Can the US stay in top gear?

Key points

• The US economy powered ahead of it developed-market peers again in 2024.
• Lower inflation and interest rates appear to be on the cards in coming months.
• With the election out of the way, can the US remain top dog in 2025?
• With much uncertainty around what the new administration will do, investors should remain openminded.

Slower but still strong

Once again, the US economy powered ahead in 2024. Indeed, the country is on track to expand the economy by 2.7%, in real terms, this year (see table). By contrast, the consensus among economists expected just 1% growth, back in November 2023. 

Sure, 2024 hasn’t been plain sailing, with market sentiment swinging between a ‘soft landing’ and a ‘hard’ one. While this debate is likely to resurface before long, the combination of supportive fiscal policy and retreating interest rates should underpin more of the same: we pencil in GDP growth north of 2% in 2025, as a base case. Importantly, though, 2024’s drivers of  growth (the government and consumer spending) are anticipated to slow, with investment spending doing some of the heavy lifting. 

One reason for this shift in the growth mix is that US consumers appear to be running on fumes, in particular at the lower end of the income distribution. Indeed, the savings rate remains relatively low (at 4.8%), pandemic-related excess savings have been depleted, and real income growth, although still positive, is likely to slow.

Tariff unknowns

Beyond that, the outlook is rather clouded. Indeed, with a change in leadership at the White House, there could be important policy changes. Whether it’s tax cuts, deregulation or new tariffs being imposed, they could all significantly alter the US growth trajectory. It’s important to remember that any impact may not be felt in 2025, though.  

When it comes to tariffs, president-elect Trump was pretty clear, saying ’tariffs’ is “the most beautiful word in the dictionary¹” and, if he follows through on his promises, much higher import duties could be on the way in 2025. If so, their ultimate impact will depend on the scope and range of them, and any retaliation that may ensue. Companies, in their ability to pass on and absorb those additional costs, and consumers will also be key deciding factors.

Importantly, though, any tariffs-related inflation shock should be short-lived. Similarly, just as how companies and consumers adjusted after the ‘trade war’ in Trump's first administration, we would expect the US economy to “move on” within a few quarters, following the announcement of new tariffs.

The possible roll back of policies

Another key unknown is the future of existing stimulus packages, such as the Inflation Reduction Act. While some committed capital has already been spent, the majority of it remains to be allocated. Of that, only around a quarter, representing a few hundred billion US dollars, based on some estimates, is likely exposed to a possible roll back.  

This is significant, when compared to the large US tech companies’ expected investments in artificial intelligence next year alone (close to $200 billion). However, it is relatively small in the context of US net domestic investments (close to $1.5 trillion²). Yet, this could have an impact on the country’s economic outlook, especially if additional tariffs are implemented.

Rate cuts still on the agenda 

In the meantime, the US Federal Reserve (Fed) will probably keep banging away about it being focused on the data, and the data alone, in setting policy. On that note, the uncertainty around US trade relationships could lead to a short-term boom in activity, to pre-empt higher tariffs. Unfortunately, the subsequent hangover may not be pleasant, resulting in lower growth from late 2025. 

Meanwhile, employment may slow in the immediate aftermath of the election. Indeed, companies may prefer to adopt a ‘wait and see’ approach, further compounding the recent declines in in real-time measures of demand for workers. Beyond that, a stricter stance on immigration may ‘artificially’ support employment, by preventing the labour force from expanding, but also put upward pressure on wages. Overall, however, the Fed is likely to lower interest rates further, at least initially. 

More questions than answers

In this highly uncertain environment, economists and investors alike should remain open-minded, acknowledging the wide range of possible economic outcomes. Importantly, as was seen in Trump’s initial presidential term, the most obvious consequences of the election result (in this case, the “doomsday” predictions of some, and hopes by others that the oil sector will outperform) may not happen. With that in mind, and while everyone seems convinced inflation will rise; it’s tempting to assume that it may, in fact, fall faster than expected in 2025.