Potential Economic Turmoil Looms This Summer
In recent developments, the US economy has managed to maintain its stability amidst higher tariffs and the Middle East crisis, with inflation mostly steady and unemployment near historic lows. However, several looming issues could significantly impact the economy in the coming months.
Firstly, the end of President Donald Trump's 90-day pause on reciprocal tariffs on dozens of America's trading partners is fast approaching, on July 9. If no trade deals are reached, trading partners could potentially face much higher tariffs, with Vietnam facing 46% tariffs and Malaysia 24%. Commerce Secretary Howard Lutnick predicts 10 trade deal announcements are imminent.
Simultaneously, the president has pressured Congress to raise the debt ceiling by July 4, but this effort is complicated by other measures included in his "One Big, Beautiful Bill." Treasury Secretary Scott Bessent argues that lawmakers need to raise the debt ceiling before August 4 to avoid global economic upheaval. If the US defaults on its debt by not raising the debt ceiling, as warned by Bessent, the consequences could be severe and wide-ranging.
A US debt default could cause Real GDP to decline by over 4%, potentially costing the economy more than 7 million jobs and pushing the unemployment rate above 8%. Default would damage confidence in US creditworthiness, leading to increased Treasury yields as investors demand higher risk premiums. This would ripple across capital markets, raising borrowing costs for mortgages, auto loans, and business financing, thus slowing economic activity broadly.
The US has never defaulted on its debt before, but rating agencies have already downgraded US debt partly due to debt ceiling battles. An actual default could cause further downgrades, making Treasury securities less attractive to both domestic and foreign investors, who could reduce their holdings and exacerbate market volatility. Market trust would erode, causing unpredictable swings in Treasury rates and general financial instability.
Beyond government securities, default would disturb prices and financing conditions across all asset classes, including multifamily and commercial real estate sectors. If the debt ceiling is not raised, some government payments might be postponed, potentially affecting government employees and services until an agreement is reached.
In the midst of these challenges, some countries could revert to the April 2 reciprocal tariff rate of 10% if they are negotiating in good faith, according to Bessent. Economist Sweet expects lawmakers to raise the debt ceiling in the 11th hour to avoid a default.
On a positive note, stocks hit fresh record highs last week, suggesting a robust stock market despite the economic uncertainties. Matthew Luzzetti, chief US economist at Deutsche Bank, expects higher prices in the coming months and suggests that reinstituting more tariffs could add more fuel to the fire.
In conclusion, the political stakes in raising the debt ceiling and negotiating trade deals remain high to avoid the potential economic recession, sharp job losses, financial market shock, and long-term damage to the US credit reputation and borrowing costs. The fragile ceasefire Trump brokered between Iran and Israel could quickly become undone and cause oil prices to surge, adding another layer of complexity to the economic landscape. It's indeed a critical time for the US economy, with economic decisions carrying significant weight.
[1] Congressional Budget Office, "The Long-Term Economic Effects of Increasing the Debt Limit," June 2019. [2] Committee for a Responsible Federal Budget, "The Risks of a Debt Limit Crisis," July 2019.
- The upcoming deadline for President Donald Trump to lift the 90-day pause on reciprocal tariffs on trading partners, on July 9, could significantly impact the business sector as Vietnam and Malaysia face potential tariffs of 46% and 24%, respectively, if no trade deals are reached.
- The risk of the US defaulting on its debt by not raising the debt ceiling, as warned by Treasury Secretary Scott Bessent, could have severe and wide-ranging consequences for the finance sector, potentially pushing the unemployment rate above 8%, damaging confidence in US creditworthiness, and causing increased Treasury yields and market volatility.
