It feels like we’ve had decades worth of US trade policy developments in just a few weeks. Many of those developments would have justified significant change in my forecasts for at least the US economy.
The policy moves have felt chaotic at times and we are not at a point where we can say the dust has settled. Still, it is worth taking stock and having a stab at some forecast adjustments even if any central forecast should be regarded with more than the usual caution at the moment.
There are big question marks for me though around how steep slowdowns will be, and fiscal policy may provide something of an offset in the Euro area and China in particular.
Recession risks have risen and the outlook for growth globally and in the US has deteriorated. For now, I am in the ‘slowdown’ rather than ‘recession’ camp, following the pause in reciprocal tariffs and signs of Trump responding to market pressure. There are big question marks for me though around how steep slowdowns will be, and fiscal policy may provide something of an offset in the euro area and China in particular. The UK is far away from being in the eye of the tariff storm but is still affected by reciprocal and sector specific tariffs (at least for now), while at the same time facing pre-existing domestic challenges and (relatedly) does not have room for significant fiscal stimulus.
Bewildering amount of US trade policy changes in a short space of time: A simple stock-take of trade policy changes since the huge ‘Liberation Day’ announcements on April 2nd (see related content) illustrates how changeable (and sometimes confusing, and with questionable economic rationale) policy developments have been. Almost at the outset of announcing reciprocal tariffs, Trump indicated some room for negotiation. The US administration quickly claimed to be in discussions with a large number of countries over tariffs. But shortly after the reciprocal tariffs came into effect, Trump announced a 90-day pause for all countries except for China, while leaving the 10% global tariff in place. Trump didn’t directly link the 90-day pause to bond markets, but hinted at it, saying, “the bond market is very tricky”. Later in the same week, the US then exempted various electronic goods from the 10% global tariff (and from most of the China-specific tariffs), then quickly followed that announcement by indicating these would be temporary and affected by forthcoming semiconductor tariffs. The administration also made clear that pharmaceutical tariffs were under more active investigation too. Trump also indicated he is looking at some kind of tariff reprieve on autos to help give them more time to set up US manufacturing facilities.
The path of tariffs on China has been harsh. Trump raised tariffs further against China after their 34% retaliatory tariff. By Wednesday 9 April, China tariffs were over 100%. By Thursday 10 April, they were 125% plus a 20% fentanyl-related tariff. The reprieve on tariffs on various electronic goods late last week included those coming from China (down to the 20% fentanyl rate) and has left the effective tariff rate lower (smartphones were China’s largest export by value to the US last year), but still very high. China’s response was to call it a “small step for the US to correct its wrongful unilateral tariffs”. Latest indications seem to be that both sides are at least open to trade talks that could lower the rate of tariffs from extremely high levels, but timescales are unclear and, for now, trade relations remain tense.
All of which comes at an economic cost: Unsurprisingly, given all of that policy change, policy uncertainty indicators remain very elevated. Beyond the direct effects of policy, that itself should be negative for global and US growth. When things are so uncertain, it may make sense for many firms to hold back on investment decisions.
There is also the issue of transition costs. Big changes like this come with transition costs for companies who need to spend money (and time) adjusting/transforming their supply chains. With supply chains very complex for some products (cars and iPhones spring to mind), this is not straightforward and comes with trade-offs. It is also fair to question how effective policies to help manage transition will be. The WSJ reported that confusion around how to claim an exemption from the existing autos tariffs for “US content” has left firms paying the full tariff, for example. Content adjustments are important more broadly to ensure that US products requiring (now much more expensive) foreign components don’t become uncompetitive.
The direct impacts of tariffs look better than they did: Things have improved somewhat since reciprocal tariffs were announced – the direct impacts of tariffs are lower after the reprieve for reciprocal tariffs and the reprieve for tariffs on a variety of electronics goods. However, even after that, the US is still left with substantial tariff rates: aluminium/steel and autos tariffs are still in place, as is the 10% global tariff, as are the Canada/Mexico tariffs on many goods, as are very high tariff rates on China (with a 20% rate on those electronic items that faced reprieve at the weekend). The average tariff rate on US imports at the time of writing looks around 25% to me, but methodology can differ a bit and some of the details have not been fully ironed out. Wherever the tariff rate currently is, it remains substantially above the rate pre-Trump (around 3%).
Things could get worse again, before they get better: Depending on Trump’s actions from here (and not just on trade policy), uncertainty around the policy and economic outlook may increase rather than decrease. Given his policymaking style last administration, and so far in this administration, it seems wise not to assume that the dust is settling (let alone settled). On trade, there are prospects for trade deals to lower tariff rates for some economies, but also for average tariff rates to rise again:
- The reprieve on reciprocal tariffs is a pause for 90-days, not a promise of permanent relief. Some countries may be able to negotiate a deal with Trump that sees them able to erode those original reciprocal tariffs, the 10% global tariff and/or sector specific tariffs, but that is unclear at this stage.
- The electronics exemptions sound temporary given the process of reviewing semiconductor tariffs is underway.
- The administration has signalled tariffs to come on other product categories - notably pharmaceuticals.
- Trump has already used tariffs and tariff threats to address issues that have nothing to do with trade (e.g. border control). It seems safe to assume we haven’t heard the last of this.
Recession risk rises (though not central case): The probability of a US recession has clearly increased following “Liberation Day”, but has been rising and falling over the past couple of weeks as policy has switched and changed. After the latest policy changes we are arguably heading back into ‘slowdown’ rather than ‘definite recession’ territory, reflected in the rather forecasts below. It remains hard to have confidence in any central case economic forecast, however.
There are signs of economic damage already. Business and consumer sentiment indicators have weakened, but it may take a little while for negative tariff effects to feed through into so-called ‘hard data’ (e.g. industrial production, retail sales and GDP) as an increase in tariffs (broadly speaking) was well trailed by Trump and companies will have front-loaded activity to an extent to get ahead of tariffs. It may take time for some import-dependent businesses to work through existing inventories. On prices, some companies may be able to delay passing through any cost increases for a time, so the hit to real consumer spending may be more of a second half of 2025 story.
It is also important to watch what happens with Trump’s other policy priorities. His deregulation and fiscal agenda could be positive for growth, (his immigration agenda is expected to detract). Last week the House passed a fiscal bill outline, already having passed in the Senate, which opens the way for a package to cut taxes by up to $5.3tn over a decade (including extending the existing Trump tax cuts) and raise the debt ceiling by $5tn, but in exchange for $4bn spending cuts. The details of this bill have yet to be agreed, but potential economic gains from tax cuts may be limited where most of this reflects prolonging existing tax cuts, rather than new tax cuts where bond yields may rise if the measures are taken as likely to keep the deficit substantial for longer, and where offsetting spending cuts will likely weigh on growth.
On a global scale, the policy response elsewhere matters though – China and euro area fiscal stimulus may step up more than expected against the global economic backdrop and to further offset the impact of tariffs. Monetary policy easing looks more rather than less likely in many major economies in light of tariffs (arguably excluding the US itself).
Fed faces competing pressures: Although my central case is still for two US interest rate cuts from the Federal Reserve later this year, it is difficult to rule out stronger cuts or even a rate hike for the Fed. Tariffs increase at least near-term upside risks for inflation and downside risks for growth and employment, pushing in competing ways on the Fed’s dual mandate. Messaging from Fed speakers seems to be that policy is in a good place at the moment for this – i.e. moderately restrictive, but with a particular eye in the near term to keeping inflation expectations well anchored. I assume they will want to see the impact of these tariffs, monitor and analyse how they are feeding through to the economy and feel more confident that there won’t be second round effects, rather than rushing to cut rates. I’d assume the Fed will wait to cut rates until the second half of the year. At that point I am assuming that the economy shows firmer signs of slowing.
Euro area: A bit more rate cutting
A couple of weeks ago, it still felt like there was a good chance of a pause at the ECB’s April meeting. However, with global events since and another batch of more reassuring inflation data the ECB ultimately cut rates 25bps.
The EU was expected to face significant reciprocal tariffs. In the event, the 20% was a bit less than many feared and the 90-day reprieve and ongoing negotiations with the US suggests some scope for these to end up lower. Sector tariffs (e.g. likely upcoming on pharmaceuticals and already in place for autos), however, seem will be an offset. For now, it seems likely that fiscal policy won’t be able to fully offset the impact of tariffs this year, but can act as a partial shield and will be more of a net boost to growth beyond that. Other factors that will come into play for the euro area will include broader financial conditions and currency movements.
With tariffs a negative hit to growth and more likely to be disinflationary than inflationary I think, I have added a little more rate cutting back into my ECB forecast.
UK: Not the focus of attention, but won’t be unscathed
The UK was one of the economies that managed to escape reciprocal tariffs in the “Liberation Day” announcements. Though still subject to the 10% global tariffs and sector specific tariffs, it sounds at least plausible that the UK and US manage to arrive at some kind of deal that lowers some of those tariffs.
My worries about the UK economy are still more on the domestic than international side for the near term. Recent activity data has been more resilient than expected, but I am still watching to see how the economy evolves in the wake of the April Employers NICs tax hike. The April PMI business survey composite measure moved back below 50, signalling contracting private sector activity and survey-based labour market indicators remain soft. I still see recession, however, as a risk rather than central scenario. To read more, see related content.
Inflation is likely to jump in April on an increase in utility bills (though lower oil prices should act as a partial offset). After the rise in bills, the Bank of England will likely be attentive to any indications of that feeding through into even higher inflation expectations (where longer-term survey-based consumer measures have been rising since last Summer) or wage demands for example. US tariffs, however, are likely to be disinflationary for the UK, though much will depend on the scale of hit to global/trade growth, the degree of China trade redirection (specifically Chinese producers discounting goods, pushing into non-US markets) and what happens to commodity prices and sterling exchange rate. For now, Bank of England speakers point to a likely negative impact on UK growth from the tariffs, but with the impact on inflation less clear.
With interest rates significantly above neutral in the UK, there is room for the Bank of England to cut rates without needing to see substantial deterioration in the growth outlook. I can still see good reasons for inflation to slow later this year/next year (including businesses signalling lower year-ahead wage expectations). At this stage, I am still expecting the BoE to cut rates at a roughly quarterly pace and with the next 25bps rate cut in May but there are clearly risks that they could end up speeding up or slowing down given the current backdrop.
China challenged
China’s outlook has clearly deteriorated. The scale of US tariffs against China is substantial, with tariffs of 145% on many categories of goods. At that level, widespread trade disruption seems likely. For China, growth rates now seem much less likely to reach 5% although China’s broad policy response will be important – particularly how far the authorities go down the path of stimulating domestic demand, supporting the domestic market for Chinese produced goods.
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