An American economy that has been praised for its surprising resistance to pandemic, high inflation and rapid increases in interest rates, now faces a new challenge: the self -proclaimed commercial war of President Donald Trump, which economists see as a recipe for less jobs, slower growth and higher prices.
The repercussions, assuming that Trump does not turn before the fall of stock markets and the erosion of the confidence of consumers and companies, they are expected broad, deep and prolonged, while the world’s largest economy adapts to the immediate impact of a 25% tariff on most of the products from Mexico and Canada – two close commercial partners and geographical neighbors – and an additional tariff of 10% of 10% of 10% of 10% About China imports.
Canada and China already announced retaliation tariffs on US imports, while Mexico is expected to do the same this weekend.
A price shock at first glance, tariffs could also begin to reduce demand, said Diane Swonk, a KPMG chief economist, especially if consumers reduce their expense and companies, given greater uncertainty, slow down investment and hiring.
The measure also entails risks of unwanted consequences, such as banks to harden credit for small businesses instead of extending customs bonds that are now suddenly expensive.
A deceleration threatens the entire continent
A recession at the beginning of next year is not ruled out, Swonk said, and analysts expect that a slowdown could affect the entire continent, given the dependence of Canada and Mexico in exports to the US market. The retaliation of these countries could further aggravate the impact.
“Now we have multiple commercial wars on multiple fronts,” said Swonk.
Its analysis shows that the effective rate of tariffs over approximately 3 billion dollars in American imports could be shot at 16% in early 2026 from a current level of around 3% if Trump meets all its threats.
“That would be the highest level since 1936”, in full depression, and “it would lead us to flirt with stagflation,” the toxic combination of low growth, high unemployment and persistent inflation that characterized the 1970s.
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Although the US economy is structured differently from that of the 30s or 70s, the scope of Trump’s actions and the uncertainty about what is coming later have disturbed the markets, which they expected to be only threatening with tariffs to gain advantage in negotiations with their commercial partners.
The S&P 500 index has suffered strong losses since Trump, on Monday, faded the expectations of a last minute extension on tariffs, and has now fallen approximately 5.5% since its historical maximum of February 19. The yields of the US Treasury bonds have dropped to their lowest levels since October.
Trump, who has criticized US commercial deficits and has accused Canada and Mexico of not doing enough to curb the flow of the mortal fentanyl opioid towards the US, will go to Congress this Tuesday night.
“Let’s stop”
Trump administration members have said that they want lower interest rates, since this lowers government financing and could eventually benefit consumers through lower interest rates in mortgages and cars for cars. However, the reason behind the fall in yields – a flight to safe assets due to the growing economic uncertainty and recession risks – is not exactly reassuring.
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Consumer will probably see price increases: target
In a sign of the deterioration of the economic landscape, the American retail giant Target announced Tuesday that he expects little or no growth in its sales this year, with his CEO Brian Cornell warning in CNBC that the highest prices are on their way. Walmart and Best Buy have also issued recent warnings about their expectations by 2025.
“The consumer will probably see price increases in the next few days,” said Cornell, noting that the food imported from Mexico is now subject to a 25%tariff.
Jack Kleinhenz, chief economist of the National Federation of Retail, said that small businesses will face even more difficult decisions, since they do not have the negotiation power of companies such as Target to absorb cost increases, which will probably lead them to reduce investment and hiring.
“We are going to see an increase in the price level,” said Kleinhenz. But beyond that, “the panorama becomes blurred… the business sector will wait and observe, and when they do not know what the future holds, they will say: we better stop the investment. We stop the hiring. ”
The potential of a rapid change in the US economy comes after a period in which the country was surpassing other global economies, with growth above the trend, decline inflation and more than three years with the unemployment rate around or below 4%, a level that many economists consider full employment.
What happens next “is not just a story of tariffs,” said Gregory Daco, an EY chief economist. It is both a matter of how Trump’s actions affect an economy where the memory of recent inflation remains fresh and the savings of the pandemic era have probably been exhausted, he said.
“The exceptionalism and the resilience of those we have spoken for two years are beginning to show some cracks,” Daco added. “We are seeing that a minor proportion of consumers is making a majority of the expense, and we are noticing that, either in terms of trust or income, both important pillars of consumption, are weakening.”
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Daco said that he now expects recessions in Mexico and Canada, and estimates that the probability of a recession in the US exceeds 50% if the tariffs are maintained.
What will the Federal Reserve do?
The final outcome will also depend on the Federal Reserve (Fed) and if it considers that the risk of greater inflation is more or less harmful than the impact on growth and the possible increase in unemployment.
During much of its recent fight against inflation, the Fed had enjoyed the best of both worlds: consumers freely spending growth, federal investment contributed to expansion and inflation continued to fall while global supply chains stabilized after the COVID-19 crisis.
Trump’s first actions have increased risks on all these fronts, with fiscal support potentially becoming negative due to mass dismissals of federal workers and cancellations of government contracts, prices under pressure for tariffs and consumers trapped in the midst of the conflict.
The spark this time may be internal commercial policy, not the geopolitics of the Middle East, but it could still leave the Federal Reserve facing similar dilemmas to those that the former president of the Fed, Paul Volcker, had about whether to risk a recession to stop inflation.
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In contrast to the predominant perception until recently that the Fed was close to controlling inflation without a cost in terms of lower growth, “it should also be considered a less favorable but plausible scenario,” said the president of the Fed of St. Louis, Alberto Musalem, on Monday at a conference of the National Association of Business Economy.
“In this scenario, inflation stagnates above 2% or rises, while at the same time the labor market weakens,” he said.
With Reuters information
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