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The trade war President Donald Trump has initiated will reduce economic growth and boost jobless rates and inflation across the board, according to economists at S&P Global (SPGI-1.63%).
The U.S. will lose about 0.6% of its output over 12 months.The effect will be greater on Canada and Mexico, reducing the level of GDP by between 2% and 3%, because they are relatively smaller and more trade-dependent economies. The economists didn’t adjust their forecast for China.
“We confirm our view that there are no winners in a trade war,” the researchers, led by Global Chief Economist Paul Gruenwald, wrote in a report. Uncertainty around U.S. policy could deter companies from investing and households from spending, derailing the firm’s soft-landing baseline scenario.
The credit rating firm’s assumptions are based on the tariffs remaining in place for an extended time. Trump yesterday suspended the 25% tariffs on Canadian and Mexican goods for a month for the major U.S. automakers, prompting a late-day rally in American stock markets.
The duties will probably boost U.S. consumer inflation by 50 to 70 basis points, with currency adjustment, product substitution and cost absorption providing only limited relief, the economists write. With U.S. CPI set to stay near 3% all year, the Federal Reserve isn’t likely to cut interest rates in 2025.
In Canada, the trade war may boost inflation by 50 basis points. The country’s central bank will probably look through that increase to cut rates to support the economy, the firm wrote, projecting the loonie will weaken a further 10% against the U.S. dollar.
The economists Mexican economy will contract 0.5% in 2025 and the peso will depreciate about 10%, assuming the tariffs stay in effect all year. This would add about 90 basis points to inflation, and could prompt the central bank to pause its interest-rate cutting cycle.
And while S&P Global hasn’t adjusted its GDP growth forecast for China, the higher U.S. tariffs are likely to put downward pressure on domestic prices and cause the yuan to weaken. This will prompt the People’s Bank of China to cut its policy interest rate by 20 basis points less than the firm’s prior assumption.