Introduction to Stagflation
The US economy has been facing a major threat in recent times – the risk of stagflation. Stagflation is a dire scenario in which economic growth slows down while inflation remains high. This problem is often regarded as even harder for policymakers to solve than a typical recession, as higher inflation can prevent the Federal Reserve from cutting interest rates to boost the economy. According to Torsten Sløk, the chief economist at Apollo Global Management, the US is at a critical inflection point for stagflation.
Causes of Stagflation
The scenario has largely been triggered by President Donald Trump’s tariffs. Sløk wrote in a white paper that "tariff hikes are typically stagflationary shocks — they simultaneously increase the probability of an economic slowdown while putting upward pressure on prices." Consensus forecasts on Wall Street for economic growth have drifted lower this year, while inflation forecasts have edged higher. This is the definition of stagflation, and it’s a significant concern for the US economy.
Predictions for the US Economy
Sløk has made several predictions for the US economy in the current environment. These predictions include:
1. GDP Growth
GDP growth will most likely slow to about 1.2% in 2025, reflecting economic growth being slashed by more than half compared with its peak in the third quarter of 2024.
2. Inflation
Inflation will probably hover around 3% by the end of the year, which is a significant increase from the prior forecast of about 2.4% before Trump announced his sweeping tariffs in April.
3. Unemployment
The jobless rate in the US will keep picking up through at least the next 18 months, with estimates suggesting it could rise from 4.2% currently to 4.4% in 2025 and tick up to 5% or higher in 2026.
4. Recession
The chances of a recession over the next 12 months are pegged at 25%. Prior to Trump’s tariffs, Apollo wasn’t anticipating a recession at all this year. There is still a risk the economy could enter a recession as soon as this summer, according to Sløk’s "voluntary trade reset recession" thesis.
The Risk of Recession
The idea of a "voluntary trade reset recession" involves the economy entering a recession this summer as tariffs cause shipments to US ports and trucking demand to slow, leading to empty shelves and lower sales for firms. This scenario still remains a risk, and the effects of Trump’s Liberation Day tariffs are still working their way through the trade pipeline.
Conclusion
In conclusion, the US economy is facing a significant threat from stagflation, which is triggered by President Donald Trump’s tariffs. The predictions made by Sløk suggest that the economy will slow down, inflation will remain high, unemployment will rise, and there is a risk of a recession. While most forecasters on Wall Street generally expect the economy to avoid a downturn this year, Sløk’s warnings about stagflation and a recession cannot be ignored. The US economy is at a critical inflection point, and it’s essential to monitor the situation closely to avoid any potential downturns.
