Growth outlook cut further for the Eurozone amid tariff turmoil
Given the unique nature of the hike in US tariffs, the size of these supply and demand shocks and the speed at which they are arriving make the precise economic implications particularly hard to pin down. Overall, however, we expect GDP growth in the US and world economy to slow sharply, but we don’t anticipate recessions in either.
The tariff shock is both cyclical and a structural. Initially, alongside the heightened uncertainty, we expect a huge contraction in US imports and a broad-based weakening in economic growth around the world prompted by the asset market sell off.
After this cyclical downturn ends, the tariff hikes will leave lasting scars. Our baseline forecast assumes that the US maintains 10% tariffs on the world with far higher tariffs on China, causing a long-term decline in world trade as a share of GDP. This will force many economies to rethink their growth strategies.
US inflation is set to surge over the coming months as higher tariffs and possible supply chain problems take hold. We think the US Federal Reserve will delay cutting rates until the end of the year to minimise the risk of second-round inflation effects, resulting in a more back-loaded path for policy rates than the market currently anticipates.
