Schroder Investments: If Trump implements radical policies and supply is restricted, the United States will fall into stagnation.

On January 7, Schroders Global Investments released a statement saying that they have recently raised their forecast for the US economy due to the expectation that President-elect Trump, who will take office on January 20, will implement policies favorable to economic growth. However, Schroders Global Investments may have been overly optimistic in their expectations, as Trump may not follow through on his previously promised radical policies. Schroders Global Investments pointed out that the impact of global trade and supply chain disruptions on economic growth is more significant compared to a scenario of "US consumer recession." However, due to large-scale fiscal stimulus policies, retaliatory tariffs, and depreciation of currencies relative to the US dollar, the downside risk of inflation is expected to be limited. Trump's radical policies will have varying impacts on the US and economies around the world. Weak trade, stagnant investment decisions, and overall market confidence could lead to most economies heading towards recession and significant interest rate cuts, but this may bring stagflation to the US. Supply constraints could lead to stagflation in the US In a scenario of radical policies, Trump may attempt to introduce large-scale fiscal stimulus measures, but strong demand could accelerate the deterioration of supply issues. While some impacts may be offset by a strong dollar and profit margins, significant increases in tariffs could lead to increased commodity inflation. However, the greater threat to inflation may come from crackdowns on immigrants and mass deportations. If this leads to labor shortages, it could eventually result in wage increases and service sector inflation. Analysis from the Peterson Institute of International Economics indicates that an additional 10% import tariff could temporarily increase US inflation by about one percentage point, but mass deportations could rapidly increase inflation by over three percentage points, taking several years to normalize. GDP growth may initially decline as a result, and it may not improve until stimulus measures are introduced by 2026. Estimates from the Pew Research Center based on the American Community Survey show that in 2022, approximately 8.3 million US employees were undocumented immigrants. Schroders Global Investments estimates that damage to the US economy's supply will lower its potential growth rate to about 1.5% annually, meaning nominal growth will deviate from real growth and tend towards inflation. While other central banks are cutting interest rates significantly in 2025, stagflation will make it difficult for the Federal Reserve to ease monetary policy, causing the dollar to strengthen further. This could lead to strong criticism of the Trump administration, possibly resulting in Federal Reserve Chair Powell being replaced by someone advocating for looser monetary policy when his term ends in May 2026. Schroders Global Investments believe that in order to stimulate economic growth, US interest rates will drop to 3% by the end of 2026. This, coupled with twin deficits, will eventually lead to a depreciation of the US dollar.