‘Worse than anticipated’: Will Trump's 'Liberation Day' turn into US's recession day?

US President Donald Trump has pitched the rollout of tariffs as liberation from purported unfair trade relationships with countries across the world. In reality, economists fear that these tariffs, coupled with other policies of the administration, may drive the nation into a recession.

In the most sweeping rollout of tariffs in nearly a century , Trump on Wednesday imposed 10 per cent tariffs on all imports and higher tariffs on a select group of countries. In line with his policy so far , he spared US adversaries like Russia and North Korea and punished top partners, such as Japan and India, with high tariffs.

Trump slapped Vietnam with 46 per cent tariffs, China with 34 per cent tariffs (on top of 20 per cent tariffs already in place), Taiwan with 32 per cent tariffs, India and South Korea with 26 per cent tariffs, and Japan with 24 per cent tariffs.

Read our complete coverage of Trump’s tariff rollout here

While analysts had made grim forecasts, nothing prepared them for what lay in store. Analysts, traders, and markets reacted with shock and fear to the rollout, with markets across Asia crashing and futures at S&P 500 and Nasdaq trading in the red.

Deutsche Bank Senior US Economist Brett Ryan told Yahoo Finance that Trump’s tariffs “were definitely worse than we had anticipated”. He said there were expectations for tariffs to be within the range of 15-20 per cent, but it now appears that the overall effective rate would be in the range of 25-30 per cent.

‘I don’t see how we avoid a recession’

Following the rollout, Moody’s Chief Economist Mark Zandi said that there does not appear to be a way for the United States to now avoid a recession. Over the weekend, he had raised the odds of recession this year from 15 per cent to 40 per cent.

“We’ll see over the next few days how our trading partners respond to this. If they are more circumspect and cautious, then we can maybe breathe more easily. But if they retaliate in kind or close to it, I really don’t see how we avoid a recession. These are big tariffs — 25 per cent effective tariff rate,” said Zandi in an interview with NewsNation.

However, Zandi said that there is a template of how the worst-case scenario may still be avoided. He highlighted that Trump had moderated his stance in his first term after realising that tariffs were not working as desired.

“If history is any guide, go back to President Trump’s first term when it looked like the economy was starting to struggle and manufacturing and agriculture were in recession. He pivoted, you know. Hopefully, he pivots again here,” said Zandi.

However, as things stand today, the United States appears to be headed towards a recession, according to Zandi.

ALSO READ: Trump’s tariff war could cost world $1.4 trillion, raise prices in US by 5%, finds analysis

BCA Research Chief Strategist Peter Berezin has an even gloomier assessment than Zandi.

In an interview with Yahoo Finance, Berezin said that there is a 75 per cent possibility of a recession in the United States this year. He added that the economy may already be in a mild recession without economists realising it.

Berezin has predicted that the S&P 500 would fall 21 per cent by the end of the year. The US stocks have been falling for weeks now as a result of Trump’s topsy turvy economic and trade policies. In March, the S&P 500 fell by 5.8 per cent, the Nasdaq by 8.2 per cent, and the Dow Jones by 4.2 per cent.

While Berezin does not expect a 2008-like recession, he expects as much as 49 per cent of stocks’ value to be eroded.

“I don’t expect a very deep recession because the imbalances in the economy are not as severe as they were in, say, 2008. Nevertheless, I think we’ll probably get a fairly nasty recession, especially as financial markets are concerned. You think about the 2001 recession, that was a very mild recession. We didn’t even have two consecutive quarters of negative growth, and yet stocks still fell 49 per cent peak to trough because they were so expensive going into that recession,” said Berezin.

Why recession —or something worse— appears to be on horizon

Trump’s tariffs, coupled with other government decisions, such as the dismantling of the federal government, are driving the United States towards a recession, according to nearly all indicators.

Technically, an economy is in recession when there has been a contraction in growth for two consecutive quarters.

In reality, however, an economy is deemed in recession when there is all-round economic downturn. This includes rising unemployment, falling consumer spending, declining consumer sentiment, fall in business investment, declining industrial production, and loss of confidence among investors and a fall in the stock markets.

Currently, all indicators in the United States point towards a recession — or worse stagflation. Consumer sentiment is at a four-year low, inflation is persistently above the preferred 2 per cent target, and stock markets have been consistently falling since last year.

With the latest tariffs, prices are certain to rise as importers would pass on the costs to consumers and purchasing power of Americans is set to fall. As cost of production mounts and profits margins fall, industrial production as well as business investment is set to fall. With increased cost of living, consumer consumption is expected to fall in the coming months.

ALSO READ: Amid recession fears, Trump’s approval rating starts to fall

While all of this points to a recession, experts have indicated that stagflation may be in the offing as well . It is a worse phenomenon in which recession and inflation coexist. In stagflation, economic growth remains stagnant, industrial production remains sluggish, unemployment remains high, consumer sentiment remains slow, and prices remain high and keep rising. It is much harder to tackle.

To tackle recessionary aspects of stagflation, traditional steps like lowering interest rate and releasing stimulus packages cannot be deployed as they can worsen the existing inflation. On the other hand, traditional steps to tackle inflationary aspects of stagflation, such as raising interest rates, can worsen unemployment and adversely affect the existing recession.

Ahead of tariffs’ rollout, Yardeni Research on Monday raised the odds of stagflation this year from 35 per cent from 45 per cent.

As if tariffs were not enough, the dismantling of the federal government by Elon Musk is expected to make 1 million Americans unemployed as government employees are fired, contracts are cancelled, and contractors and contractual workers are put out of work.

Moreover, the indiscriminate arrests and deportations are set to dent the agricultural and construction sectors that depend on migrants. The resultant decline in food production may affect food security as well. Moreover, the shutdown of USAID has shuttered procurement of food from American farmers in large parts of the country, adding to the rural economic insecurity.

Trump with his tariffs and dismantling of the government appears to have set the stage for recession or, worse, stagflation.

Stagflation may already be here — at least in part

Louis Navellier, the founder of Navellier & Associates, told MarketWatch that “classic stagflation trends” have already arrived.

“We’re already seeing inflation before the tariff impact has arrived…On the surface, we have classic stagflation trends of elevated inflation and a slowing economy. The Fed has a problem if these trends continue, with inflation saying hold/raise rates and the economy saying cut,” said Navellier.

Last week’s Personal Consumption Expenditures (PCE) data was a particularly concerning warning sign, noted William Watts in an article for MarketsWatch.

Fears of incoming stagflation increase when PCE data is combined with downbeat consumer-sentiment reading from the University of Michigan, whose survey also showed a significant rise in inflation expectations, according to Watts.

The article quoted economist David Rosenberg of Rosenberg Research as saying that inflation-adjusted PCE data net of government fiscal transfers has “virtually stalled out” and has increased just 0.1 per cent in each of the past three months and running at a “near-stall-speed” rate of just over 1 per cent year-on-year.

“This doesn’t exactly resemble the hallmark of a very tight labour market. Maybe this is what bond investors are seeing — more of the ‘stag’ and less of the ‘flation’,” said Rosenberg.

Echoing the belief that stagflation has arrived, at least in part, Yardeni Research President Ed Yardeni pointed to faltering manufacturing activity and higher prices paid by purchasing managers and told Yahoo Finance that “the higher inflation part of stagflation is almost a certainty”. He directly blamed Trump’s policies.

“It’s really a shame that Trump is so willing to take a wrecking ball to the economy. It has been very resilient over the past three years in the face of the tightening of monetary policy,” said Yardeni.

Separately, Yahoo Finance’s Alexandra Canal noted that data released by the Bureau of Economic Analysis (BEA) last week showed that consumers spent less than forecast and, when combined with weak survey and sentiment readings, this showed that “stagflation cracks are beginning to show up in hard economic data”.