• Tariff announcements were more extensive than expected, US economy and businesses could be significantly impacted
• A US recession is still not our base case, but we estimate that recession odds have increased to 30 - 40 percent
• Greater policy certainty could help stabilise short term global market weakness, but economic uncertainty is set to linger

By announcing tariffs on many of the US’s biggest trading partners, President Trump said today that the US was reborn and the country was now on the road to economic independence.

However, the repercussions on the US and global economy are far less straightforward. US markets have so far responded negatively, with the futures market down between 3 to 5 percent. Conversely, despite the announcement of a further 34 percent reciprocal tariffs on China, the CSI 300 and SSE indices both opened slightly up.

The market was expecting moderately aggressive tariffs. Was the final announcement a surprise?

The tariff policies are probably worse than expected in scope and speed, and it remains unclear if there is any flexibility to negotiate these tariffs. However, the vastness of the scope would appear to make negotiations difficult, at least in the short term.

To put the tariffs in context, the US’s average tariff rates had been close to 1 percent before Trump’s first term. This rose to about 3 percent when Trump was elected the first time. With this announcement, the rate is expected to be over 20 percent on average. This is a return to the levels of the 1930’s when tariffs were seen to be a contributory factor to the Great Depression.

Additionally, the scope appears wide and is hard to understand. For example, Trump is levying 20 percent tariffs on the European Union to counter what he says are the EU’s 39 percent tariffs on the US. However, we estimate EU tariffs are around just 3 percent. So there are other factors and considerations that come into play that are not yet evident.

Which countries and sectors are most adversely impacted?

On the face of it, China, Europe, and many Asian exporters will be significantly affected. Mexico and Canada are already significantly affected by the previously announced 25 percent tariffs, although the implementation has been delayed. However, there is some room for governments, especially in countries like China, to help companies partially absorb these tariffs

In terms of sectors, the most affected look likely to be autos and auto parts, electronics and machinery. Domestically, we would expect US consumers to suffer significant price increases across a wide range of goods, although this may not kick in immediately because many companies have been stockpiling their imports ahead of these tariffs. And if there are retaliations from the affected countries, then in the medium term, US industries and farmers could suffer even more.

What are the short-term implications for the US economy?

Firstly, at the level of the policy makers, we think the US Fed has a difficult period ahead of them. They will be trying to assess the inflationary impact of these tariffs, and balancing this against the risk of an economic slowdown.

For US companies, there is likely to be a substantial amount of trading chaos going forward. Businesses must now decide how much they can afford to drop their margins and/or raise prices. There is also likely to be a lot of planning confusion as businesses try to decide how and where to make future investments.

Finally, US consumers will likely struggle to decide which purchases they can defer and how to rebalance their budgets, especially if they also face hiring and employment uncertainties.

On the plus side, if these policies appear definitive then the uncertainty that have plagued markets and businesses may subside. This will at least allow for planning and decision making. Uncertainty was a leading reason for the weaker economic data in 1Q25 and lifting that uncertainty may stabilise economic trends.

What is your longer-term outlook for the US economy?

At the start of the year we saw a very low risk of recession. The US economy had just proved itself surprisingly resilient to fiercest monetary policy tightening seen in decades. Markets were also buoyed by expectations of more interest rates cuts amid a further moderation in inflation. In this scenario, we placed the odds of a recession at 0 – 10 percent.

However, we have seen US consumption growth stall since then. Survey data of consumers and businesses look worrisome. If business margins contract then they may consider layoffs, which could trigger weaker consumption, and this in turn could trigger more layoffs.

At this point, given the aggressiveness of the policy announcements, we are raising our recession odds to 30 – 40 percent.

Do you think this is now a real risk of a global recession in 2025/2026?

Our current base case is not for a US or global recession. We are only increasing the odds of a US slowdown spilling over into a global recession. And of course, we are concerned about the effect of the tariffs on many global economies.

One of the most important data points going forward is how US consumers will react to the increased prices. If they continue to spend then there is a good chance the global economy can continue to grow. Companies may suffer some margin compression in this process but this can recover over time, especially with the effective application of technology and AI.

At a global level, do these measures suggest new trading blocs and alliances?

It is probably too early to assess the geopolitical restructuring that will evolve as a result of this trade war launched by the US. However, with global trade so interconnected, it is possible that the White House may not achieve the results it was intending.

For example, car manufacturers may conclude that it is too expensive to build in the US. As part of the manufacturing process, car parts can enter and leave US borders several times before they are used, incurring tariffs each time. Given this, manufacturers may prefer to produce entirely outside the US and then pay the import tariff just one time.

Amid the chaos, China has an opportunity to present itself as a more reliable global partner. However it is unclear at this stage how much it will take advantage of this opportunity, especially as this is also tied up with its stance on global geo-political matters.

Should investors consider underweighting global equities, and overweighting global bonds?

Yes, even if there is now more certainty about the policy, it seems to me that there is now greater uncertainty about the economic effects of such high tariffs.

Early indicators suggest that there is some softness creeping into the US economy. If this continues, we will likely upgrade our recession forecasts. Additionally, we had expected US corporate earnings to grow at about 15 percent, but with these tariffs, we are now assuming a drop to less than 10 percent, and maybe even more. If so, then the upside potential for equities in 2025 would be undermined and could justify an underweight position.

On the other hand, the US economy proved remarkably resilient to COVID disruptions and sharp rises in interest rates, and may be equally resilient to disruptive tariff policies.

Please can you summarise the key takeaways for investors?

We think the uncertainties are great enough that we do not advise investors to immediately buy the dip, despite the market declines of the past couple of months. We think it is time to be in “risk management” mode and to assess the economic sensitivity to these policies.

At the same time, we would suggest that investors not panic. Our base case is for slower growth and not a recession. In such a scenario, the US market’s 10 percent correction so far may have already priced in most of the downside.

We do think investors should diversify to other regions like Europe and China. Lower risk investors should still find comfort in low-risk asset classes like fixed income and gold.