Solid growth despite political uncertainty
Fiscal and trade policy uncertainty overshadows US economic outlook, but we maintain our forecast for steady yet gradually cooling growth in 2025. We revise up our 2025 GDP forecast to 1.9% (from 1.5%) partly due to more positive overhang, and see 2026 growth at 2.1%
We expect easier tax policies to lead to a net increase in fiscal deficits especially in 2026 when compared to CBO’s baseline. Weaker immigration outlook poses a downside risk to structural growth.
We assume 10% universal tariffs on all imports and 40% on imports from China, likely implemented towards the end of 2025. Trump’s announcements suggest some increases could be announced already at the beginning of the new presidential term in January.
Inflation forecasts have been adjusted modestly higher for 2025, with roughly half of the increase reflecting impact from tariffs. We see headline inflation averaging 2.7% in 2025 (from 2.2%) and 2.4% in 2026. Core inflation is set to average 2.9% in 2025 (from 2.4%) and 2.5% in 2026. We keep our Fed call unchanged and expect the Fed to reach a terminal rate of 3.00-3.25% by September 2025, which will be maintained through 2026.
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