Trump's tariffs will hit the US economy hardest in the near term
Economic Outlook
Chief US Economist
Chief European Economist
Chief Emerging Markets Macro Strategist
The Trump administration’s tariffs—combined with any retaliatory measures from US trading partners—will, if implemented, deliver a supply shock to the US and a demand shock for the rest of the world. The severity of these shocks will depend on the outcome of ongoing trade negotiations and legal challenges. However, it seems certain that the world’s two largest economies, China and the US, will experience lower economic growth than projected at the beginning of the year—and the ramifications of this will be felt across the globe irrespective of any individual trade deals struck.
The US faces downside risks to the growth outlook even as higher reciprocal tariffs with China and other trading partners have been paused. Businesses face rising input costs, which would squeeze profit margins and force some firms to reduce investment spending. Tariffs on consumer goods will likely reduce real purchasing power and slow consumer spending, which accounts for more than 70% of US gross domestic product. Any further downward pressure on the US dollar could exacerbate upside risks to inflation.
The US labour market has remained resilient so far, but recent data confirm that it has transitioned from exceptionally tight in 2022–2023 to more balanced now. This implies a thinner cushion for the labour market than at any point in the post‑pandemic period. In the event of a large and persistent shock to economic activity, a pickup in the pace of layoffs would push up the unemployment rate.
The US Federal Reserve (Fed) is in a difficult position as it balances the risk of tariff‑fuelled inflation with supporting a weakening economy. This tension will likely linger through 2025. President Donald Trump has been leaning heavily on the Fed to cut rates, but the Fed’s independence remains intact for now. For the remainder of the year, we expect the focus to be on deregulation and fiscal measures such as tax cuts, which could deliver a boost for US growth. We will monitor these developments closely as they would pose upside risks to both the growth and inflation outlooks.
As the main target for US tariffs, China also faces economic headwinds in the second half of the year, albeit different in nature and probably less severe than those the US faces. Although negotiations between the two countries have resulted in lower tariffs, those currently in place will still have a major impact on US‑China trade.
One advantage China has is that while the US is busy fighting a trade war with almost every country in the world, it is only fighting one against the US As such, China will likely seek to reship many of its goods through other countries with lower tariffs. If this happens at scale, it will mitigate the growth and deflationary pressures China faces, although it may not be enough to prevent a growth slowdown. We expect Beijing to use a combination of monetary and fiscal stimulus to offset the drag on growth from tariffs, but any such measures will be taken sequentially and in response to data rather than being rolled out all at once.
Despite being lowered from the levels previously threatened, the US’s tariffs on China will still impact the eurozone in several ways: First, because weaker growth will reduce China’s demand for European exports; second, because Chinese manufacturers seeking to redirect their exports away from the US will provide more intense competition for European exporters in other markets; and third, because a surge of Chinese imports will contribute to goods disinflation within the eurozone itself.
Combined with the direct impact of the eurozone’s own trade tensions with the US, these secondary impacts from China will likely contribute to slowing growth in Europe in the second half of the year. Inflation should continue to decline in the near term, and while Germany’s debt brake reform will eventually provide a boost to the eurozone economy, this may take some time to materialise. Negotiated wage growth in the eurozone is expected to continue falling, giving the European Central Bank further latitude to cut rates—and we expect it to do so several times before inflation risks rise again in 2026.
Deflationary pressure in China is also likely to spill over into other emerging markets (EMs) as Chinese goods are redirected to other countries in the region, lowering prices. Weaker global growth and lower commodity prices may bring further disinflationary pressures in EMs, with commodity producers likely to remain under pressure. Given the uncertainty, most EM central banks will be cautious and wait for the data to tell them what to do next.
(Fig. 1) Fiscal reform and deregulation could partially offset tariff impact
The world’s two largest economies will be most affected by tariffs, with inevitable consequences for all other regions.
