Markets, innovation, and AI are overpowering Trump’s chaos—and pushing America toward 4% growth, recession or not.
Last December, I argued that while some of US President Donald Trump’s policies would be stagflationary (reducing growth and raising inflation), such effects would ultimately be mitigated by four factors: market discipline, an independent US Federal Reserve, the president’s own advisers, and the Republicans’ thin majorities in Congress.
The script has played out as predicted. The reaction from stock, bond, credit, and currency markets forced Trump not only to back down from his “reciprocal” tariffs against most of America’s trading partners, but also to beg China to sit down and negotiate. In the game of chicken between Trump and Chinese President Xi Jinping, Trump lost. Market traders trumped the tariffs, and bond vigilantes proved more powerful even than the US president – just as the political strategist James Carville observed a quarter-century ago.
Then came the game of chicken with Fed Chair Jerome Powell. Again, Trump was the first to blink – at least for now. Markets swooned when he suggested that he would fire Powell, and he soon backpedaled, declaring that he has “no intention” of doing so. Meanwhile, Powell has made clear that the president has no lawful authority to remove him.
Similarly, while lunatics like Peter Navarro, Trump’s main trade adviser, initially gained the upper hand – appealing to Trump’s self-image as “Tariff Man” – this did not last. Once markets stumbled, those advocating an “escalate to de-escalate” tariff strategy, such as Treasury Secretary Scott Bessent and Stephen Miran, the chair of the Council of Economic Advisers (a former colleague of mine), seemed to prevail.
Finally, some congressional Republicans have come out in support of legislation to limit the president’s authority to impose tariffs, and many other political players – from state governors and attorneys general to business groups – are suing the administration for what they describe as an unlawful overreach.
Beyond these four guardrails, there is also the technology factor. The US economy’s potential growth will approach 4% by 2030, far above the International Monetary Fund’s recent estimate of 1.8%. The reason is obvious: America is the world leader in ten of the 12 industries that will define the future, with China leading in only electric vehicles and other green tech. US growth averaged 2.8% in 2023-24, and productivity growth has averaged 1.9% since 2019, despite the pandemic-era dip.
Since the launch of ChatGPT in late 2022 – something I predicted in my 2022 book, Megathreats – AI-related investments have driven a US capital-expenditures boom. Even tariffs and the resulting uncertainty have not fundamentally changed the guidance from most big tech firms, AI hyper-scalers, and others. Many are even doubling down on AI investments.
If growth goes from 2% to 4% because of technology, that is a 200-basis-point boost to potential growth. Yet even draconian trade protections and migration restrictions would reduce potential growth by only 50 bps at most. That is a four-to-one ratio between positives and negatives; technology would trump the tariffs over the medium term.
As I recently argued elsewhere, even if Mickey Mouse were president, the US would still be on the way to 4% growth, because US private-sector innovation promises to offset bad policies and erratic policymaking.
The AI-driven investment boom also implies that, with or without high tariffs, the US current-account deficit will remain high and on an upward trajectory (reflecting the difference between sluggish savings and booming investment). But since America’s exceptional growth will survive Trump, portfolio inflows will continue despite the trade-policy noise. Although fixed-income investors may pull out of US assets and the dollar, equity investors will remain overweight on US assets, perhaps even doubling down. Any substantial weakening of the dollar will be gradual, and the greenback will not suddenly lose its role as the global reserve currency.
Over time, higher growth, combined with existing redistribution policies, will weaken populist forces in the US. Meanwhile, Europe will continue to face the headwinds of demographic aging, energy dependence, an overreliance on Chinese markets, weak domestic innovation, and stagnant growth hovering around 1%. The 50-year innovation gap between America and Europe will only widen as AI-driven growth moves from logarithmic to exponential.
In this context, hard-right populist parties may well take over in most of Europe, as they already have done in some countries. With the US apparently drifting toward illiberalism, Europe might currently look like the world’s last bastion of liberal democracy; but this narrative could be flipped over the medium term.
Such an inversion becomes more likely if Europeans continue to ignore the recommendations by former Italian Prime Ministers Enrico Letta and Mario Draghi. In his report on European competitiveness last year, Draghi pointed out that inter-EU tariffs on goods and services are much higher than the ones Trump has threatened. One silver lining to Trump’s bullying is that it could force Europe to wake up.
To be sure, US inflation will surge above 4% this year. Trade deals with most countries will limit the tariff rate to an undesirable but manageable 10-15% level, and a likely de-escalation with China will leave that rate at around 60%, on average, driving a gradual decoupling of the two economies. The ensuing shock to real (inflation-adjusted) disposable incomes will stall growth by the fourth quarter of this year, perhaps leading to a shallow US recession that will last for a couple of quarters.
But a Fed that remains credibly committed to anchoring inflation expectations will be able to cut rates once growth stalls, and a modest rise in the unemployment rate will weaken inflation. By the middle of 2026, US growth will be experiencing a strong recovery, but Trump will have been damaged politically, auguring a loss for his party in the midterm elections. Fears of the US descending into autocracy will be alleviated. American democracy will survive the Trump shock, and, after an initial period of pain, the US economy will thrive.
Nouriel Roubini, a senior adviser at Hudson Bay Capital Management LP and Professor Emeritus of Economics at New York University’s Stern School of Business, is Co-Founder of Atlas Capital Team, CEO of Roubini Macro Associates, Co-Founder of TheBoomBust.com, and author of Megathreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them (Little, Brown and Company, 2022).