Chart of the week: Tariffs - our forecast for US GDP growth
Inflation impact will depend on the scope of tariffs, fiscal policy, and the Fed’s response.
This week’s Chart of the Week comes from Morningstar’s Senior U.S. Economist, Preston Caldwell. His article ‘Why tariffs will hurt US economic growth but liely won’t reduce the trade deficit’ offers indepth analysis and insights on the likely outcomes of the hikes.
Below is one chart from the article, where he offers what trade hikes could mean for GDP growth.
Higher tariffs would unambiguously reduce real GDP. We estimate a 1.6% long-run impact: a 1.1% impact from the 10% uniform hike and a 0.5% impact from the 60% China hike. (To be clear, this represents a permanent downward shift in the level of real GDP by 1.6%.)
Although there is a greater possibility that the tariffs on Chinese goods are implemented, they would likely have a lower impact on GDP than the uniform tax hikes.
We think there is a higher chance of Trump implementing the China tariffs because of the increasing bipartisanship of anti-China sentiment, and because of the extent of similar tariffs that Trump implemented in his first term.
However, we estimate a lower impact from the China tariffs, partly because companies could likely dodge them by rerouting through third countries.
We still think the probability of these tariffs’ implementation is relatively low, and markets mostly seem to be pricing in the same estimate to their GDP forecasts.
Still, we’ve shaved 0.32% off our forecasts for cumulative real GDP growth through 2028 to account for the probability-weighted impact.
The degree to which tariffs also affect inflation and other variables depends on the fiscal and monetary policy response.
- If proceeds from tariffs are used for tax cuts, the tariffs would be more inflationary, or they would lead to higher interest rates owing to the Fed’s response to inflationary pressures.
- On the flip side, exchange-rate appreciation would dent the inflationary impact of tariffs, at the cost of harming US exporters.
- To the extent that foreign countries retaliate with tariff hikes of their own, exchange-rate appreciation would be less likely.
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