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The new year will mark five years since the Covid-19 pandemic upended the global economy. From the initial plunge in economic activity to the subsequent sharp rebound and roller coaster ride of inflation, the pandemic and its aftershocks have dominated economic developments over the past five years.
The echo of the pandemic is still evident today, but its reverberations have steadily faded over time. In the Wells Fargo 2025 economic outlook, the financial services company cites several new and important developments on the horizon.
One of the most important development to both the U.S. and the global economy will be the changes in the American economic policy framework that will be implemented in the wake of the recent elections in the United States.
Trade policy represents one of the most important potential changes starting next year. Unlike fiscal policy, which requires approval from Congress, and monetary policy, which is the purview of the independent Federal Reserve, the American president has wide latitude to make trade policy changes unilaterally. President-elect Trump campaigned on a promise to enact a 10 percent across-the-board tariff on America's trade partners with 60 percent levied on Chinese goods.
A Wells Fargo report published in July said that tariff increases of those magnitudes, in conjunction with likely retaliation by trading partners, would raise the core CPI inflation rate in 2025 by more than one percentage point relative to baseline, while shaving about two percentage points off baseline real GDP growth, everything else equal.
Tariff increases are largely paid for by consumers via higher prices, which erodes growth in real income thereby weighing on growth in real consumer spending.
President-elect Trump may not fully enact these proposed tariff increases once he becomes president next year. That said, Wells Fargo says it believes some tariff increases are likely, although their magnitude and timing are uncertain.
Accordingly, Wells Fargo has pushed up its inflation forecast and reduced the real GDP growth projection in 2025, albeit not by the full amounts implied by its model-based estimates.
Specifically, Wells Fargo projects that U.S. real GDP will grow only 1.5 percent between the fourth quarter of this year and Q4-2025. Previously, the bank had looked for growth of 2.2 percent over that period. Wells Fargo also lifted its forecast for core CPI inflation by 0.4 percentage points at the year of next year, and now sees the core rate of inflation heading back up to 3.0 percent in Q4-2025.
Republican control of both chambers of Congress likely will lead to fiscal policy changes in 2025. Republicans seem intent on extending most of the expiring parts of the 2017 Tax Cuts and Jobs Act (TCJA), which are scheduled to lapse at the end of next year. That said, a simple extension of those tax cuts will not impart fiscal stimulus to the economy, because individual tax rates would not be reduced from their current levels. Rather, extension would simply keep tax rates from rising back to their pre-2017 levels.
That noted, some Republicans seem keen to offer additional tax relief to households via other means (e.g., a larger Child Tax Credit, larger standard deduction, etc.). The Wells Fargo forecast looks for new tax cuts of roughly $1 trillion over 10 years, beginning in 2026.
Although revenues raised by tariff increases and some spending cuts may help to offset some of the budgetary cost of the TCJA extension and additional tax cuts, the federal government likely will continue to incur gaping budget deficits for as far as the eye can see. This tax relief, the effects of a lighter regulatory touch, and the fading effects of the initial tariff increases should lead to stronger economic growth in 2026.
The report says Wells Fargo looks for real GDP in the United States to grow 2.9 percent between the fourth quarter of 2025 and Q4-2026.
