The US economy’s 0.3 per cent contraction during the first quarter offers an early glimpse into the vulnerabilities being exposed by Donald Trump’s aggressive tariff policies. The downturn coincides with a notable shift in the US president’s rhetoric, moving from optimistic pronouncements of a “golden age” to warnings of fewer and pricier toys for American families.
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This suggests the pursuit of trade leverage may be coming at a tangible cost to the American economy, unmasking weaknesses that were perhaps previously underestimated.
The economic contraction, revealed in the Bureau of Economic Analysis’ recent gross domestic product report, reflects a surge in imports as businesses scrambled to stockpile goods before anticipated tariffs took effect. This front-loading of imports, while seemingly a short-term boost, contributed to the economic downturn, as imports are subtracted from GDP.
Slower consumer spending isn’t helping. Fears of auto tariffs prompted Americans to spend US$790 billion on cars and vehicle parts in March – an 8 per cent increase from the month before. But economists say this momentum is waning. Some US auto retailers are reporting declining sales, indicating that the pre-tariff surge was short-lived.
Overall spending growth has slowed significantly, from 4 per cent in the previous quarter to just 1.8 per cent, raising fears that the initial impact of tariffs is eroding consumer confidence and purchasing power. The slowdown in consumer spending, which accounts for more than two-thirds of the US economy, underscores the immediate and worrying economic headwinds generated by the tariff strategy, highlighting the significant risks to economic stability.
Mark Zandi, chief economist at Moody’s Analytics, warned that “the economy isn’t in recession, but is on the precipice”. Simulations from the Kiel Institute for the World Economy’s KITE model project that “the current trade war between the US and China is likely to weigh heavily on the US economy in particular. Inflation is likely to rise by over 5 per cent and exports are likely to slump by almost 17 per cent”.