Trump tariffs: analysts warn of inflation bump, slower growth as trade war brews

Investing.com-- U.S. President Donald Trump signed an executive order imposing trade tariffs on Canada, China, and Mexico over the weekend, with analysts warning that the move will push up inflation and undermine growth.

Trump had largely telegraphed the tariffs over the past week, although markets had still held out some hope that he would adopt a more moderate stance, especially given recent reports that some members of his administration were pushing for a less severe tariff plan.

But Trump imposed 25% import duties on Canada and Mexico, along with a 10% duty on China. All three countries decried the tariffs and threatened retaliation, marking the beginning of a renewed global trade war. 

Trump said the tariffs were aimed at cutting the flow of illegal substances- particularly fentanyl, as well as illegal immigrants, into the U.S.

He mentioned a clause in his executive order that any retaliation against the tariffs will invite higher duties. 

Analysts warned that the trade tariffs- which will be paid by U.S. importers- stood to increase inflation and slow growth if they were allowed to remain for an extended period. 

U.S. stock index futures plummeted on Sunday evening, while the dollar rose sharply. 

Goldman Sachs sees north American tariffs as short-lived 

Goldman Sachs analysts had earlier projected a 0.7% increase in core PCE prices and a 0.4% drop in gross domestic product.

GS analysts said in a weekend note that they expected the Canada and Mexico tariffs to be “short-lived,” especially due to their potential to increase inflation and stymie growth. Canada and Mexico account for a total 40% of U.S. oil imports, and also play key roles in the broader U.S. energy and manufacturing industry. 

GS analysts also noted that there remained the possibility of a “last-minute compromise” before the tariffs take effect on February 4. 

Capital Economics sees lower chances of Fed rate cuts

Analysts at Capital Economics said the new tariffs essentially “slammed shut” the window for the Federal Reserve to cut interest rates in the next 12 to 18 months, citing concerns over inflation.

They also warned that the tariffs could put Mexico and Canada in recession. 

Contrary to GS, Capital Economics analysts said they did not see any deal removing the tariffs soon, although some sectors could still be added to exemptions. 

Trump imposed smaller tariffs on Canada’s oil and gas sector. 

Wolfe Research says Trump operating with fewer guardrails 

Wolfe Research analysts noted that Trump was “clearly operating with fewer guardrails” during his second term, with his first two weeks in office potentially setting the precedent for the coming years. 

“This strikes us as the kind of action that Trump’s advisors in his first term would have prevailed upon him not to do,” Wolfe Research analysts wrote in a note. 

“Investors cannot assume that his advisors and staff will moderate his impulses to the extent they did during Trump 1.0.” 

Wolfe Research analysts warned that it was now possible that Trump will deliver on his threat of 60% tariffs on China and 10% universal tariffs, while warning that such a scenario heralded more upside for inflation and pressure on the economy.