He pointed out that while tariffs get the headlines, the deeper damage is being done by the policy uncertainty gripping US businesses. “It’s not just the tariffs—many companies have pulled back on expansion plans simply because they don’t know what’s coming next,” he said.
Recession Risk and Growth OutlookKrugman put the probability of a recession at 50%, but was unequivocal about an economic slowdown. “Slower growth is certain. For 2025, I see little or no GDP growth, rising unemployment, and persistent inflation.”
He warned that the US is entering a period that bears a resemblance to the 1970s-style stagflation, with supply shocks and weak consumer confidence colliding.
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Adding to the economic backdrop is a new projection from the House Reconciliation Bill: Budget, Economic, and Distributional Effects (May 19, 2025), which estimates that while the bill would boost long-term GDP by 1.7% over 30 years—driven by a 3% rise in capital stock and a 1.7% increase in hours worked—it would also raise US debt levels by 12% over the same period.
Krugman, however, cautioned that short-term risks outweigh these long-term gains. “These are modest gains far into the future. What’s pressing now is the policy confusion, inflationary pressure, and investment paralysis,” he noted.
Capital Markets and Global Trust Eroding
The economist also raised serious concerns about the global perception of US capital markets under Trump’s leadership. “We’ve gone from being a safe haven to a country that doesn’t reliably honour agreements,” Krugman told CNBC-TV18.
He expects investors to move away from US assets, warning that “we’re entering a ‘sell America’ phase.” According to him, the dollar is losing its safe-haven appeal, and confidence in U.S. bonds is weakening.
Capex Freeze Amid Fear and Uncertainty
Krugman noted that corporate America is sitting on cash, afraid to invest in a volatile environment. “Businesses are seeing investment as a potential waste. The uncertainty is acting like a tax on capital spending.”
In a final word of caution, Krugman said that President Trump’s economic playbook is undermining both investor confidence and America’s long-standing financial credibility. “The risks are real, the slowdown is here, and we may be heading toward something far worse than just a soft patch,” he concluded.
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