INCREASING UNCERTAINTY POINTS TOWARDS LOW GROWTH/RECESSION
Since Liberation Day, markets have been concerned that the import tariffs proposed by Trump will lead to chaos for global trade, particularly because it is likely that many countries will implement countermeasures. It is therefore understandable that markets breathed a sigh of relief when Trump announced this week that, for most countries, the import tariffs will be limited to 10% for the next three months (although higher tariffs will continue to apply to specific products such as cars, pharmaceutical products, and steel). Only China – with which the US has the largest trade deficit – is excluded from this measure. The tariffs for this country – and the counter-tariffs China has imposed in response – are so high that hardly any trade between the two countries will take place. This will also have major geopolitical consequences.
The question, however, is whether a three-month delay will largely eliminate the uncertainty. In our view, the opposite is true. Trump is not only looking at the level of import tariffs imposed by other countries but also at various other factors that hinder or promote imports: currency manipulation, export subsidies, stricter requirements for imported goods than for domestic products, etc. This is an extremely complex issue, which is why negotiations on trade agreements always take years to conclude. In other words, this will not be resolved in the next three months.
It is possible that this postponement is merely the first step by a Trump who realizes he is on the wrong path. However, listening to the president and those around him, this does not seem to be the case at all. The conclusion is therefore that a trade war remains a very real danger. For the time being, there will remain a climate in which businesses and consumers will be extremely cautious about making large investments and taking risks. In such a climate, it is also unlikely that many foreign companies will move their production to the US. No one knows how long the import tariffs will remain in place, whether they will be further increased or decreased, or how foreign countries will respond. In addition, it remains to be seen how American consumers will react when they are soon confronted with various price increases. In short, a climate has emerged in which economic growth is likely to decline sharply.
On top of this, there is now another significant negative factor for the US economy. In a weakening economy, accompanied by downward pressure on inflation – even though this may temporarily increase due to import tariffs – long-term interest rates should normally fall. However, these have recently risen significantly. As a result, real interest rates have increased, which should in turn push the dollar higher and the gold price lower. However, the opposite has happened.
This indicates that something else is going on – namely, that foreign investors are starting to turn away from the US. In the case of the Chinese, this is certainly understandable; they have seen that the West seized various Russian assets when the war in Ukraine broke out. China has far greater amounts invested in the West and is terrified that something similar might happen to them. It is therefore entirely logical, especially now that US actions are primarily directed against China, that they are trying to reduce their exposure to the US as quickly as possible and convert the proceeds into gold, EUR, GBP, and JPY. These involve such large sums that they can strongly influence exchange rates. Other countries outside the US will probably do the same, albeit on a smaller scale.
All of the above responses point towards recession. In Europe, however, efforts are being made to significantly increase spending on defense, infrastructure, etc., which will actually provide a boost to growth. This is why the risk of recession in Europe is lower, especially since the ECB has more room to lower interest rates than the Fed.
This brings us to the key question of the moment. There is a high likelihood that financial markets will continue to move in such a way that the risk of recession will increase even further: lower stock prices, persistently high long-term interest rates and credit spreads, etc. A climate in which capital providers will also become increasingly reluctant to issue loans. The big question is therefore whether all this will exert so much political pressure on Trump that he will be forced to back down. We ultimately believe he will, but not for the time being. Trump himself, as well as those around him, seem convinced that their policies will only cause short-term damage and that it is only a matter of time before, economically speaking, 'paradise on earth' will be realized. The problem, however, is that approximately 99% of economists have a different view.
