower growth as their exports are curtailed by retaliatory tariffs. Bloomberg Economics estimates that these tariffs could boost inflation by 0.7% but also shave off 1.2% of GDP. The effects will still be one sided, as Mexico and Canada export 35% and 22% of their respective GDPs to the U.S., whereas the U.S. exports only 1.5% and 1.2% of its GDP to Canada and Mexico.
So, in a war of attrition, the US will likely win. The question remains at what cost.
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