Tariffs eat into growth outlook

Tariffs eat into growth outlook

Last week, the International Monetary Fund (IMF) cut its forecast for global growth this year from 3.2% to 2.8% and halved its forecast for growth in global trade.

• These downgrades have been driven largely by US tariffs that are likely to weigh particularly heavily on US growth this year. The IMF expects the US to grow 1.8% this year, down from a previous forecast of 2.7%. Even this downgraded number looks optimistic. If tariffs persist at current levels growth of well below 1.0% this year is quite plausible.

• The Mexican economy is highly integrated with America’s and is particularly vulnerable to US tariffs. Last week, the IMF cut its forecast for Mexican growth from 1.5% in January to -0.3%. The Fund has also lowered its forecasts for the major G7 economies and has pencilled in slower growth for emerging markets, driven by rather slower growth in China and India.

• The IMF characterises the risks to its new forecasts as being “tilted to the downside”. Uncertainty about trade policy has never been higher, but this is not the whole story. The momentum of global growth started to soften before America imposed tariffs while inflation had edged up from last year’s lows.

• The IMF is concerned that governments and central banks have limited capacity to respond to any marked weakening of growth. Public borrowing is running at multi-decade highs in many western countries, constraining the ability of governments to boost growth with debt-fuelled spending. In many countries, inflation expectations are above central banks’ target rates making it harder for policymakers to collapse interest rates, particularly since tariffs will themselves fuel inflation.

• Unsurprisingly, in the light of recent volatility in equity, bond and currency markets, the IMF thinks that the risk of financial instability has “increased significantly”.

• As well as considering what might go wrong, the Fund also suggests what could go right. US tariffs could push the authorities in China towards boosting domestic demand, creating a new motor for global activity. Deeper EU integration, the policy prescription recommended in last year’s Draghi Report, has the potential to reboot European productivity. The resolution of conflicts, particularly Russia’s war against Ukraine, would support growth and reconstruction. An easing of trade uncertainty and new trade agreements would boost growth.

• The IMF makes clear that high tariffs spell slower growth. It is hard to see a material improvement in the outlook for global growth this year without a material change in US policy.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 1.7% at 8,413 as stock markets continue to rebound from the early April lows.

Economics

• US president Donald Trump said he has “no intention” of firing Federal Reserve chair Jay Powell following his recent criticism of the Fed. Equities rallied on the news
• China has granted some exemptions to import tariffs on US goods, according to the lobby group American Chamber of Commerce in China
• Estimates of business activity in April from surveys of purchasing managers indicated a slowdown in growth across the US and euro area. UK activity declined at its fastest pace since November 2022
• US equities have underperformed the rest of the world this year by the widest margin in 32 years
• In a sign of rising risk aversion, Japanese investors sold more than $20bn of international bonds at the start of April, one of the largest outflows on record since 2005
• Gold prices rose above $3,500 per troy ounce for the first time last week as ongoing global uncertainty boosted demand for the safe-haven asset
• UK chancellor Rachel Reeves said that she is “confident” of securing a trade deal with the US amid ongoing trade talks
• The UK government announced a review of the low value import scheme, whereby imports under £135 are exempt from customs duties, following fears of Chinese firms ‘dumping’ products in the UK as they reroute goods from the US to avoid tariffs
• The UK government borrowed £15bn more than expected in the 12 months to March, according to the Office for National Statistics, raising concerns that the government may have to adjust spending and taxation plans to meet its fiscal targets
• UK retail sales unexpectedly rose in March by 0.4% compared with the previous month, with recent good weather providing a boost to sales
• UK consumer confidence fell in April to its lowest level since November 2023 due to rising bills and deteriorating future economic expectations 
• Declining cash transactions, despite a record £86bn worth of banknotes in circulation, suggests UK consumers are hoarding cash as a store of value, according to analysis by the FT
• Insolvencies of UK recruitment firms over the last six months rose by the fastest rate since the global financial crisis, according to analysis by City AM
• German business sentiment improved slightly in April, according to the ifo Business Climate survey, however future expectations fell. The ifo Institute commented that “the German economy is preparing for turbulence”

Business

• The EU has fined Apple €500m and Meta, owner of Facebook, €200m for breaching competition regulations
• Apple said it plans to shift production of its US-sold iPhone from China to India, the FT reports, amid rising US-China trade tensions
• The FT reports that US Republicans are planning to close the US audit regulator founded in the wake of the Enron scandal as part of the administration’s deregulation agenda
• German logistics company DHL said it was suspending some deliveries to the US due to recent higher administration costs
• Chinese battery manufacturer CATL revealed a car battery that provides 520km from just 5 minutes of charging, surpassing the 470km recently announced by Chinese rival BYD
• Steel manufacturer British Steel reversed plans to cut 2,700 jobs following the UK government’s takeover of its Lincolnshire production site
• The cost of obtaining planning permission for the Lower Thames Crossing tunnel project surpassed £450m, more than one-third of total spending to date, the FT reports, highlighting the complex UK planning and regulatory environment 
• The UK will expand its domestic production of explosives following investments made by defence company BAE Systems, in a bid to reduce the UK’s reliance on international partners
• Harvard University is suing the Trump administration over the government’s decision to freeze more than $2.2bn of federal funding and increase oversight of the university

Global and political developments

• President Trump and president Zelensky held talks on the fringes of the Pope’s funeral after which Mr Trump suggested that Vladimir Putin could be stringing him along over ending the war in Ukraine
• Mr Zelensky said that their 15-minute conversation had the “potential to become historic” and the White House described it as “a very productive discussion”
• The Wall Street Journal reports that Mr Trump’s approval rating has declined by about seven points since the start of the administration in the polling average maintained by analyst Nate Silver. The loss of confidence in Mr Trump’s ability to manage the economy is especially striking. A Fox News poll released last week shows that 38% approved of Mr Trump’s handling of economic matters and 56% disapproved
• Pakistan said it would suspend its peace treaty with India as tensions rise following the killing of 26 tourists in the Kashmir region
• China has seized a disputed reef close to the Philippines’ most important military outpost in the South China Sea, increasing the chances of a stand-off between the two countries

And finally… 21 humanoid robots participated in a half-marathon in Beijing last week, the first time that robots have ran alongside humans. The winning robot, named Tien Kung Ultra, completed the race in 2 hours and 41 minutes – Usain nuts-and-bolts