The implementation of extensive tariffs by US President Donald Trump has significantly disrupted markets, sparking fears of a trade war and a potential recession in the United States. This analysis highlights the main impacts of these tariffs thus far. In the US, consumers are expected to face increased costs amounting to roughly 2.5% of household spending.
While there may be some gains in domestic production, jobs, and wages, these benefits are unlikely to outweigh the negative repercussions. As a result, we are revising our GDP outlook downward. We anticipate that the Federal Reserve will maintain current interest rates initially, then cut them more than previously expected later in the year.
As economic forecasts deteriorate, longer-term interest rates are projected to remain lower, with more analysts predicting a recession. Financial markets have reacted negatively to the tariffs, marked by a significant decline in US equities, lower interest rates, and a weaker dollar. This perception of economic instability will have adverse effects on consumer wealth.
Asia has been hit hard by Trump’s tariffs, particularly countries like Vietnam, Thailand, Japan, and Korea, where export dependency on the US is high. The estimated impact for these nations could reach 5.5% of their GDP. In China, GDP could suffer a decline of 0.4% to 0.8%, in addition to growing industrial overcapacity and deflationary pressures.
In the European Union, approximately 2% of GDP is reliant on US demand. A 20% tariff could decrease export volumes to the US by about 15%, leading to an expected 0.3% drop in GDP in the short term. Countries like Ireland, Germany, and Italy are particularly vulnerable, while the Central and Eastern European region shows lesser sensitivity.
Retaliation is being considered, including redirecting tariff revenues back into the economy and strengthening ties with other nations. Despite negative impacts, the overall forecast for Europe suggests the effects will be less severe than those experienced during the Covid-19 pandemic or the energy price hikes related to the Ukraine conflict. In conclusion, while we are reducing our economic forecasts for the eurozone in 2025 and 2026, the anticipated changes are relatively limited given prior assumptions about tariff impacts.
There is a possibility of one or two quarters of slightly negative growth, but severe recession is unlikely. The ongoing political momentum for cooperation within Europe could strengthen the economy post-2026, although differences among member states pose challenges.