A Trump recession?

Disruptive economic policy unsettles firms and consumers...

Donald Trump has set about implementing his election promises. Tariffs such as the 25% on auto imports announced this week are being aggressively used to decouple from foreign countries and bring production back to the US. At the same time, federal agencies are being ruthlessly restructured or dissolved to reduce the government's influence on the economy and society and to save money. This is weighing on the economy for a variety of reasons:

There is currently no sign of a coordinated and consistent economic policy that sets a stable framework for trade and investment. On the contrary, tariff policy in particular is extremely erratic. Time and again, additional tariffs are imposed – including on close US allies – but in some cases they are suspended or postponed after only a few days.

The markets had assumed that the new administration would first ease the economic burden by cutting taxes or deregulating, and only then would it tackle costly projects such as raising tariff walls. This order was apparently reversed.

During Trump's first term in office, the government usually backtracked as soon as the financial markets came under pressure. Now, however, the government seems to be willing to accept price losses on the financial markets. For example, Treasury Secretary Bessent pointed out that corrections are normal and even healthy.

... and weighs on sentiment

As a result of these developments, economic policy uncertainty has increased massively (title chart). According to surveys, consumer sentiment has also deteriorated noticeably. The outlook for the labor market, for example, is being viewed much more pessimistically. In the University of Michigan's March survey, two-thirds of respondents expected unemployment to rise within a year. This share has doubled since Trump's re-election in November. In the past, a rise of this magnitude has typically been a sign of a recession.

One of Trump's recent TV interviews, in which he refused to rule out a recession, has caused additional unease. He said that the US was currently in a transition phase. It might take a while, but then everything would be great.

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