As 2024 draws to a close, economists and policymakers are discussing whether the U.S. economy will enter a recession in 2025. Current economic indicators present a mixed picture, and the potential implementation of President-elect Donald Trump's proposed policies adds further complexity to the economic outlook. This uncertainty is not ideal, although in some ways, markets have a blueprint to look back on, the incoming president's previous time in office.

 

Current economic indicators

 

Even in the best of times, looking too far ahead on the economic front is challenging. When you also consider the unpredictability and uncertainty surrounding Donald Trump, this makes a difficult situation even worse. So, what do we know?

 

Labour market dynamics

 

The U.S. labour market has shown resilience, with the unemployment rate holding steady at 4.1% in October 2024, unchanged from September. This stability suggests a robust job market, which is a positive economic sign.

 

Inflation trends

 

Inflation has been a focal point for economic analysis. In October 2024, the Consumer Price Index (CPI) rose by 2.6% year-over-year, up from 2.4% in September. This uptick indicates that inflationary pressures are present, which could influence monetary policy decisions.

 

Economic growth projections

 

The Conference Board anticipates that real GDP will expand by 2.6% year-over-year in 2024, an upward revision from 2.4%. Some moderate growth at year-end and early next year may constrain annual 2025 growth to 1.7%, despite expectations of stronger quarterly annualised growth over the course of that year.

 

Potential impact of proposed policies

 

Even though Donald Trump gave markets a "heads up" during the election campaign, there is still uncertainty with regards to which policies he may introduce and when. However, one thing is certain, he is set to continue his "America First" policy, which is likely to go down well with the electorate and even domestic markets, but internationally, that is a different scenario.

 

We have put together a summary of what we know, what might happen and the likely impact.

 

Tax cuts and fiscal implications

 

President-elect Trump has proposed reducing the corporate tax rate to 15% and extending individual tax cuts. While these measures aim to stimulate economic growth, they could also significantly increase the national debt. Analysts estimate that extending these tax cuts could add over $5 trillion to the national debt over a decade. An increase in national debt may lead to higher interest rates, dampening economic growth.

 

Tariffs and trade policies

 

Trump's proposed tariffs include a 10%-20% levy on all imports and between 60% and 100% on Chinese goods. These protectionist measures aim to bolster domestic manufacturing but could lead to higher consumer prices and strained international trade relations. Imposing such tariffs may disrupt supply chains and increase production costs, contributing to inflationary pressures and potentially slowing economic growth.

 

Deregulation and business environment

 

The incoming administration's focus on deregulation seeks to reduce constraints on businesses, potentially fostering investment and job creation. However, the extent to which deregulation will offset the potential negative impacts of increased tariffs and national debt remains uncertain.

 

Conclusion

 

The probability of a U.S. recession in 2025 remains a subject of debate among economists and financial analysts. While specific indicators, such as a softening labour market and global economic uncertainties, suggest potential risks, other factors, including robust consumer spending and favourable monetary policies, point toward continued economic growth.

 

Implementing President-elect Trump's proposed policies could further influence these projections, mitigating or exacerbating recessionary pressures. As the year progresses, closely monitoring these variables will be essential to assess the nation's economic trajectory accurately. A recent report by Goldman Sachs reiterated their opinion of the U.S. economy, maintaining 15% chance of a recession in 2025. However, there are significant variations in opinion across other financial institutions.

 

One thing is certain, as we move into the realms of the unknown, nothing is off the table from an economic front.

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