April Global Macro Monthly - Tariff Turmoil

Global Macro Monthly Summary April 2025

By David Page, Head of Macro Research

Biting off more than one can chew?

On 2 April, US President Donald Trump’s Liberation Day, ‘reciprocal’ tariffs were announced for 57 countries and a flat 10% on 136 others. He stated this was “our declaration of economic independence”. In our Theme of the Month, we detail developments – and retreats – since, and the rest of the world’s reaction. Certainly, the subsequent four weeks have tested the limits of this independence.

The most obvious test was in deeply integrated US financial markets. After the announcement, stocks collapsed by 12.1%, until the administration retreated on implementation day (9 April) announcing a 90-day pause; stocks recovered but are still 2.7% lower. The fall was accompanied by the dollar’s decline, down 4.4% against a basket of currencies since Liberation Day (and 9.6% from the pre-inauguration peak), unusual both for raising tariffs and a currency that has traditionally gained during periods of risk aversion. Alarmingly, 10-year US Treasuries have fallen by 1.1% to date (down 3% at their worst). Treasuries are seen as a ‘safe haven’ asset to which increased uncertainty and US activity doubts should have provided a bid. The combined fall suggests at best a scaling back of US asset allocation; the risk of a more structural pivot; and at worst bore the hallmarks of financial instability.

Economic independence has also been tested by US supply chains. Canada and Mexico’s exclusion from Liberation Day tariffs perhaps reflected belated acknowledgment of the degree of North American industrial integration. Canada paused some of its retaliation. And while the US administration has initiated trade deals with many countries since, to date China has refused to play ball. China has been the only economy to effectively match US tariffs in tit-for-tat retaliation and while both sides declare they remain open to negotiation, neither has initiated. Senior US cabinet members believe they hold the whip hand as the world’s largest buyer. Yet this may be a miscalculation as the world’s largest supplier turns the screw, particularly on key supply-chain imports, including rare earths for electric vehicle battery production.

Whether the US administration has responded to the financial market reaction – a so-called Trump put – or to belated supply-chain disruption concerns, recent days appear to mark a change. Tariff-sceptic Treasury Secretary Scott Bessent suggested the US-China stand-off was unsustainable. Trump subsequently suggested China tariffs could fall substantially with a deal but also indicated de-escalation over coming weeks. Talk of further tariffs on pharmaceuticals and chips has faded.

Economic paralysis

The US tariff policy outlook remains unclear but even after the pause, US tariffs are the highest in over a century. This will weigh on global growth and raise US prices in the short term, risking more persistent inflation. But trade uncertainty itself remains a major drag on growth prospects. Even if companies buy into the administration’s vision of America, it is impossible to enact strategic investment for a global realignment amid such volatility and uncertainty about future trade relations. Companies will also pause on major investment decisions globally; this will likely weigh on hiring. Consumers are also wary of slowdown and rising prices and sentiment has cratered.

Acknowledging this backdrop, we have cut our US GDP forecasts to 1.6% for 2025 (from 2.2%) and 0.6% for 2026 (from 1.5%). Assuming no return to Liberation Day tariff levels – and an easing from current levels in H2 of 2025 – we expect the US to avoid recession, just. We have also cut our global growth forecasts, to 2.5% for 2025 and 2.4% for 2026 (from 3.2% and 2.9%). In the Eurozone we now see growth at 0.7% and 0.5% (from 0.8% and 1.1%). And in China we forecast growth to remain at 4.3% and 4.0%, below Beijing’s growth target for this year with US tariffs estimated to strip around 2.5 percentage points from headline growth (noting China only exported 2.8% of GDP to the US in 2024). This is weaker than the International Monetary Fund (IMF)’s recently lowered forecasts to 2.8% and 3.0% for global growth, 1.8% and 1.7% for the US, 0.8% and 1.2% for the Eurozone and 4.0% in both years for China.

It is tempting to think the US administration will have learnt a lesson on the delivery and implementation of unorthodox policy, which could pave the way for risk recovery from here. This may be, but the administration is still striving to cut taxes in the face of elevated deficits and concerns about fiscal sustainability and likely to use the threat of default in the debt ceiling extension to pass such a bill. The summer may see more concern over US Treasuries. Moreover, in retreat over trade, the administration may double-down for ‘victory’ elsewhere. The recent aggressive pivot back to Ukraine suggests the search for a ‘quick win’ here. And the US has started negotiations with Iran over nuclear development – geopolitical developments could also add to concerns over the coming months.