By George Brown, Senior US Economist, and David Rees, Senior Emerging Markets Economist, at Schroders

President-elect Trump will ultimately pursue a pro-growth policy mix when he enters office on 20th January. However, economic forecasting is currently even more challenging than usual given the uncertainty about the new administration’s policy priorities. There is a clear risk that we are far too sanguine, and that Trump will do exactly what he has promised.

This is something we have modelled in our “Aggressive Trump” scenario, where we make four key assumptions:

• A tariff of 60% is applied to Chinese goods, with a 10-20% tariff on the rest of the world.
• Border controls significantly limit immigration, with one million undocumented migrants deported annually.
• Fiscal loosening of $10 trillion over the next decade, mainly through lower taxes for individuals and businesses.
• Widespread and rapid deregulation, particularly of the fossil fuel and financial sectors.

Our work indicates that these factors would have a deflationary impact on the global economy relative to our baseline forecast. China would probably suffer the most from aggressive Trump policies, although they could prompt a large fiscal stimulus to boost domestic demand. Disruptions to global trade and supply chains means that the hit to growth is more pronounced than in our “US Consumer Recession” scenario. But the downside to inflation is estimated to be more limited because of large fiscal stimulus, along with the tit-for-tat retaliation in tariffs and the depreciation of local currencies versus the US dollar.

There are important distinctions to be made on the impact of an aggressive Trump policy mix on the US economy relative to the rest of the world. Weaker trade, a pause in investment decisions and a general shock to confidence would be likely to tip most economies towards recession and lead to aggressive interest rate cuts.

But this mix would have more of a stagflationary impact for the US. In other words, while the US’s growth outlook is also diminished under an aggressive Trump scenario, slower growth would be accompanied by more, rather than less inflation

Constrained supply would leave the US mired in stagflation

While an aggressive Trump may try to deliver large fiscal stimulus, stronger demand would quickly run into a deteriorating supply side of the economy. Despite being partially absorbed by the stronger dollar and profit margins, substantially higher tariffs would be likely to increase goods inflation.

But the greater threat to inflation probably comes from a crackdown on immigration, along with mass deportations, if it leads to labour shortages that would ultimately result in higher wages and services inflation. For example, analysis by the Peterson Institute estimates that while an additional 10% import tariff might temporarily add about one percentage point to US inflation, mass deportations could quickly add more than three percentage points and take several years to normalise.

GDP growth would probably slump in the first instance due to huge disruption, before receiving some boost from stimulus measures heading into 2026. In this scenario, we estimate that destruction of the supply side of the US economy would lower its potential rate of growth to around 1.5% per year. In other words, a more supply-constrained economy due to aggressive Trump policies would skew the composition of nominal growth away from real growth and more towards inflation.

All of this would leave the Federal Reserve (Fed) in a bind. While other central banks slash interest rates in 2025, stagflation would leave the Fed unable to loosen policy, causing the dollar to strengthen even further. That would be likely to draw intense criticism from the Trump administration, such that at the end of his term in May 2026 the central bank’s chair Jerome Powell would be replaced with someone more amenable to loose monetary policy.

Our modelling then assumes that in a bid to raise growth, US rates are cut to 3% by the end of 2026. That, along with gaping twin deficits, would finally cause the dollar to roll over.

An aggressive Trump would force China to stimulate the economy

Amongst other major global economies, China would probably suffer the most from aggressive Trump policies. After all, the economy’s starting point is already weak – we recently revised down our growth forecast for 2025 to just 4% – and it would face the most aggressive trade policies.

The first trade war with Trump was, admittedly, largely ineffective and China would be likely to try again to avoid tariffs by re-routing trade through third parties. However, other countries may be more reluctant to participate this time around, for fear of reprisals from the US administration.

With Chinese industry already suffering from overcapacity, in addition to a slump in net trade, punitive tariffs would be likely to cause manufacturing investment to weaken significantly. This, along with a general hit to confidence, would be likely to cause GDP growth to slump in 2025.

Beijing would not take Trump’s actions lying down. Much weaker economic growth would be likely to lead to a large fiscal stimulus to boost domestic demand through infrastructure spending and consumption and eventually lead to some reacceleration in 2026.

But like the US, medium term trend growth would probably be lower due to permanently lower trading volumes. Large tariffs would be met with similar restrictions of US trade, along with outright bans of exports of key products.

And finally, the exchange rate would probably be weakened to offset some of the impact of tariffs. Indeed, the experience of the first trade war suggests this could see the renminbi weaken all the way towards 9/$.

The challenge for investors is that while an aggressive Trump remains a tail risk scenario, experience suggests that its probability will fluctuate significantly as transactional negotiations generate negative headlines. Accordingly, financial markets could price in these extreme policies during the course of 2025, even if they never actually come to fruition, leading to increased volatility across asset classes.

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