Asset Management: Monthly Macro Insights - April 2025

Global growth remained relatively resilient in early 2025. However, front-loading of global trade flows, particularly between Asia and North America, greatly distorted the reality. In fact, stagflation and recession risks have both increased significantly.

Trump's vision...

US President Trump announced on 2 April the biggest escalation in US tariffs in a century, with a 10 per cent baseline tariff on imported goods. Certain sectors such as pharmaceuticals and semiconductors have been exempt for now, but more tariffs are coming. The strategy has been described as an effort to build up leverage and resources to manage US debt, reset its industrial base, and renegotiate its standing in the global order.

Regarding the latter, tariffs are being deployed alongside a deliberate reshaping of global alliances. These tariffs serve as leverage, offering relief to allies who align with US priorities, while imposing higher costs on those who do not.

Regarding public finances, the most recent projections from the Congressional Budget Office confirm once again that the US fiscal outlook is on an unsustainable path. In that regard, lower borrowing costs, higher revenues and tighter spending (DOGE) would lower the debt burden.

But arguably the most important pillar of the Trump strategy is growth, with tariffs serving as the ignition switch for a supposed manufacturing revival. Indeed, by making imports more expensive, Trump thinks he will create space for US producers to step back in.

… is facing reality

Economists have long understood that higher tariffs do not, in general, reduce trade deficits. In fact, global data indicate that countries with higher tariffs actually have higher trade deficits.

Although the new policy was supposed to be calibrated to offset trade partners' tariff, nontariff, and currency barriers to US exports, it was instead completely arbitrary and focused only on bilateral trade balances, which in many ways are a healthy reflection of comparative advantages.

Overall, to think that the bilateral balance is caused by trade barriers overlooks the fundamental reason why countries trade. The recent bout of unpredictability also risks robbing the US of one of its important and differentiating edges: long-term investor confidence in policy framework and decision-making.

The Fed facing a complex challenge

The new trade policy will raise inflation, not only on imported goods but also on domestic prices, as input costs rise and demand increases on domestic products, whereas supply-chain disruptions will also translate into higher prices. Yet, growth will also be negatively impacted.

So far, investors seem to think that the growth effect will dominate, demonstrated by the increasing expectation that the Fed will cut rates swiftly to support the economy, in part due to its dual mandate of full employment and price stability. Expectations of more rate cuts have certainly risen, but inflation represents a significant constraint that will slow the Fed's reaction , which could dampen investors' hopes.