Investing.com - Analysts at Morgan Stanley have lowered their U.S. growth projections and raised their estimates for inflation, citing greater-than-expected "intensity" in trade policy developments.
In a note to clients on Friday, the brokerage said it now sees the U.S. economy expanding by 1.5% and 1.2% in 2025 and 2026, down from 1.9% and 1.3%, respectively.
Meanwhile, headline personal consumption expenditures inflation -- a metric of price gains that is closely monitored by the Federal Reserve -- is tipped to come in at an annualized pace of 2.5% by December this year, up from 2.3%. The core measure, stripping out items like energy and foods, is expected to be 2.7% year-on-year, compared to 2.5% previously.
The comments come after U.S. President Donald Trump temporarily suspended levies on Canada and Mexico until April 2 on Thursday, reversing a decision days earlier to allow the duties to come into effect because of a perceived lack of action by these countries to help stem the flow of illegal drugs and migrants into the U.S.
Trump’s approach to trade relations with Canada and Mexico -- the two biggest U.S. trading partners -- has fluctuated since his return to office, clouding the outlook for the highly-integrated North American economy. In February, Trump slapped 25% tariffs on non-energy Canadian goods and all Mexican products, but later delayed them for 30 days.
However, the president has placed 20% tariffs on all imports from China, claiming the illicit drug fentanyl and its precursor chemicals move from the country to the U.S. via Canada and Mexico. China has vowed to retaliate against the levies.
Meanwhile, Trump has threatened to roll out sweeping reciprocal tariffs and impose duties on materials like steel and aluminum.
"While it looks like tariffs on Mexico and Canada will be short-lived, reciprocal tariffs are now part of our baseline," the Morgan Stanley analysts wrote. They also flagged that a raft of recent public sector layoffs announced by the Elon Musk-led Department of Government Efficiency and a "rapid" slowing in border crossings are also clouding the broader economic outlook.
"Our forecast changes pull forward the anticipated effects of restrictive trade and immigration policies," the analysts said. "If our narrative entering the year was ’slower growth, stickier inflation’ then we now think ’slower growth, firmer inflation.’"