Trump's Election Impact on US Economy

Investing.com — Former President Donald Trump's recent election victory is predicted to bring significant macroeconomic changes, particularly an increase in inflation, according to Capital Economics.

The economic research firm suggests that while the immediate effects of Trump's return may not be substantial, the long-term outlook is “a very different story.”

A consensus is forming around the expectation of stronger GDP growth in the US due to Trump’s re-election, driven by lower taxes and fiscal expansion. However, the firm expresses skepticism regarding this outlook, citing the absence of a filibuster-proof majority in Congress as a potential barrier to meaningful tax cuts.

Capital Economics stated, "The US economy is now in a very different place than it was during his first administration in 2016.” They noted that the federal budget deficit is larger and the government debt burden is higher, indicating that significant fiscal expansion could provoke a strong backlash in the bond market.

Additionally, given the economy's proximity to full employment, any fiscal expansion might result in faster inflation instead of higher output.

Uncertainties surrounding Trump's administration policies and their timing remain. Nevertheless, his campaign promises suggest inflationary pressures may arise from potential immigration restrictions, increased tariffs, and tax cuts.

As a result, Capital Economics is contemplating raising its US inflation forecast by approximately 1% between mid-2025 and mid-2026. They have also updated their forecast for US interest rates, now predicting a low point of 3.50-3.75% in this cycle, an increase of 50 basis points from earlier estimates.

The report concludes that this implies higher US government bond yields and a stronger dollar.