Trumpnomics: Will the US economy collapse in 2026?

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Donald Trump's second-term macroeconomic record is radical: it's surprising, disturbing, or amusing.

However, such an experiment comes with its own limitations.

The Trump administration is already backing away from some of its measures.

Today in the United States, the loss of purchasing power is very noticeable;evidence of this is the results of the recent elections in New Jersey and Virginia, which forced the White House in the spring to propose new exemptions from tariffs.

It is true that the US administration could appoint a more "flexible" successor to Jay Powell as head of the Federal Reserve, hoping to lower and liberalize short-term interest rates with the goal of price stability.However, this approach can quickly backfire and raise the stakes in the long run, putting more pressure on an already uncertain economic path.

It will take time for the radical period to give way to a normalization of US economic policy, but it could begin in the second half of the current president's term.

Next, we will analyze the consequences that such a change would have, based on the hypothesis that conservatism would prevail in the current radical phase, although it would leave deep scars in China and Europe.

In addition to this scenario, we also consider two other scenarios. One examines the success of the MAGA economy and its impact on other parts of the world, especially the EU. The second scenario is the opposite scenario, where China emerges victorious in its confrontation with the US.

To go beyond the approach focused only on the two great rival powers, we will finally analyze the hypothesis of the "Awakening of Europe".

Middle ground: Orthodox is dominant

In short, the United States will experience an episode of stagflation.

Currently, there is no indication that foreign producers will reduce their rates to compensate for the cost.In September 2025, the price of manufactured products imported from the United States - measured before the implementation of tariffs - also increased slightly in a year (0.8%), with the best performance for Mexican producers (+2.3%).

The data clearly shows that most of the economic impact falls on workers in the United States.

Although inflation rose more modestly than expected, at an annualized rate of 3.7% in the three months to September 2025,1 it is difficult to argue that core inflation is consistent with the Fed's goals.Even if price pass-through to consumers turns out to be limited, the inevitable erosion of margins will inhibit investment.

On the other hand, the expected positive effects on the supply side of the President's program of deregulation and federal support for investment will be offset by the negative effects of stricter immigration policies.

In fact, according to data from the US Border Patrol, there are now very few people trying to cross the US border: between February and October 2025 there were 97,000, compared to 1.3 million in the same months of 2024, despite the fact that there has already been a change in policy by Joe Biden.

The Center for Immigration Research estimates that the number of foreign-born people in the United States fell by more than 2 million in the first seven months of 2025.2.

This is certainly not the first time that the US has tried not only to drastically reduce immigration, but also to deport permanent immigrants: a similar situation was observed during the Eisenhower presidency in the 1950s. However, unlike the Eisenhower episode, the negative impact of Trump's policy on the labor supply comes from the implementation of yet another protectionist policy regarding the import of goods.

As such, the inflationary components of tariffs are mainly affecting manufactured goods, but may also reach the service sector and agriculture through wage pressures due to labor supply constraints.

For this reason, it will be difficult for the Fed to continue to lower interest rates quickly to bring them into their acceptance zone (below 3%), which would reduce the negative impact on growth.

This opposition is particularly noticeable when it comes to the emergence of "detractors" from the Federal Reserve who opposed the interest rate cut in December and now refuse to consider further cuts in 2026.

"Reaction" to the White House

But this strategy will backfire.

By relaxing its goal of stabilizing prices, the Federal Reserve requires investors to charge a "risk premium" to prevent future increases in inflation.However, the rise in long-term interest rates further underlines the change in the country's finances, which faces a deficit of more than 6% of GDP over the next 10 years after the extension of tax cuts granted in Donald Trump's first term.

Considering these costs, the restoration, at least in part, of religious practice seems to us the most possible "settlement".

Some signs of this regret are already being detected, albeit slowly.

in New Jersey and Virginia; Democrats won the election by a larger margin than expected.His position, which focuses on protecting purchasing power, appears to have played a fundamental role in the Trump administration's decision to recently exempt from tariffs many common consumer goods imported from Latin America.4

The recovery in inflation is now associated with a weak labor market.

It's true that GDP growth remains strong — impressive even in the third quarter of 2025 — but that's not translating into job creation.Investment in new technologies is a major contributor to growth, but the sector has lost jobs since the start of 2025. While the valuations of some technology companies raise questions, a shaky stock market could lead to a decline in domestic confidence.

Until recently, monthly opinion polls showed the president's popularity levels well above eight years ago.

This difference has almost completely disappeared.

In the face of these changes in the public opinion, and even without a rapid review of the American administration's economic platform - its ideological structure is much stronger than during the first season, and can take time for the negative effects of questioning the central bank's independence - mid -term elections could be noted by November 2026.

China will not reduce its weapons

Faced with rising U.S. tariff barriers, Beijing could respond by shifting to a model driven by domestic consumption, for example by channeling productivity gains into wages rather than competitiveness.

Obviously, this option was not chosen by the Chinese leadership.

China continues to accumulate new investments in export sectors affected by excess capacity, such as automobiles.Under the name of "Productive Quality Strategy", it opens the door to excessive investment, financed by excessive household savings fueled by financial repression, which is the result of a restricted capital account.

As protectionism spreads not only in the United States but also in the European Union, this model can only survive by shifting to external demand;

In this interval, Beijing, which is not subject to the electoral calendar, thinks it can "hold out" longer than Washington.

Faced with the "detente" launched by the United States, and due to the experience of concentration and the first trade war since 2018, Chinese leaders may be reluctant to "disarm" immediately to abandon their productivity and quality strategies.This reasoning would certainly justify China's backward policy of solidarity with Washington, in particular, which is rarely done using earth as a key.

Despite this prediction, domestic restrictions are unlikely to change China's growth pattern to a consumption-led one.

Domestically, excess capacity leads to price wars: deflation tends to perpetuate itself, especially if monetary policy refuses to enter unconventional territory, which has always been the position of the People's Bank of China, where consumers are encouraged to wait for prices to rise before consuming.Therefore, persistent deflations lead to an increase in real debt burdens.

This situation is not good for the economy in the long run.

According to the International Monetary Fund, China's public debt already accounts for about 100% of the country's GDP, taking into account off-balance sheet commitments. However, because China's economy remains largely managed, it has not responded to the warning signals that liberalized financial markets quickly emit when macroeconomic imbalances occur.

Even in the face of US-initiated detente, turning China into a new growth model may only take time.

In Europe, an apparent return to the status quo

The European Union and Japan are natural victims of the "radical phase" in which the United States becomes the agent of deglobalization.The old rules-based multilateral trading system suited them better than this treaty-based system, not least because it fit their consensus management system.

The economies of Japan and the EU have chosen to grow mainly through exports: if only exports are considered, their share in GDP is at similar levels in both cases, around 15% of GDP, which is more than double the level recorded in the United States.

This dependence on foreign demand is also reflected in the productivity of the current structure: the US is currently experiencing chronic deficits, while both the Japanese and EU economies are experiencing chronic deficits.6

The EU and Japan also depend on the rest of the world, especially the USA, for the security of their energy supply.Europe's dependence on American LPG is well known;Japan, for its part, was less dependent until recently 7 , but the trade agreement concluded last summer foresees an increase in its energy purchases from the United States. 8

Tariff negotiations have shown the vulnerability of these two economies.Although the direct impact of US tariffs on Japanese and eurozone GDP would be around 0.5 percentage points – a visible but isolated effect – the indirect impact of Chinese exporters leaving the US market could worsen the situation.9

Under these circumstances, a return to orthodoxy in American economic policy would be beneficial to Japan and Europe.

For the Eurozone in particular, the "return to normalcy" of the Central Bank and the end of the attacks on its independence could result in a revaluation of the dollar, which would facilitate European competitiveness.However, if China were to maintain, at least for a while, its policy of boosting exports - as expected - growth in Europe would remain under pressure.

Most importantly, American normalization can translate into withdrawal from Europe, as Europe begins to realize itself. The commitment to military protection and assistance in Europe must be renewed.

In this case, the need to ensure European defense autonomy will remain comprehensive;However, given the tight budget situation in Europe - except for Germany - it is possible that Washington's return to more classical positions will be an excuse to reconsider the reduction of domestic investment projects in the field of infrastructure.

Second condition: economic success of MAGA.

You can also imagine a world in which the United States defies skeptics and populist experiments succeed.

Let's start by defining this success.

Assuming the MAGA model was successful, an episode of stagflation could be avoided, or at least it would be short enough not to call into question the US macroeconomic strategy as a whole;Potential growth will be underpinned by productivity gains, particularly from technological innovations, and productivity gains will in turn allow real wages to rise more rapidly, supporting consumption, without creating additional inflationary pressures.

In these circumstances, stronger growth would improve the sustainability of U.S. public debt and restore international confidence in the United States as the world's leading provider of reserve assets.In this way, long-term interest rates will remain at a lower level than if only domestic factors were considered.

To achieve the investment boom that generates the productivity boom, the United States needs a massive influx of foreign investment, both spontaneous – to take advantage of low US energy costs and avoid tariffs to supply the domestic market – and driven by the commitment of the Japanese and European governments to channel, respectively, $550 billion and $600 billion into US strategic sectors by 2028.

At the same time, domestic investment in the United States is stimulated by deregulation - for example in the areas of the environment, finance and data protection - and direct federal support, for example in the field of semiconductor or rare earth metal processing.In this way, the US economy will enter a virtuous circle: increased spending on investment in digital technologies will ensure permanent technological dominance and increase the export of "intellectual property" services to the rest of the world.

Faced with this virtuous circle, it will be more difficult for other countries to reject the use of American technology, under penalty of losing competition.The United States will be in a position to set regulatory standards and preferences.

Politically, the success of this model will strengthen Republican power, strengthen the macroeconomic strategy of the MAGA movement: Congress will be firmly in their hands in the mid-term elections, and loyal supporters of Donald Trump will be the undisputed favorite for 2028.

By retaining control of Supreme Court and Federal Reserve Board appointments outside of the current presidential term, the movement could pursue its regulatory agenda without facing significant opposition.A large congressional margin, combined with a strong labor market and rising real incomes, would make it politically easier to reduce social spending, thereby improving the long-term trajectory of the US national debt.

"Trumponomics" Obstacles to Success

The list of conditions necessary for such success is long.

Although we think that a significant stoppage event can be avoided in the short term, the fulfillment of the investment obligations in other countries depends on the level of taxes and financial stability that has not yet been achieved.

Industrial location decisions are always complex: they must integrate labor costs and availability—two areas in which the United States currently does not lead—as well as the predictability of input costs.

Therefore, foreign companies cannot avoid all US tariffs.Unfortunately, some imported goods from third countries that need to be manufactured in the United States are subject to customs often higher than those applied to finished products sold from the country of origin of these companies.12

These costs are subject to change at the discretion of management;Uncertainty about the use of administrative powers through it creates additional difficulties.

For its economic strategy to bear fruit, the United States will also have to deal with “physical constraints”: ensuring that electricity supply can keep up with the increase in demand driven by information technology activities, especially in relation to artificial intelligence technology.

It is true that electricity prices in the United States remain low compared to other developed countries;but the US grid is already under pressure and retail electricity prices are rising again.The rapid increase in supply requires a US government approach to renewables, which over the past decade has been the second largest contributor to electricity generation growth after natural gas.

For a technology-driven economy, the availability of skilled labor may be another supply constraint.

American primary and secondary education has never been among the best in the world: for example, the "PISA score", which aims to provide a common international reference for school results, in 2022 in the US was 465 in mathematics, below the OECD average.

Historically, the United States compensated for this deficit through skilled immigration, but today this is being questioned.

It is clear that the period of time and the amount of increase in productivity that will occur due to investment in artificial intelligence are a major source of uncertainty.Two Nobel laureates in economics, Daron Etcemoglu and Philippe Aghion, have defended diametrically opposed theses about the additional growth that artificial intelligence can bring.

If this promise of growth does not materialize, it is difficult to imagine what other sources of growth the United States can count on: without investment in information technology, US GDP growth (1.4% annually in the third quarter of 2025) is already below its long-term trend.

Assuming all these conditions were met, America's very success would be in jeopardy.Central bank planning, rapid growth, reduced funding and immigration restrictions disrupting the labor market would all be positive indicators of a financial crisis.

MAGA models are exported to Europe

However, Europe should seriously consider the idea that the MAGA economic model will be successful.

It is true that stronger US growth would benefit the European economy: after absorbing the one-off impact of tariffs on European competitiveness, EU exports to the US will benefit from increased demand, further supported by a stronger dollar.

On the other hand, it is not certain that Europe will be able to maintain the necessary domestic income after helping to revive the industries of the United States through large direct investments in the United States.If the United States maintains its technological dominance, the European bilateral deficit in services is likely to increase.

It is above all at the level of political economy where the success of the Trumpist model will have profound consequences for Europe.

Initially, resentment against the United States could dominate public opinion.However, it is likely that some European political forces will rush to aggressively imitate the Trumpist economic model by adopting protectionist measures, 13 while beginning the turn towards an interventionist industrial policy accompanied by an intensification of immigration policy.

At the same time, the success of the MAGA model in the United States would reduce the influence of traditional European political forces, often identified with conservative economic policies;It will also put pressure on Europe's commitment to combating global warming, and increasing electoral popularity will increase US regulatory pressure.

It is true that opposition to decarbonisation policy in Europe would be somewhat different from that observed in the US, as climate skepticism is not as widespread in Europe.Instead of denying global warming, this opposition would shift the responsibility to other countries that emit carbon, especially China.

The prevailing argument for this shift of responsibility is that the efforts of the Union, already a largely carbon-free economy, are insignificant compared to the emissions of emerging market countries within the global carbon budget;The fact that Europe's carbon emissions are achieved in part by resorting to high carbon imports will be largely ignored.

Against compliance with European MAGA safeguards

Although the MAGA economy could be successful in the United States, there are several reasons that make us question whether the MAGA economy can be successful in Europe.

First, such a change in direction would put pressure on European institutions, which, unlike the US institutions, are built precisely on principles of economic legitimacy.Europe's legal framework for competition limits public intervention in all areas, but although it has recently become more flexible, environmental and financial deregulation will be needed to achieve a level of certainty among member states.

One limitation of populist forces is that they operate primarily at the national level;While they can negotiate across European borders against the status quo defended by traditional forces in the Council or Parliament, reaching consensus on a concrete set of policies will be difficult.

In this situation, we can see populists winning in some of the largest member states, perhaps without reaching the "critical majority" of the qualified majority in the Council.The danger would be that instead of leaning completely on a hard line, Europe would weaken further, causing more and more confusion, among populists and traditional powers, to the point of raising questions about the strength of the Union.

There are also structural and economic constraints to successfully replicating the American model.

Exports account for a larger share of European GDP than in the United States;Therefore, the initiation of protectionism, and the price risks it implies, will be more expensive in Europe.In addition, the Union, an energy importer and other military power, is not the same as the United States.

Financial stability is an important part of the MAGA economic model.It is true that the United States of America is currently exceeding its financial limits, but the public funds of many European countries - which do not benefit from the "great power" in the US treasury - are not fully prepared for a new cycle of increases in public spending or taxes, if there is a "federal" policy that combines resources.

Although such a plan may represent a way out, it will require a greater degree of political rapprochement, which will be difficult to achieve if populist forces win a majority in the national elections.

Sina in funes

For China, in a scenario where Trump's economic model succeeds, it is likely to create severe problems, especially if Europe says it will follow the model.Therefore, Beijing will do everything possible to prevent such a victory.

As we discussed in our central position, one can imagine a “positive outcome” in which China perceives the security limitations of America and Europe as well as the control of American technology to push towards a consumption-based model: this is, in any case, an approach that can be considered desirable.

Despite concerns about China's fiscal margin, monetary policy has been surprisingly cautious against a deflationary backdrop. Monetary support could boost domestic demand and pave the way for a more cooperative approach – or at least peaceful economic coexistence with the United States – although political dynamics may work against this.

Domestically, this model - usually associated with a less central economy - is likely to make Chinese leaders reluctant to encourage consumption because it believes it could undermine the power of the Communist Party.

Finally, on the external level, in the world of the MAGA economy, China's sphere of influence would shrink."United countries" that have tried to maintain a balance between the United States and China until now, such as Vietnam, are likely to be aligned with the United States.

As a result, China could see its supply lines threatened by US dominance and adopt a more hostile attitude towards, say, Taiwan, while further strengthening its ties with "anti-Western" countries.

Third scenario: Chinese victory

A hypothesis can also be proposed in which the parties are involved and China takes the lead in global competition.

The first step in such a scenario would be to slow the wheels of the American industrial revolution by limiting access to processed rare earths: Although the United States could quickly find alternatives to "raw" rare earths, refining and processing capabilities would take time to develop.

In this case, Beijing will continue to exert pressure even if Washington offers a trade deal: the rare world will not be a deal to secure a deal with the United States - in exchange for access to advanced semiconductors or low tariffs - but will be used to slow down American industry, even if the cost of China's repairs will be exposed in the short term.

Beijing may therefore feel that the advantage is on its side in the medium term: in fact, its leadership is not subject to the American election cycle.

In addition, China could mitigate the effects of the ongoing trade war by instrumentalizing its internal deflation and its dominance of the global supply of manufactured goods.If such a war were to escalate, the depreciation of the dollar against many other currencies would strengthen Chinese competitiveness outside the US market, as the yuan is de facto pegged to the dollar.

As America's push has slowed, China is outpacing the US in technology as it maintains massive support for strategic sectors such as artificial intelligence, semiconductors and green technologies.

In such a case, the "linking 14 countries" will side with China, and Beijing will strengthen its influence in Africa and Latin America, thereby protecting its supply lines.

Overcome the US embargo

For Beijing to succeed, a number of key conditions must be met.First, China should face a tough embargo on technology transfer from the US.

If the launch of "DeepSeek" at the beginning of 2025 raised doubts in the United States about the choice of American technology, these concerns began to disappear: a new document from the US Department of Commerce concluded that "the DeepSeek developer's AI model lags behind the US model in terms of performance, cost, security and adoption."

Certainly, the Commerce Department can be biased: What Chinese solutions lack in performance can be made up for by ease of adoption, especially compatibility with less sophisticated chips, and versatility.

Despite these reservations, an embargo would be a risky bet for Beijing.Of course, even if Chinese AI models are objectively better, the issue of data security will hinder their adoption in key regions, especially Europe.

China's advantage in green technology is clearer, but its success depends on the world's continuing carbon footprint and its willingness to adopt Chinese solutions rather than develop competing products domestically.

China's strategy carries other risks: maintaining excess capacity as a means of achieving technological and commercial dominance is likely to be accompanied by persistent deflation.

As we pointed out in the central scenario, deflation creates macroeconomic costs because it increases the real value of accumulated debt.Such an increase would prolong the real estate crisis and weaken the fiscal position of local governments, which have long relied on land sales for much of their income and account for the bulk of China's public spending.

Over time, this situation may affect social consensus: although China is not subject to an American-style electoral cycle, its leaders cannot ignore these tensions forever.

A China-win scenario would severely punish Europe: As long as American demand is weak and the euro is strong, Chinese competition will destroy its productive base.

For Europe and the US, escalation or compromise

Faced with a Beijing win, the league will hesitate between two responses.

In the event, Europe succumbs to protectionism and increases public investment to restore domestic demand.The European Central Bank would be under strong pressure to demand an expansionary monetary policy to recover appreciation and control the currency.

Alternatively, Europe could make compromises, such as opening its markets in exchange for Chinese investment that supports local businesses.

In fact,Member States are likely to be torn between these two options, raising the possibility of political paralysis at the Union level.

From his side, the United States have an existential choice.

To avoid falling into the "Thucydides trap," Washington could initiate a strategic expansion or, conversely, recognize its relative decline.In the second theory, a new American administration could find ties to Beijing - as others have done in Europe before.

The choice between these two options will depend on the American voters who will criticize the outcome of this competition, the American leaders or the Chinese.

Fourth scenario: Europe is waking up

There is no need to dwell too much on how the Union could be awakened.

There is already a clear plan: the Draghi report.

Europe can accelerate its growth potential by simplifying its regulatory framework – which is not the same as full deregulation – and by mobilizing its abundant domestic savings to finance strategic investments.

In such a situation, alliances have stepped out of the ranks to accelerate growth and expand political cooperation, including security.Under the NextGenerationEU recovery plan, member states can approve new funding for green energy, technology 16 and security.

Germany's fiscal stance has turned towards public spending;It can be replicated at the "federal" level, allowing countries with limited national room for maneuver to access additional financing.17 In such an environment, it will be useful for the ECB, recognizing the risk of falling inflation, adopting a flexible and comfortable approach, based on the principle that more investment today will increase potential growth tomorrow.

The result would be a virtuous circle: foreign capital would flow, attracted by the stability, predictability and prospects of European growth.Traditional political parties would be strengthened, which would lead to public criticism and help to ensure that structural reforms are carried out in the right way.

Over time, Europe will become not only an economic bloc, but a true "safe haven" in a turbulent world.

However, the conditions for success are needed for many countries.

For example, France must achieve political stability, which is a difficult goal at this stage.Likewise, German public opinion is grappling with unusual budget politics at the national level: adding a European layer – which would only work if Berlin guaranteed its tax breaks – will be difficult.

On the other hand, the European Union system, although they favor predictability and are based on a solid process, are not suitable for quick decisions: in fact, the limitations of the Union of States can block important decisions.

Finally, economic recovery is not enough to moderate populism, which is also affected by cultural and identity issues: the failure of the American experience would not automatically favor Orthodox support in Europe.

However, there are reasons for hope.

Polls show that public opinion in Europe is more favorable to European institutions than it was after the sovereign debt crisis of 2010-2012.18 Although this cause is more "noble" than others, fear can be a powerful driver, and Europe is very worried right now: the war in Ukraine is prompting decisions that would have been unimaginable due to economic pressures a few years ago.The United States and China must provide another catalyst.

If our central scenario offers stability without dynamism, the scenario of the victory of the Trump economic model ignites growth but creates imbalances.Likewise, China's victory leads to a realignment of global power at the expense of Western cohesion.

Reflecting all three scenarios, Europe's awakening would benefit everyone and improve global economic prospects without creating strategic instability.

This scenario is perhaps the most ambitious.It is also the most collaborative.

Footnotes

– compared to 1.1 percentin April, when the first version of tariffs was published. For data after 2025in Septemberaffected by the government shutdown. We will have to wait until 2026.data for January to get a more reliable picture of US inflation.

- Steven A. Camerota, Karen Ziegler, Why the Foreign-Born Decline in Monthly Household Surveys in 2025 Is Very Likely Real, Center for Immigration Studies, 8 Oct. 2025.

- According to the latest estimates from the Congressional Budget Office.

- These measures are the result of reduction of additional duty on Chinese products from May.

- Before the defense model became widespread, the European measures adopted in 2024 regarding Chinese electric vehicles, as well as those on steel in 2025, would have been unthinkable.

- China is a long-term surplus economy, but neither the EU nor Japan have comparable assets with previous control over rare earths.

- By the summer of 2025, the United States accounted for only about 10% of Japan's LNG supplies, which the country received mainly from the Pacific region, particularly from Australia.

- The trade deals of the summer of 2025 reveal other dependencies: by controlling its military power, the United States can obtain asymmetric agreements from its allies, which in the case of the European Union can counter Russian aggression in Ukraine and threats against Taiwan in the case of Japan.

- Faced with these consequences, Japan can still avoid difficulties by devaluing the yen due to rising inflation;Likewise, the euro benefits from doubts about the dollar's ability to maintain its status as the dominant international reserve currency, and Chinese imports into Europe are growing very quickly.

- Germany's announcement of an ambitious program to reactivate public spending in favor of infrastructure - in addition to the recovery that has started in defense - is an example of this.

- The US already has a large presence in the region.

- For example, in the case of a British company using Chinese inputs.

- This may be intended for China to align with the United States.

- Distribution and "connector countries": Europe short-circuiting?, Banco de Francia, 6 December 2023.

- American political scientist Graham Allison: Towards war.China and America in Thucydides' Trap?, Paris, Odile Jacobs, 2017.

- In the case of Europe, the development of renewable energies is not only a selfless contribution to the global fight against climate change, but also a matter of sovereignty.Every year, the Union spends about 22% of its GDP on imports related to its energy needs.

- Within the framework of the existing device, this approach has already proven to be effective in Italy.

- Even during the financial crisis, Europeans could get unexpected flexibility from an institutional framework that was, however, considered very rigid.

- We can cite as an example Germany, which is considering reinstating compulsory military service, although the political process is declining, or France, which is considering extending the nuclear umbrella to Europe.