Growth to Slow and Inflation to Rise if Trump Implements Tariff Plan, Says Morgan Stanley

Morgan Stanley issued a report on Monday highlighting the potential consequences of tariff proposals made by former President Donald Trump, warning that they could lead to significantly slower economic growth and a short-term rise in inflation in the United States.

The bank outlined that the proposals carry risks for U.S. economic growth and could exacerbate inflation, particularly if Republicans secure the presidency in the 2024 election.

The proposed tariffs are characterized by broad 10% levies on all imports or more targeted tariffs specific to certain countries, with a notable focus on China. Analysts at Morgan Stanley expressed concern that the swift application of these tariffs could trigger a substantial increase in costs for various industries in the U.S.

The report emphasized that over half of the goods imported into the U.S. consist of capital and intermediate goods, suggesting that these tariffs would essentially act as a tax on domestic capital expenditures and manufacturing. Currently, around 60% of imports from China are subject to tariffs, but under Trump’s new proposals, this could escalate to 100%. The average tariff rate on Chinese imports could soar from 17% to as high as 77%, while tariffs on imports from other nations might range between 25% and 35%.

Morgan Stanley’s analysis indicates that such tariff increases could lead to a 3% decline in U.S. consumption, a 3.1% reduction in business investment, and a slowdown in real GDP growth by 1.4 percentage points. Additionally, monthly job growth could decrease by 50,000 to 70,000 positions.

The bank anticipates a rapid uptick in inflation due to the proposed tariffs, estimating a rise in headline PCE inflation by 0.9 percentage points over the course of four quarters.

These inflationary pressures could complicate the Federal Reserve’s policy decisions, delaying any potential interest rate reductions. However, as economic growth decelerates, Morgan Stanley projects that the Fed would eventually return to easing measures.

The full ramifications of the proposed tariffs will ultimately hinge on the specifics of their enactment, any retaliatory actions from other countries, and fluctuations in currency values.