The convergence of escalating national debt, assertive trade policies, and a cautiously optimistic economic environment underscores the complexities facing the US economy. Policymakers and stakeholders must navigate these challenges to ensure sustainable growth and financial stability in the years ahead.
The US economy stands at a crossroads, grappling with ballooning debt, policy ambiguity and a persistent tug-of-war among policymakers over prioritizing growth versus ensuring price stability. In a situation like this, navigating the US economic landscape remains a challenge. While recession may not happen unless something very dramatic occurs, a US slowdown could hurt the global economic order at a time when China’s pace of growth remains questionable.
Moody’s downgrade of US sovereign ratings is an alarm in view of the national debt which has surpassed USD 36 trillion as on May this year. In simpler terms, the credit rating downgrade refers to higher chances of default by a country. While the US is the largest economy and dollar is still the world’s reserve currency, the likelihood of a US default is farfetched. It can print more dollars and repay its debts.
But, this will weaken the greenback and can lower the currency’s clout. That is the danger that the US currently runs into.
This might entail into raising the bond yields, which means that the US bond prices will fall and the country will have to pay higher interests for the money it raises from the market. That will potentially unsettle the inflation dynamics.
The US Federal Reserve has a 2 per cent inflation target, which has still not been achieved, though a big progress has been made on this front albeit with a lot of pain.
The United States of America has to service USD 9.2 trillion of debt which is maturing by the end of this year according to a media report. The US’ debt-to-GDP level is now almost reaching 130 per cent.
The credit rating downgrade pushed US Treasury yields up, with the 30-year rate rising to 5.037 per cent. This level was last seen in 2007, this report said.
Tariff conundrum
The current US dispensation has been speaking about this growing debt, vowing to reduce it by curtailing government expenditure. The government set up Department of Government Efficiency (DOGE) with great fervour under the leadership of Elon Musk. The real impact of its action is yet to unfold completely.
The Trump administration has also been speaking about reciprocal tariffs, arguing that its trading partners for decades have unfairly treated the US with very high tariffs. As a result, the government implemented what it called ‘Liberation Day’ on April 2 only to put a 90-day pause, a week later. While the government said that the tariffs were used as bargaining chips and that showed as countries made a beeline to strike a deal with the US, there is other side to it.
There is also a reality that China began selling US treasuries post April 2 as a result of which US bond prices plunged. The decision of pause on all countries apart from China came following this development.
The US had to finally relent against China and on May 12 both countries struck a deal to lower tariffs and paused tit-for-tat tariffs for a 90-day period.
But tariff uncertainties loom. The latest salvo came this Friday when the President warned smartphone companies of tariffs if the devices sold in America were not locally made. He also warned the European Union of 50 per cent tariffs, saying that the talks were going nowhere.
Even with the countries where some agreement over tariffs have been made by the US, the contours are not known and the fear is that the deals remain half baked. They could bring more uncertainties as things begin to unfold.
Any further escalation could reignite the selling spree for the US treasuries by countries if tariff scuffles start.
Inflation
Inflation has moderated to 2.3 per cent, with the job market showing signs of strain and the Federal Reserve maintaining a cautious stance with interest rates steady at 4.25 – 4.5 per cent. The US central bank has maintained that any rate cut in the near term is unlikely.
Tariff remains the biggest variable and there is another theory emerging lately and which is that if the US is able to strike a deal with most of its trading partners either though agreements or coercion, a low tariff for imported good to America can create problem of plenty. Goods available at low cost could trigger inflation in the US, unsettling Fed’s plan of hitting the 2 per cent target.
We do not know how things will unfold but one has to wait till July to know what is going to happen. Even then, the impact of the decisions will make its presence felt in due course.
Evolving discourse
After the US-China deal, major US banks have cut back their recession forecasts on the world’s largest economy. Goldman Sachs reduced its US recession estimates to 35 per cent from 45 per cent, while JP Morgan placed the probability to sub 50 per cent levels. Meanwhile, Barclays dismissed recession risks entirely. But these are only estimates and it could change.
The discourse has changed for the past 4-5 months and when US starts looking inwards, the era of globalisations is bound to get a setback. It is trickling down to other aspects as well like what is happening to jobs and education. The recent development around Harvard University where the US administration blocked entry of foreign students via an executive order, also has an economic cost.
There is a big churning happening in the global order and for now the uncertainty is written with a capital ‘U’.
Moreover, the China+1 strategy is now at the backburner. The developed world, which had a US backing, is now looking for partners amid a growing rift with the US which is moving beyond trade to politics. This will make China’s position even stronger in the world.
The convergence of escalating national debt, assertive trade policies, and a cautiously optimistic economic environment underscores the complexities facing the US economy. Policymakers and stakeholders must navigate these challenges to ensure sustainable growth and financial stability in the years ahead.