According to a report by Morgan Stanley, the US economy is projected to experience slower growth and persistently high inflation in the coming years.
The firm has revised its GDP growth estimates downward, citing factors like a cooling labour market, tighter immigration policies, and rising tariffs as major contributors to the slowdown. The report forecasts GDP growth of 2.4 per cent in 2024, which is expected to drop to 1.9 per cent in 2025 and further decline to 1.3 per cent by 2026.
The report attributed this deceleration to weakening consumer spending and reduced business investment. “Tighter immigration policy and tariffs weigh heavily on the economy, slowing GDP growth in 2025 and more sharply in 2026,” the report stated. The report highlighted that consumer spending, a key driver of the US economy, is anticipated to slow significantly over the next few years. Growth in consumer spending is expected to decline from 2.6 percent in 2024 to 2.0 percent in 2025 and to just 1.3 percent in 2026.
It said, “As labour income growth cools, consumption decelerates. Goods consumption declines less than services as lower interest rates support durables consumption. In 2026, we expect sharper deceleration as tariffs dampen economic activity and labour markets.” Higher tariffs are predicted to slow economic activity and contribute to inflationary pressures by driving up prices. This, combined with reduced labour income, is expected to weigh heavily on consumption.
The labour market outlook also presents challenges. Payroll growth is projected to average just over 100,000 jobs per month in 2025, while unemployment is forecast to end 2024 at 4.3 percent, drop slightly to 4.1 percent in 2025, and rise again to 4.5 percent in 2026.
The report highlights that tighter immigration policies will constrain labour supply, affecting both income and employment levels. “Lower immigration means significantly lower payroll prints in 2025 and 2026,” it stated. Additionally, fiscal policy is expected to provide minimal relief in the near term, with most provisions of the Tax Cuts and Jobs Act set to expire by the end of 2025. While the reinstatement of SALT deductions and other minor provisions for tariff-affected firms are anticipated in 2026, their impact is expected to be limited.
“The assumed reinstatement of SALT deductions and some deductions for tariff-affected firms will be new, but none of the changes come before 2026,” the report added. The report outlined a challenging economic environment for the US, marked by slower growth, sticky inflation, and a cooling labour market.
Source: newsmobile.in
