Investing.com -- Former President Donald Trump's victory in the recent US election is expected to drive significant changes in the macroeconomic landscape, including increased inflation, according to Capital Economics.
The economic research firm believes that while the immediate macroeconomic effects of Trump's return will not be as large, the long-term outlook remains “a very different story.”
Capital Economics notes that a consensus is emerging 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 is not as convinced about this outlook, citing the lack of a filibuster-proof majority in Congress as a potential obstacle to passing significant tax cuts.
“The US economy is now in a very different place to where it was during his first administration in 2016,” Capital Economics explained in a note.
“The federal budget deficit is larger and the government debt burden is higher, meaning a major fiscal expansion would risk a strong backlash in the bond market,” they added.
The note also highlights that, given the economy's proximity to full employment, any fiscal expansion might lead to faster inflation rather than higher output.
It points out the uncertainty surrounding the policies Trump's administration will enact and their timing. Nonetheless, the president-elect's campaign promises suggest they could be inflationary, with potential curbs on immigration, increased tariffs, and tax cuts all contributing to price pressures.
In light of this, Capital Economics is considering adding approximately 1% to its US inflation forecast between mid-2025 and mid-2026. It has also revised its forecast for US interest rates, now expecting them to bottom out at 3.50-3.75% in this cycle, which is an increase of 50 basis points from previous forecasts.
“That means we now expect higher US government bond yields and a stronger dollar,” the report writes.