Just a day after Donald Trump patted himself on the back for completing what he called, in his usual humble style, ‘the most successful first 100 days of any administration’, the US economy gave him a rude wake-up call. US GDP, a measure of the money-value of goods and services produced in the economy, contracted for the first time in three years during Q1 (Jan-Mar 2025). Against expectations of a growth of 0.3%, the world’s largest economy contracted 0.3%, a sharp fall from the 2.4% growth recorded in Q4 2024.True, part of the contraction can be explained by American companies importing more in a bid to beat tariff deadlines. Imports reportedly grew 41%, the fastest since 2020, chipping away five percentage points from Q1 growth. Optimists hope the dramatic increase in imports will reverse in Q2, once the uncertainty over tariffs ends, although that is yet to be tested.
But regardless of whether trade deals are struck, or the 90-day pause on tariffs that comes to an end early July is extended, US imports will face higher tariffs than before. Thanks to a flat import duty of 10%, higher tariffs on China and a complex web of sector-specific tariffs, US consumers will face higher prices that will, in turn, hit domestic demand and growth.
However, as with all things macroeconomic, there is no consensus on whether Q1’s GDP contraction is only a one-off, or whether the next quarter will also see a contraction, tipping the US into a recession (two consecutive quarters of fall in GDP). So, if NYU Stern Business School‘s ‘Dr Doom’ Nouriel Roubini expects to see the US economy ‘thrive’ after an initial period of pain, Yale’s Stephen Roach sees the US heading for a ‘long period of stagflation’ (lower growth and higher inflation).

What is undeniable is that regardless of whether the US economy goes into a recession or not, Trump’s trade wars, and even more his policy flip-flops and accompanying uncertainty, will impact global growth adversely. Last fortnight, IMF in its latest World Economic Outlook (WEO) downgraded its forecast for world economic growth. Growth is now expected at 2.8%, down from 3.3% earlier (January WEO), while US economic growth is expected to be impacted even more adversely. US GDP is now expected to expand by only 1.8 % this year, down from the January estimate of 2.7%.

Unfortunately, for now, Trump seems unfazed. Arguing that US Q1 GDP numbers had nothing to do with his tariff policies, and brushing them off as part of ‘transition pain’ from the overhang of Biden’s policies, Trump has promised more of the same. Despite turmoil in world financial markets in April that forced him to backtrack on his egregious tariff proposals, at the celebrations marking his first 100 days in the White House, he remained upbeat. ‘We’ve just gotten started. You haven’t even seen anything yet.’Presumably, Trump is hell-bent on continuing down his chosen path of knocking down the building blocks on which the post-WW2 world economy has been founded. And that spells trouble for the world at large.The more important question for us in India is whether we can hope to grow at 6%-plus, as projected by RBI, finmin and IMF. Can we really expect to escape unscathed when the US – the main driver of post-WW2 growth – slows, or worse, enters a recession?

Sure, we are largely a domestic-driven economy, and our exposure to the US, especially in terms of goods exports, is not significant. Sure, we are reportedly in the final stages of signing a trade deal with the US that will limit the damage from higher tariffs on our US-bound exports. But the collateral damage from trade wars, and dismantling of the world economic order as we know it today, cannot be contained by bilateral deals, with the US or any other country.

So, what are the other options beyond trade deals before our policy authorities? What, if anything, can monetary and fiscal policy do in the face of such an unprecedented extraneous shock? Not much, really. RBI has cut interest rates twice in succession – in February and April 2025 – and modified its monetary policy stance from ‘neutral’ to ‘accommodative’, infusing almost as much liquidity as during the pandemic, and over a shorter period. In contrast, GoI has been restrained.

The combination of loose monetary policy and relatively restrained fiscal policy worked during Covid, even though we paid a price in the form of a K-shaped recovery and high inflation subsequently. Whether the same policy combination will do the trick this time round remains to be seen. What is certain is that we will need more guard rails to address legitimate and pressing concerns of equity in the aftermath of Trump’s trade war.