04 Apr 2025
President Trump’s announcement on reciprocal tariffs on 2 April was more severe than the market expected. On top of a 10 per cent universal minimum tariff, the new regime includes significantly higher reciprocal tariffs for most major trading partners and brings US effective tariff rates to around 24 per cent according to our calculations, levels we have not seen since the early 1900s. If fully implemented, it will be a significant shock to the global trading system and presents serious risks to global growth.
The tariff rates for most major trading partners are close to or higher than the maximums most market participants were expecting. China and its broader Asian supply chain now face a significant shock, which China will only be able to buffer partially with fiscal and monetary policy. On the other end of the spectrum, Europe’s fiscal and monetary policy means it is in a better place to weather the storm.
Additionally, even though Treasury Secretary Scott Bessent mentioned that the tariff rates will likely be a “cap” and could potentially be negotiated down, we think the uncertainties around final tariff rates and the negotiation process will also hurt investors’ confidence and dampen the outlook for capex and consumption globally, accentuating downside risks.
Our outlook
Going into the event, our 2025 outlook grid was already more bearish than consensus and most of the market. In February, we moved to signal that a stagflationary-type outcome for the US economy was a significant downside risk, and at the beginning of March we made this our base case (50 per cent probability), with the downside risk scenario of cyclical recession pegged at 40 per cent.
The scope, breadth, and depth of these newly announced tariffs clearly validate this bearish stance. If these tariff rates do become permanent, then we would expect inflation in the US to reach 3.5 per cent by the summer and stay around that level for the rest of the year. On the growth side, an effective tariff rate eventually settling at 20 per cent would likely mean the US just escapes a recession, while experiencing a traumatic stagflationary shock. Anything beyond that is likely to push the US economy into a cyclical recession.
The key questions from here are what deals countries can do with the United States, whether they retaliate, and whether the US administration agrees to dial back the tariff increases.
If large trading blocs like China and the EU decide to retaliate, then the hit to US growth will be larger, but it would also temper some of the aggregate inflation effects. On the other hand, if the US starts engaging in protracted negotiations with countries and industries seeking exemptions to various tariffs, with some of them on pause and some not, then you could see a scenario where the inflation impacts are less severe than we expect. But because higher uncertainty would persist, the negative growth effects would still be still large.
The upside scenario of a broad retreat by the Trump administration still exists. Markets had stopped reacting to various leaks and pre-announcements ahead of the event, holding on to the idea that we should take the Trump administration ‘seriously but not literally’. This proved to be a mistake. Will the administration be shocked by the market reaction? We’ll see.
In summary, our outlook for 2025 sees US growth tracking at or below 1 per cent, with inflation tracking at or above 3 per cent for the rest of the year. This stagflationary cocktail puts the Federal Reserve in a bind, unable to cut interest rates proactively to support growth because the upside risks to inflation are too great. If the Fed does end up cutting this year, it will be because the US economy would have already entered a recession, with the Fed having to catch up and cut reactively. Beyond the US, this only strengthens our base case of the European Central Bank cutting by more than markets currently expect to support growth. It is also likely to severely curtail the Bank of Japan’s nascent cycle of rate rises.
Building resilience in a tariff-driven market
Matthew Quaife, Global Head of Multi Asset
The prospects for risk assets are now finely balanced. We recognise that the economic cycle has been driven by above-trend US growth, and the global economy is in the mid-to-late cycle phase, supported by a robust US consumer. However, heightened uncertainty following President Trump’s announcements, coupled with evidence of weaker numbers in the soft economic data, calls for caution and a nimble approach to asset allocation.
Valuations pose a headwind for large cap equities and global high-yield assets. Our focus within equity allocations is on building quality through a selective approach – allocating to low-volatility equities, or sectors that offer above-average growth prospects and relative resistance to tariffs. We include positions in inflation-linked bonds and gold to safeguard against stagflation risks. Many of these positions have already been in play this year given increased uncertainty and will continue to be an important part of the investment toolkit in the coming months.
While President Trump’s announcements were immediate, the extent of their impact is not. Many aspects were left open-ended, suggesting potential room for negotiation and movement. The situation may not unfold in a straightforward manner, despite clear headlines this week, so we will be monitoring it closely over the coming days as economies and markets absorb the details. Risks have certainly increased overall, particularly regarding growth and inflation, but these have yet to impact macroeconomic fundamentals.
China’s resilience and policy tools offer a buffer
Miyuki Kashima, Head of Investments, Japan
The immediate impact of higher tariffs on China will be felt in exports, but the structure of global trade has shifted since Trump’s first term. Although still important, China has significantly reduced its export dependency on the US, and Chinese company revenues from the US are now in the low single digits. While China still maintains a substantial trade surplus with the US and gradual depreciation of the yuan is a likely adjustment mechanism, we expect authorities to manage the pace of depreciation to avoid excessive volatility.
Unlike in past cycles, the economy is not reacting with panic. Instead, policy flexibility and a potential bottoming in real estate may act as buffers to external shocks like tariffs. Importantly, China has the fiscal capacity to cushion the blow from tariffs and is pivoting toward domestic demand as a primary growth driver.
Those companies that have significant trade volumes with the US will face more challenges, although in many cases competitors are subject to the same tariffs, mitigating the relative disadvantage.
Companies with manufacturing operations in Mexico appear to be better positioned than those producing in China, Korea, or South East Asia, where tariff rates are generally higher. Firms with Singapore-based subsidiaries may also find ways to partially mitigate tariff impacts, thanks to Singapore’s lower tariff profile.
Elsewhere in Asia, the garment industry will be negatively affected, with manufacturing centres in China, Vietnam, Bangladesh, and Cambodia facing higher tariffs. The 26 per cent tariff imposed by the US on Indian imports is higher than anticipated, but pharmaceutical exports will be exempted. Indonesia may fare relatively better as a country, because it is not as industrialised as its Asian peers such as Vietnam, China, Taiwan, and Korea. Additionally, most of Indonesia’s exports now go to China and other parts of Asia.
Combined with a 25 per cent tariff on autos, there will be a direct impact on the Japanese economy via exports. There is also the prospect of the higher-than-expected reciprocal tariffs having a secondary impact through a slowdown in Japan’s other trading partners. The scale of the impact will depend on how long the tariffs remain in place and the extent to which Japan can negotiate with the US.
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