As investors look ahead to 2025, many of our recent discussions with clients have focused on how the incoming Trump administration’s policies might shape the US and global economic landscape. Will the agenda lean towards traditional Republican causes such as deregulation and cutting taxes, or pivot to more unorthodox measures, such as raising tariffs, stricter immigration policies, and attempts to gain influence over the Fed’s monetary policy.
While many are drawing lessons from Trump’s first term to predict what lies ahead, there are important differences between then and now. Eight years ago, the US economy arguably required some kind of inflationary jolt. Today, the context is different. The economy has far less slack, as shown in the first chart, where both the unemployment gap and output gap are estimated to have closed.
The lingering effects of the 2021-22 inflation shock, ongoing large federal government deficits, higher levels of government debt, and a narrower gap between inflation-linked Treasury yields and potential GDP growth – highlighted in the second chart – further complicate the policy environment. All this suggests that policies that worsen the trade-off between growth and inflation or persistently widen the deficit will have a larger effect on the future trajectory of government debt. Financial markets may be less forgiving of policies that push in those directions.
We at Absolute Strategy Research believe these constraints could serve as a moderating force. Bouts of market volatility might act as a periodic reminder of these challenges, and steer policy toward those that support growth. Ultimately, this leaves us optimistic about the broader outlook for the US and global economies.
Article in Full: Macrobond | 2025 H1: What investors should expect
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