Global Macro Trends
An increasingly complex and changing world
Despite numerous last-minute reversals, the initiation of the trade war by the USA is now a reality. So far, America has imposed 25% tariffs on Canada and Mexico, though certain exemptions and delays have been granted in specific sectors. Additionally, 20% tariffs have been imposed on China, on top of existing tariffs on Chinese products, as well as 25% tariffs on global imports of aluminum and steel and car imports. Uncertainty remains high due to unanswered questions about the next potential targets and the duration of their implementation, as well as which countries will respond and to what extent. Inevitably, these developments also have political ramifications, as they shape a climate of structural changes in the international status quo. Since the traditionally close allies of the USA see that they can no longer rely on it for defense and exports to the same extent as before, they are compelled to seek solutions, including exploring greater cooperation among themselves without the USA. On the other hand, the more active role of the USA towards peace both in the Middle East and the Russo-Ukrainian war is a positive tailwind.
In the US, there is growing concern that tariffs and high uncertainty about future economic conditions will negatively affect demand, at least in the short term, and drive inflation upwards. As a result, the likelihood of a significant slowdown in the growth rate has increased, with the possibility of contraction in some upcoming quarters now a possibility. However, for now, recent economic data remain generally favorable although leading indicators have been deteriorating. Inflation remains above the Federal Reserve's target and labor market conditions remain fairly robust.
In the euro area, the economy grew slightly faster in the fourth quarter than previously estimated (quarterly basis, 0.2% versus 0.1%) achieving an overall growth of 0.9% in 2024. However, the negative impact of US tariffs and the need for rearmament create a new framework of challenges both politically and commercially. Indicative is the proposal of the new, barring any unforeseen events, German Chancellor to exclude part of defense spending from the calculation of the public deficit/debt and a new €500bn infrastructure fund over time in Germany. At the same time, similar exemption of defense spending from fiscal rules is also being discussed at the EU level, although here the high public debt of several countries acts as a deterrent to the possibility of a large increase in these expenditures. In this context, the ECB is expected to proceed even more cautiously in easing its monetary policy, leaving open the possibility of a temporary halt in the reduction of its key interest rates.
In China, economic activity continues to grow robustly, albeit at a somewhat more restrained pace amidst a period of nearly zero inflation. The very limited response from China to the imposition of US tariffs is viewed as leaving ample room for negotiations between the world's two largest economies.