Mr. Trump's impact on our forecasts

Donald Trump has done it: he is moving back into the White House after being voted out in 2020; this is only the second example in US history of an “interrupted” presidency. The Republicans also won a majority in the Senate. This will make it easier to appoint senior government officials who require Senate confirmation. And the Republicans might also achieve a narrow majority in the House of Representatives; however, the result is still uncertain. Trump has thus received a strong mandate from the electorate to implement his agenda.

US: the implementation of Mr. Trump's agenda...

During the election campaign, Donald Trump aired numerous ideas and plans, not all of which will survive contact with political reality. Many details are still unknown, and the plans are likely to change in the course of the legislative process. However, some guidelines of the Trump-II administration are emerging clearly:

Trump sees tariffs as a panacea. A general tariff of at least 10% and a tariff rate of 60% on imports from China are being discussed. If all of this is implemented, the US's average tariff rate would rise to its highest level since the 1930s.
At the end of 2025, the income tax cuts that Trump passed in his first term will expire. Trump wants to extend them completely and has also promised a further reduction in the corporate tax rate (currently 21%).
How the plans will be financed is unclear. The increased tariff revenues will not even come close to covering the holes torn by lower taxes, and at least in the short term, tax cuts cannot be expected to be fully self-financing through their growth-promoting effect. Rather, the already high budget deficit is likely to widen. We expect the shortfall in the budget year 2025 (ending September 30, 2025) to be around 7% of GDP (previous forecast: 6.3%) and in 2026 to be just under 8% (previously: 5.9%).

... will only boost growth moderately, ...

We assume that the tariff increases vis-a-vis China will probably come into effect in full, while the others will only be partially implemented (here, the threat of higher tariffs may also serve as leverage to persuade trading partners to make concessions). Together with the expansionary fiscal policy, this will boost demand for domestic products, at least for the time being. However, this stronger demand will be met by an economy that is already operating at high capacity, meaning that US companies will only be able to expand their supply to a limited extent. In addition, there are considerable uncertainties, for example with regard to the global economic environment, which has been disrupted by a trade war, that in themselves will curb investment. We therefore expect growth in 2025 to be only slightly higher than our previous forecast of 2.0%, at around 2.3% (about 1/2 percentage point above potential growth).

... but inflation significantly

A more pronounced effect can be expected in terms of inflation. US consumer prices are likely to rise due to an increase in the price of imports and a shift in demand towards domestic products that were originally more expensive, especially since many companies will also use the increase in demand to expand their profit margins. Overall, these effects will cause prices to rise by an additional one percent, with the price-driving effect starting around mid-2025. The average inflation rate for 2025 would then be 2.5% (previous forecast: 2.3%).

For full text see attached PDF-Version.