CICC: The U.S. economy may show a state of "slowing growth and phase-increasing inflation" in the second half of the year

According to the Zhitong Finance APP, CICC released a research report stating that the biggest change in the U.S. economy in the first half of 2025 is the tariff increase by the Trump administration. This round of tariffs is characterized by large magnitude, rapid implementation, and broad scope, serving not only as a technical response to trade issues but also as a recalibration of globalization over the past few decades. Looking ahead, tariffs, as an important tool of Trump's governance, may become institutionalized, with some potentially being lifted while others may persist.

CICC predicts that the U.S. economy may exhibit a state of "slowing growth and phase-wise rising inflation" in the second half of the year. Under the baseline scenario, CICC forecasts that the core CPI inflation rate in the U.S. will rise from 2.9% in the second quarter to 3.5% in the fourth quarter, before turning downward again in 2026. The actual GDP growth in the U.S. for the entire year of 2025 is expected to drop to 2.0%, with further slowing of domestic demand indicators in the second half. The Federal Reserve's interest rate cuts may be delayed until the fourth quarter, with a potential reduction of 25 basis points. In terms of forecasting risks, upside risks may come from progress in trade negotiations between the U.S. and other countries, tariff reductions, and improvements in the global economic outlook. Downside risks may arise from changes in negotiations, the re-emergence of extreme tariffs, and "missteps" in fiscal or exchange rate policies leading to financial market turmoil.

CICC's main viewpoints are as follows:

In the first half of 2025, the biggest change in the U.S. economy is the tariff increase by the Trump administration. This round of tariffs is characterized by large magnitude, rapid implementation, and broad scope, serving not only as a technical response to trade issues but also as a recalibration of globalization over the past few decades. Trump views tariffs as a multifunctional "universal wrench" to address various domestic economic and social issues, including: persistent trade deficits, social inequities, national security, government debt, illegal immigration, and drug proliferation.

Looking ahead, tariffs, as an important tool of Trump's governance, may become institutionalized, with some potentially being lifted while others may persist. First, Trump may continue to use tariffs in negotiations to expand U.S. exports and encourage other countries to lower trade barriers and ease market access. Second, a 10% base tariff may be retained to increase fiscal revenue. Third, tariffs targeting specific industries may expand to more key sectors to promote the return of manufacturing. Fourth, tariffs imposed due to illegal immigration and fentanyl may be lifted once their objectives are achieved. In the second half of the year, we expect a more optimistic scenario where the U.S. reaches more trade agreements with other countries, reducing uncertainty in tariff policies. A more pessimistic scenario would be a lack of progress in negotiations, with Trump threatening to reinstate "reciprocal tariffs," causing further shocks to the global economy and financial markets.

From the perspective of economic impact, tariffs represent a negative supply shock, exhibiting "stagflation" effects. However, due to the inherent reversibility and repetitiveness of tariff policies, their impact also carries a high degree of uncertainty. Our calculations show that if tariffs remain at current levels, U.S. inflation may experience an upward trend in the second half of the year. However, unlike in 2021-2022, this price increase is more likely to be one-time and structural: there is currently no strong fiscal or monetary stimulus, overall economic demand is not robust, and the Federal Reserve's management of inflation expectations is more proactive and cautious. Therefore, inflation is more likely to be a localized pressure rather than a result of overall economic overheating. The downward pressure on U.S. growth mainly stems from policy uncertainty. Companies tend to delay investments and reduce hiring in the face of uncertainty, thereby dragging down economic activity One unexpected consequence of tariffs is the depreciation of the dollar. The market believes that high tariffs harm the U.S. more than they impact other countries, leading investors to avoid dollar-denominated assets. Meanwhile, Europe's fiscal expansion and expectations of technological advancements in China have also driven capital rebalancing, increasing the pressure for dollar depreciation. Another factor suppressing the dollar is market concerns over the potential concept of the "Mar-a-Lago Agreement." However, historically, the U.S. has implemented dollar depreciation twice—through the 1971 Smith Agreement and the 1985 Plaza Accord—both of which ended with high inflation and severe market turbulence. If the U.S. were to restart such strategies in the current macro environment, the risks would be high and unsustainable. Therefore, the active promotion of dollar depreciation is not our baseline scenario.

Another issue related to tariffs is fiscal policy. Essentially, tariffs are a form of taxation, with the entities paying them being those engaged in international trade. However, this tax burden often gets passed on to domestic consumers through price transmission, thus functioning similarly to a "hidden consumption tax." Tariffs help offset some deficit pressure, but the market remains concerned about the high level of U.S. government debt, which could be a potential risk point in the future. In the medium term, the key to fiscal policy is not the size of the deficit itself, but the efficiency of fiscal resource utilization and whether it leads to high inflation. The current version of the tax reduction bill does not embody a "helicopter money" logic, but rather reflects a functional fiscal approach: continuing tax cuts while compressing welfare spending and reducing unnecessary waste, overall maintaining a balance of support and restraint. This may limit the stimulative effect of the bill, keeping inflationary pressures generally controllable.

It is important to emphasize that the rise of functional finance may change our traditional understanding of fiscal deficits. The U.S. economic recovery since the pandemic has been driven by fiscal expansion; despite significant interest rate hikes by the Federal Reserve, the economy has not entered a recession. One reason is that government deficits equate to surpluses in the private sector; government borrowing essentially provides safe assets for the private sector, generating interest income under high rates, which helps improve balance sheets. Compared to credit-driven cycles, this path enhances the economy's "tolerance" for high interest rates, but the risk is a decline in inflation stability. Therefore, maintaining a certain level of deficit is not inherently harmful, provided that fiscal resource allocation is reasonable and does not lead to excessive inflation; rather, it can be beneficial for economic stability. Excessively cutting deficits in pursuit of fiscal balance may lead to unnecessary unemployment. Over the next decade, the U.S. fiscal deficit rate may remain around 6%, which could be the new normal under the new framework.

Economic forecast: In the second half of the year, the U.S. economy may exhibit a state of "slowing growth and phase-increasing inflation." Under the baseline scenario, we predict that the U.S. core CPI inflation rate will rise from 2.9% in the second quarter to 3.5% in the fourth quarter, before turning downward again in 2026. The actual GDP growth for the U.S. in 2025 is expected to drop to 2.0%, with domestic demand indicators further slowing in the second half of the year. The Federal Reserve's interest rate cuts may be delayed until the fourth quarter, with a potential reduction of 25 basis points. In terms of forecast risks, upside risks may come from progress in U.S. trade negotiations with other countries, tariff reductions, and improved global economic prospects. Downside risks may arise from changes in negotiations, the re-emergence of extreme tariffs, and "missteps" in fiscal or exchange rate policies leading to financial market turmoil