America’s economy enters 2025 in great shape

It is naturalBy Simon Rabinovitch, US economics editor, The Economist to assume, with Donald Trump back in charge, that America’s economic outlook for the coming year will depend on his agenda and his whims. But when thinking about how the economy might fare, it is best to start by leaving politics aside.America enters 2025 with impressive momentum. Not long ago the consensus prediction of analysts was that it would have suffered a recession by now. Instead, it is the only major economy where output is above pre-pandemic trends. Its unemployment rate is hovering around 4%, well below the average of the past three decades. Even better, the bane of the past few years is fading away: inflation is set to return in 2025 to the Federal Reserve’s target of a 2% annual pace.One worry is that all this sounds too good to be true. Some economists fret that a slowdown in job creation augurs poorly for growth. Others have the opposite concern—namely, that inflation will prove stubborn. But in 2025 these fears are unlikely to materialise. With supply chains fully healed from the covid-19 pandemic and the labour market also back to normal, price pressures will continue to recede.With inflation abating, the Fed has already started reducing rates from their peak of 5.5% in September. It will take rates below 4% by the end of 2025, a level that will encourage businesses and consumers to spend more. And that, in turn, will allow the economy to make a soft landing in 2025. It would be an accomplishment to celebrate: a best-case scenario in which America wrestled down inflation without crushing growth. Mr Trump is sure to take credit for the strong economy, though Joe Biden will have played a bigger role in bringing it about.So, how will Mr Trump’s policies affect America’s economy? His supporters believe that he will make it even stronger. Two parts of his programme could help. First, he has vowed to unleash a wave of deregulation. He will make it easier for energy companies to obtain drilling permits, for tech giants to deploy artificial intelligence and for financial firms to lend money. Second, he has vowed to slash taxes. But these policies may not deliver as much of a growth kick as Mr Trump hopes. Oil and gas production were already at record highs under Joe Biden, and there is not much scope for major increases. As for the tax cuts, with America’s federal deficit already at 6%, at least some Republicans in Congress will object to Mr Trump’s tax plans, limiting their eventual size.Two other parts of Mr Trump’s agenda present serious risks. He is hell-bent on raising tariffs, viewing them as necessary to bring more manufacturing back to America. And he wants to boot millions of illegal immigrants out of the country, a central promise of his election campaign. Together, these policies could prove a harmful combination: they would drive up the price of imports and strip the economy of workers, thereby weighing on growth and fuelling inflation.Much will depend on how aggressive Mr Trump is in his pursuit of his goals. He is likely to move swiftly in jacking up tariffs on China, but he may be a little more deliberate in slapping levies on the rest of the world. Stricter border controls will stanch the flow of people entering America from the south, but it will be harder to round up migrants already in the country.The economic consequences of Mr Trump’s worst policies may thus remain relatively muted in 2025. That is not to minimise the danger: as he escalates both tariffs and deportations, the fallout will increase. But in the coming year, at least, America’s robust economy will overpower its corrosive politics.