The new Trump Administration in the US is a major wildcard for the year ahead, both economically and geopolitically, with implications home and abroad.

Whilst Trump’s main campaign policies and threats are known (tariffs, taxes, immigration, deregulation), the degree of implementation and timing are still fluid.

Overall, these factors suggest a scenario of higher nominal U.S. growth, elevated inflation, and favourable domestic drivers for corporate earnings, tempered by the potential downside risks from global trade tensions and geopolitical instability. Outcomes are very uncertain with higher downside risk.

Tariffs

The impact of tariffs is stagflationary on the US (lower growth and higher inflation) but there is a very wide range of potential outcomes. Tariffs are a tax on imports, which will slow economic activity as demand slows. Firms may pass on tariff related expenses to the end consumer, resulting in a kick up in inflation; however, this may be short-lived if tariffs are reduced in the future.

The timing and size of tariffs are still uncertain, as is the degree of bilateral negotiations and sector exclusions. The current headlines are opening gambits and form part of Trump’s broader negotiating strategy, all with the aim of increasing FDI and manufacturing activities into the US. Trump’s biggest targets are those countries with large goods trade surpluses with the US, which include China, Mexico, Canada and Europe.

We expect a China tariff to be implemented in late 2025, with a universal baseline tariff (UBT) in 2026, but with several exclusions and amendments in place. There is less clear footing on the implementation of the UBT and there is the widespread expectation based on input from Trump advisors that Trump will use the threat of the 10% tariff to negotiate concessions with major trading partners, rather than imposing them indiscriminately.

It is important to consider how US trading counterparties react to tariff proposals and negotiations (e.g. Australian permanent exemption from Trump’s 25% steel/aluminium tariffs in 2018).

As to impacts on countries, a 10% UBT will hit Europe 0.5-1% GDP growth, with the biggest hit in Germany. Trump has also proposed larger tariffs on European autos, further hurting Germany. Weaker exchange rates will act as a safety valve for EM exporters facing US import tariffs. The biggest impact in the EM is on Mexico (0.5% GDP) due to its supply chain integration with the US. Longer term manufacturing orientated EMs (Vietnam and Mexico) could benefit from a shift by Western firms pulling production out of China. The first trade war had little impact on aggregate export performance in China, as third party countries replaced US destinations and with CNY depreciation. This time round, any weakness should be met with additional Chinese stimulus in line with its gradual approach of stimulus and meeting annual growth targets.

Deregulation – Energy & IRA


Trump’s campaign trail was pro fossil fuels and against renewable build out.
Trump is supportive of domestic oil and gas production, as well as undoing Biden’s pause on new LNG export terminals. The pause only applies to projects that would come online at the end of the decade, so the effect on natural gas prices will be negligible in the short term. Several liquification terminals, that already have approval to export, are scheduled to begin operations over the next few years.

By contrast, Trump has threatened to repeal the Inflation Reduction Act (IRA), but there is a high degree of unknowns as to what and how much can be done. A full repeal is less likely because of the large amount of IRA related investments made in Republican dominated districts. According to the Department of Energy, of the total spending on clean energy technologies since 2021 (as of mid-2024), ~$10.9 billion was for solar in red states and $4.1 billion in blue states, spending on batteries was $109.9 billion in red states and $22.0 billion in blue states, and spending on EVs was $35 billion in red states and $4.2 billion in blue states. However, it is clear that the near term rhetoric is negative with comments such as “no windmills” impacting sentiment.

Immigration

Trump’s threatened immigration agenda is very aggressive, including deporting 15-20 million people immediately and stricter border controls. Trump will most likely repeal Biden’s “humanitarian parole”, which is bringing in 75 thousand people monthly into the US with the ability to work after 30 days – this will cut off a major source of labour force growth and be potentially inflationary. Immigration has been an important tailwind to recent US growth having been about 2 million above trend in recent years. Net immigration reducing to near zero and deportations of undocumented migrants should reduce the US labour supply by 0.1-0.2%. It is also important to note that Trump 1.0 ran on mass deportations, but the pace of his deportations were actually lower than Obama.

Taxes

Trump’s other policies are domestic growth focused, with tax cuts giving consumers further tailwind and a push to re-invigorate the domestic manufacturing base and re-shore facilities back to the US. The negotiation around the 2017 Tax Cuts and Jobs Acts (TCJA) looms large in 2025, and the potential economic impacts on fiscal policy are more likely to be felt in 2026.

These tax cuts are at the cost of widening the fiscal deficit and estimated to add nearly USD $5-10 trillion to overall debt over the next decade, even with the offsetting gains from government efficiency and tariffs. Rising net interest payments continue to increase and there is little fat to cut from the budget (only 14% is discretionary non-defence spending to trim) – this could lead to discomfort in the bond market.

The bond market is likely to be more important to Trump 2.0 considering the current levels of debt and intended fiscally expansive policies. Ahead of his first win, the 10-year treasury yield was ~1.8%, the US federal deficit around 3% of GDP, and the outstanding debt ~75% of GDP. Today, those numbers are ~4.4% on Treasury yield, and ~7% & nearly 100% of GDP, respectively. There is a risk of the ‘bond vigilantes’ returning to the US should the fiscal deficit and trajectory get reckless.

Timeframe & risks

Considering the many parts of Trump’s agenda, a number of conflicting dynamics mean there is a wide range of distribution of risks around outcomes, with what we believe a fatter tail risk to the downside.

We expect a focus on immigration in the first 100 days (border security, deportations, reverse Biden’s humanitarian visas). There should be tariff noise all of 2025, with China tariffs implemented in the second half of the year and UBT introduced in 2026. Tax cuts should be extended by the end of 2025.

There are still some controls over Trump’s policies, which should rationalise outcomes. His immigration and tariff plans can largely be implemented through executive action, whereas his regulatory rollback can proceed more rapidly with Congressional cooperation, and his tax plans are entirely dependent on Congress. Congress controls the US budget, and has sole authority to pass legislation (required for tax cuts). Even a Republican sweep will exercise a level of control, even on the most extreme aspects of policies (e.g., a Republican Senate did reject extreme Fed nominees in Trump’s first term).

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