Asset Management: Monthly Macro Insights - March 2025

President Donald Trump’s trade-war salvo, the largest act of American protectionism since the 1930s, combined with his foreign policy’s complete shift, are sending significant shockwaves through the global economy. Although the full impact of phenomenal uncertainty is a key unknown, inflation and growth dynamics might well evolve opposite to investor’s Goldilocks scenario.

Trumpcession?

Since the pandemic, the US economy has repeatedly proven its resilience, and defied recession forecasts. Still, the shocks are piling up: trade war, immigration and fiscal uncertainty.

Up until recently, investors were of the view that Trump used tariffs’ threats primarily as a negotiating ploy to win concessions. However, that view seems naïve, especially considering recent developments. Overall, the new US trade policy will most likely fuel inflation, slow economic growth, cut profits, increase unemployment, worsen inequality, diminish productivity and increase global tensions.

Besides tariffs, other policies are raising red flags regarding the US growth outlook. The crackdown of illegal migrants threatens to leave gaps in the workforce that won’t be easy to fill quickly, while a broader immigration slowdown, with fewer net arrivals per year, is also a significant headwind.

Meanwhile, cutbacks driven by Musk’s Department of Government Efficiency have seen thousands of federal workers lose their jobs already, with knock-on effects for many contractors. By moving fast, this policy not only concentrates the economic negative effects, but also creates uncertainty.

How the Fed will react?

Recent events suggest the second half of the 2020s will be marked by significant geopolitical uncertainty. For central banks, trade tensions muddy the outlook as tariffs are inflationary in the short-term, but also hurt growth, thus eventually leading to deflationary effects. However, if tariffs push inflation expectations higher, central banks might be forced to retain a hawkish bias for some time. The latest data in the US calls for the utmost prudence, as a University of Michigan survey showed that households’ inflation expectations have reached the highest level since 1995.

Germany’s “Whatever it takes” moment

The Trump administration’s shift away from its allies and partners has had a tectonic effect on global politics. It has convinced European governments that the US is no longer a dependable source of security and cannot be trusted to uphold its alliance commitments. Correspondingly, the European Commission announced a proposal for a defence package close to €800 billion of spending, presumably over four years from a new ReArm Europe Plan.

Yet, the most significant response to the US shift has been Germany’s historic turnaround on public spending. Although the growth impact of a fiscal package of such historic proportions will be significant, this additional deficit-spending will only be deployed gradually and should initially bring the budget deficit to 5-6 per cent of GDP, before the expected growth effects kick in, which may lead to higher interest rates. In fact, the near-term outlook will be dominated by the severe uncertainty shock emanating from US trade and foreign policy.

China

For the third straight year, China has set a forceful economic growth goal at about 5 per cent for 2025 at its annual parliamentary session, raising expectations that more supporting measures will be announced later this year. However, unleashing greater stimulus to counter the impact of the US trade war could undermine China’s efforts to rein in surging debt. What’s more, despite the yuan depreciating by more than 10 per cent against the dollar to offset the tariff hike during the first trade spat in 2018 and 2019, the already low level of the currency limits further manoeuvrability this time around.