US President Donald Trump’s decision to delay most of his sweeping tariffs could help reduce the risk of the country’s economy slipping into a period of high inflation and sluggish growth, according to analysts at Bank of America (BofA).
In a note to clients on Friday, the group of analysts led by Aditya Bhave added that the likelihood of the US economy entering a recession has “significantly diminished”.
Earlier this week, Trump announced that he would delay the implementation of “reciprocal” tariffs on several countries except China. The decision was met with relief in some corners of financial markets, although significant volatility persisted even after the announcement.
However, BofA analysts expressed doubts about whether Trump’s budget plan can be balanced by the revenue generated by his trade policies that still include higher tariffs on China, a 10% across-the-board tariff, and duties on goods such as steel and aluminum.
“We do not see tariffs as a reliable source of revenue,” the analysts argued, adding that companies are expected to shift their supply chains away from China in particular, after Trump raised tariffs on the world’s second-largest economy to 145%.
“This action will significantly reduce tariff revenue, although it may help achieve the Trump administration’s geopolitical goal of severing economic ties with China,” they explained.
On Friday, China announced that it would raise import tariffs on U.S. goods to 125% in response to Trump’s recently announced tariff hikes. The tariffs are up from the 84% rate announced by Beijing on Wednesday, marking the latest escalation in the escalating trade war between the U.S. and China. The new rates will take effect from Saturday, according to a statement from Beijing.
Against this backdrop, BofA analysts predict that the effective rate of U.S. tariffs will eventually end up “well below 25%,” noting that “This is good news for the economy in the near term, as it is less stagflationary.” Stagflation refers to a situation of high inflation, weak economic activity and rising unemployment rates.
