“It’s tough to make predictions, especially about the future”. This often-quoted remark, frequently attributed to the baseball legend Yogi Berra, aptly captures the challenge of forecasting, especially in the realms of finance and economics. That challenge is even greater this year.
President Trump’s erratic trade policy has caused an extremely high level of uncertainty. On 2 April, he announced reciprocal tariffs on more than 180 countries and territories. In response, economists sharply reduced their 2025 growth forecasts, only to revise them upwards just a few weeks later when Trump postponed those levies.
The final verdict on tariffs remains unclear, but no matter the outcome, this period of confusion will certainly take a toll. Business investment is being delayed and consumer confidence has been impacted. This has been evident in the sentiment-based economic indicators that reflect opinions and expectations. For instance, consumer confidence has dropped to levels not seen since 2020, when the COVID-19 pandemic brought the economy to a standstill. Similarly, the ISM manufacturing index has fallen well below 50, signalling contraction.
Interestingly, the weakness observed in soft data is not yet apparent in hard data, leaving economists slightly perplexed. Recent data has shown that the labour market is not deteriorating and that inflationary pressures are much more muted than feared. These are the two macro indicators that the Federal Reserve is monitoring closely to gauge the economic impact of the trade war. So, why is there such a divergence between soft data and hard data? One explanation is the reduction in immigration—a consequence of another of Trump’s exploits—which has shrunk the labour force, easing upward pressure on the unemployment rate despite slower hiring. Another factor is time, as tariffs take a while to filter through the economy. Both companies and consumers front-loaded orders in anticipation of higher prices and supply chain disruptions caused by tariffs. Additionally, low energy prices have helped keep inflation in check. Nonetheless, this earlier front-loading is likely to be followed by a payback period as stockpiles shrink and the tariffs kick in. Indeed, the tariffs still in place are far higher than what most were expecting at the start of the year.
Unpredictability is widely considered an enemy of a healthy economy, and the global outlook is becoming increasingly challenging as other risks emerge. The conflict in the Middle East threatens to push energy prices higher. Trump’s so-called “Big Beautiful Bill”, currently being debated in the Senate, is expected to deliver only a modest boost to growth, while increasing the fiscal deficit. This, in turn, would lead to higher interest rates, raising borrowing costs for both the government and private sector. Of course, a more optimistic scenario is easy to imagine: the Trump administration swiftly strikes mutually satisfactory trade deals with all partners, the Fed succeeds in curbing inflation while sustaining growth, the wars in the Middle East and Ukraine are resolved and AI investment picks up and improves productivity, boosting growth. A classic “all’s well that ends well” outcome—but perhaps that’s a bit too much wishful thinking! In our view, the risks are to the downside and at best, we expect a significant economic slowdown during the second half of the year.
Date of report: June 23rd 2025