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Investing.com - U.S. President Donald Trump's decision to delay most of his sweeping tariffs could help reduce the risk of the economy sliding into a period of elevated inflation and tepid growth, according to analysts at BofA.
In a note to clients on Friday, the analysts led by Aditya Bhave added that the chances of the U.S. economy dipping into a recession have "diminished substantially."
Earlier this week, Trump said he would delay the implementation of so-called "reciprocal" on a host of countries, apart from China. The decision was met with widespread relief in some corners of financial markets, although intense volatility continued even after Trump's announcement.
However, the BofA analysts flagged some skepticism over whether Trump's budget plans will be offset by revenue generated by his trade policy -- which, despite the pause, includes higher levies on China, universal 10% tariffs, and duties on items like steel and aluminum.
"[W]e do not view tariffs as a reliable source of revenue," the analysts argued, adding that companies are likely to shift their supply chains away from China in particular after Trump said he had lifted tariffs on the world's second-largest economy to 145%.
"This would significantly reduce tariff revenues, even if it helps achieve the administration’s geopolitical objective of decoupling from China," the analysts said.
On Friday, China announced that it will raise its import tariffs on U.S. goods to 125% in retaliation to the recent hike in levies imposed by Trump. The duty is an increase from 84% announced by Beijing on Wednesday, and is the latest escalation in an intensifying trade war between the U.S. and China. It will take effect from Saturday, Beijing said.
Against this backdrop, the BofA analysts predicted that the effective U.S. tariff rate would end up "substantially below 25%," noting that "[t]his would be good news for the economy in the near term, because it would be less stagflationary." Stagflation refers to a time of high inflation, weak economic activity, and increased unemployment.