The outlook for the U.S. economy in the light of the change of administration
U.S. outlook
Fecha: mayo 2025
Peter Jarrett
SEFO, Spanish and International Economic & Financial Outlook, V. 14 N.º3 (May 2025)
Until the end of last year the U.S. economy was performing better than most other advanced economies, and the prospects were for robust economic growth, moderate inflation and low unemployment. However, the recent policy changes driven by the new administration have generated a significant adverse shock, whose magnitude, if unaddressed, will be amplified both over time and internationally. Import tariffs will impose a serious short-term squeeze on real personal incomes, consumer spending, profit margins and business investment, even assuming no retribution from trading partners. And they will eventually blunt incentives to innovate, invest and improve product quality. It is no surprise that financial markets are reacting in such a violent fashion, further aggravating the outlook. Moreover, the on-again-off-again process that has been used to impose tariffs has exacerbated uncertainty, with powerful effects on investment and consumption of durable goods. Additional uncertainty has been generated by: i) talk of encouraging (or even forcing) foreign holders to extend maturity of their U.S. bonds; ii) deportation of both illegal immigrants and critics of administration policies; iii) firing of many federal government and agency employees; iv) perceived erosion of the rule of law; and v) territorial threats against allies, resulting in growing boycotts against U.S. goods and tourism. In such a context, the risk of stagflation or worse has increased considerably.