Focal Point "Risks to inflation and growth from US tariffs"

In Short

A new, harsher round of tariffs poses the biggest risk to the global economy from the new Trump administration. Soon after his inauguration President Trump reiterated the threat of tariffs, but so far, little is known about the shape and timing of these policies. However, legal, and political constraints, the pattern of US imports and the past Trump administration's transactional approach make bilateral tariffs, imposed after some negotiation with the main trading partner, more likely than global restrictions.

Highlights:

• As Trump becomes president, attention has rapidly focussed on the US tariffs rhetoric and the related risks. Our baseline scenario assumes a relatively mild and gradual increase in tariffs. This is a rather benign outlook, and the risks are tilted towards less favourable outcomes for the global economy.

• To quantify these risks, we have run two adverse scenarios based on what the new administration has indicated so far. Tariffs and retaliation would lead to a rapid deterioration in the global growth outlook, with a significant spike in US inflation. We then assume that from 2026 negotiations bring tariffs back down.

• We expect the Fed to initially raise rates to keep expectation anchored, but then to cut to cushion the impact of tariffs on growth.

• We expect the EU to respond in its own interest with a stick and carrot approach, and targeted measures like in the 2018 dispute are likely, in case of a mild US stance. But bolder responses with equal tariffs and use of alternative instruments (e.g. Anti-Coercion Instrument) are likely should tension escalate.   

• In China, we expect a broader retaliation that will be of a different nature and will affect multiple sectors of the US economy. Tariffs hikes will be quick while we expect tightening of critical exports (rare earth) or pressure and lobbying on certain sectors (defence, technology, agriculture). The dump of the large pool of US Treasuries seems unlikely while we expect a control and more moderate CNY depreciation than in 2018-19.

 

Focal Point - Risks to inflation and growth from US tariff
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