The changing global economic landscape

The first quarter of 2025 has been marked by significant volatility across global financial markets, largely driven by the proposed policies of the United States President Donald Trump’s administration under the banner of "making America great again."

The erratic deployment of trade tariffs and the administration’s unexpectedly stringent import tariff announcements on “Liberation Day,” coupled with threats of retaliation, have heightened policy uncertainty and raised concerns about their impact on the global economic outlook for the remainder of the year.

President Trump has introduced a major shift in US trade policy, including a minimum baseline tariff of 10% on goods imported from all foreign countries. Additionally, higher "reciprocal tariffs" will be imposed on nations that levy tariffs on US exports. These measures are set to take effect on April 5 and April 9, respectively, and could push the effective US tariff rate to nearly 25%.

Applied to a base of $3.3 trillion in US goods imports, this year’s cumulative tariff hike represents a substantial tax increase of approximately $660 billion, or 2.2% of GDP. While these changes aim to bolster American industry and reduce the national debt, they also raise concerns about potential price increases for consumers and disruptions to global trade. Inflationary pressures could be significant, potentially adding nearly 2% to headline inflation.

The US administration appears to be banking on the idea that implementing tariffs will force concessions from trading partners in exchange for lowering them. However, in the short term, elevated policy uncertainty and heavy tariffs are creating meaningful economic headwinds, likely contributing to ongoing volatility in asset prices.

While the US economy may benefit from lower taxes and deregulation in the medium term, the uncertainty surrounding tariffs, and the risk of higher inflation, have already significantly impacted consumer and business confidence this year.

Concerns about potential stagflation – a combination of stagnant economic growth and rising inflation – are growing. The US Federal Reserve (Fed) now anticipates moderately lower economic growth alongside higher inflation in the near term. This scenario could compel the Fed to maintain higher interest rates for longer as it attempts to balance renewed inflation risks without tipping the economy into recession.

Investors will need patience as the world adapts to the evolving landscape under Trumponomics 2.0. Despite generally resilient economic data year-to-date, markets are pricing in the likelihood of companies delaying investment and hiring until the new administration’s policies become clearer.

President Trump has described tariffs as “the most beautiful word in the dictionary” and views them as a strategic tool to negotiate favourable terms for the US. However, the risk of retaliatory actions by major trading partners looms large. Such actions could escalate into a more economically damaging global trade war, with far-reaching implications for supply chains and manufacturing facilities.

Recent research by the International Monetary Fund (IMF) suggests that a 10% increase in tariffs on all US imports, followed by 10% retaliatory tariffs on US exports, could reduce global GDP by 0.5%, with the US bearing the brunt of the impact. Adjustments to supply chains could further affect GDP, though these effects are harder to quantify. President Trump has acknowledged that “short-term pain” may be necessary for long-term gains – a factor that financial markets may not yet have fully priced in.

While disruptions to global trade are expected, businesses have strengthened their resilience since the Global Financial Crisis, Trump’s first term, and the COVID-19 pandemic. Diversified supply chains, a "local-for-local" manufacturing model, and proven disruption management strategies have enabled companies to navigate uncertainties more effectively.

Currency movements are expected to offset some tariff-related effects, while pricing strategies will help manage the impact. Growth strategies are likely to focus on increasing volumes rather than raising prices. Outside the technology sector, companies remain cautious about capital expenditures, prioritising debt reduction and returning surplus capital to shareholders.

As the global economy adapts to the changes brought on by the proposed policies under Trumponomics 2.0, it is crucial to monitor developments closely and focus on investing in well-managed global companies that can navigate the evolving situation effectively.

While the road ahead may be fraught with challenges, the resilience of businesses and the adaptability of global markets offer hope for stability and growth in the long term. Investors and policymakers alike must remain vigilant as the world adjusts to this new economic reality.