Trump’s partial rollback of tariff pressure — prompted by early signs of weakness in the U.S. economy — is a clearly positive development for global markets. However, given the administration’s need to finance at least part of the promised 2026 tax cuts, a full reversal of tariffs seems highly unlikely. We maintain our central scenario: an average tariff increase of around 10%, with significantly higher levels still applied to China (albeit below current figures), and elevated rates for sectors deemed “strategic.”
This more “moderate” approach reduces recession risk, but we continue to view the U.S. as the most vulnerable major economy for the rest of the year. Tariffs act as a distortionary tax, curbing growth and adding short-term inflationary pressure. Trump’s policies are also injecting significant uncertainty into the economy, weighing on sentiment. On top of that, we see a growing risk that markets could begin to question the sustainability of U.S. fiscal policy, particularly if costly tax cuts remain on the table despite an already outsized public deficit.
Outside the U.S., tariffs will also weigh on growth, mainly through weaker exports, but are likely to help reduce inflation. This divergence should give non-U.S. central banks significantly more flexibility to ease. While U.S. fiscal policy looks set to tighten (via spending cuts and tariff-induced tax hikes), most other major economies are pursuing neutral or expansionary fiscal strategies. China and Germany remain the clearest examples of the latter.
Read the Macro Update for May 2025
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