US resilience, US risks

The global economy has proved unexpectedly resilient in the face of US tariffs and geopolitical uncertainties this year. Last week the IMF upgraded its forecasts for global growth, reversing the sizeable downgrade it made in April following the initial US tariff announcements. The IMF now expects the global economy to expand by 3.2% this year, only slightly slower than the 3.3% expansion in 2024. Growth is forecast to slow only slightly in 2026 to 3.1%.

The IMF attributes this resilience to lower US tariffs than initially threatened, the absence of retaliation by other countries, easy financial conditions, the adaptability of the private sector and good growth in emerging markets. 

Improved prospects for the US explain much of the upgrade to the IMF’s global growth forecast. Since a sharp contraction in the first quarter (in part due to distortions from a surge in imports designed to pre-empt tariffs), the US has bounced back, recording solid growth in the second quarter. High-frequency business surveys show continued momentum through to September. 

The IMF now expects growth in the US to slow to 2.0% this year and 2.1% in 2026, down from 2.8% in 2024. It is a material slowdown, but significantly better than thought likely in April.

By any measure, this sort of outcome would count as a soft landing for the US economy. To achieve it, the US economy will need to navigate five risks.

The first is tariffs. The US economy has not yet felt the full effect of tariffs. Consumers have been shielded from tariffs by companies selling stockpiled goods free of tariffs, the administration’s 90-day pause in the application of tariffs and the willingness of corporates to absorb a significant share of extra costs in slimmer margins. As a result, the level of tariffs actually felt by US consumers lags far behind where they seem likely to settle.

Moreover, levels of tariffs on Chinese imports are yet to be settled. Following a series of escalations earlier in the year, the US and China are operating under a tariff ‘truce’, with Chinese imports subject to a temporary tariff of 30% that is due to end next month. Mr Trump has threatened to impose 100% tariffs on Chinese goods and trade tensions between the two countries have increased in recent weeks. 

The second risk stems from the AI boom. AI has been a major driver not just of the US stock market but, through investment in tech and data centres, of US growth this year. This investment is concentrated in a handful of big tech companies. The valuation of technology stocks is higher today than in the dotcom boom of the late 1990s and tech stocks make up a larger share of the market. A major reassessment of prospects for AI, or an abrupt change in financial conditions, could trigger a dotcom-style bust in the equity market.  That would hit tech investment and, through the loss of wealth, could have a chilling effect on US consumer sentiment and spending. 

Sharply rising levels of US government debt represents the third risk. Mr Trump’s ‘One Big Beautiful Bill’ involves large tax cuts which will boost growth and add to the fast growing US debt pile. The level of government debt is rising faster than any other developed market with the ratio of debt-to-GDP likely to hit a post-war high in two years. Bond investors have so far taken a fairly indulgent view of America’s debt position. Yields or interest rates on US government debt have fallen this year while those on other developed world debt, including the UK, France and Japan, have risen. A change of heart by the bond market could push up government borrowing costs and, in an extreme outcome, force a painful fiscal retrenchment through spending cuts and tax rises.

Fourth on our risk list is sharply lower immigration. The FT estimates that tougher controls will reduce net immigration to the US to 400,000 this year, down from 3.5m in 2023 and 2.6m in 2024. Reduced labour supply will act as a drag on growth and could stoke inflationary pressures. This leads to the final risk. Easy fiscal policy, large increases in tariffs and lower immigration could keep US inflation higher for longer. That could upset the notion in financial markets that the Federal Reserve will cut interest rates by 100bp in the next year. To keep growth going around the 2.0% mark the US needs to avoid ‘sticky’ inflation and elevated interest rates.  

The story of the last few years has been one of American economic exceptionalism. Its economy has outpaced its developed world peers and its stock market has soared. The IMF thinks the US will achieve a soft landing. That may be the most likely outcome, but it’s not assured. 

PS: UK gilts rallied last week after UK chancellor Rachel Reeves hinted that she is considering increasing taxes and cutting public expenditure in her November budget