In our last quarterly report, we noted that US economic growth would largely depend on the scale and sequencing of the new administration’s policies. Tariffs and DOGE (Department of Government Efficiency) have dominated the first quarter, sparking concerns over slower growth. Meanwhile, across the Atlantic, Germany’s fiscal package has boosted hopes that Europe’s largest economy is emerging from the doldrums.
Trump has wasted no time, launching a fierce trade war during the early months of his mandate. US tariffs on imported goods are expected to level the playing field for the US, boost tax revenues and incentivise reshoring to protect domestic industries. However, the scope and longevity of these tariffs, coupled with retaliation from targeted countries, have created an environment of uncertainty that is likely to weigh on capex, hiring plans and consumer confidence, thereby slowing future growth. Indeed, consumer and business surveys have surprised on the downside. Growth expectations have been revised lower, while inflation forecasts have edged up. The increase in cuts in government spending, including recruitment freezes and large-scale layoffs among government workers, have also added to the problem. Even so, for the time being, there are no obvious signs of deterioration in hard data, as job numbers have remained resilient. Ultimately, we believe that the administration wants to avoid a recession and let’s not forget that tariffs are also a negotiating tool; their eventual scale will be recalibrated as compromises are reached. Furthermore, the negative impact of these policies will be offset by income tax cuts and deregulation further down the line. Tariffs and government spending cuts were implemented first because they could be enacted through executive orders, bypassing the need for congressional approval.
US fiscal frugality stands in stark contrast to the remarkable shift in fiscal policy announced in Germany. The country’s new fiscal package, which will inject hundreds of billions in extra funding into Germany’s military and infrastructure, is comparable to both the Marshall Plan and the Reunification spending combined. Designed to revitalise and rearm Europe, the impact could be significant. When combined with other European efforts to boost military spending and the potential for lower gas prices following a ceasefire between Ukraine and Russia, this could lead to a substantial economic recovery. However, the full impact on growth is likely to materialise only by 2026. Moreover, during the first quarter, US tariff hikes targeted Mexico, Canada and China, but they will hit Europe by the second quarter. While the ultimate scale of these tariffs is uncertain, they are sure to take a toll on the economy.
For now, our base case scenario is that the US economy slows but avoids a recession. The negative effects of tariffs is likely to persist until more clarity emerges, but the impact should be offset by more growth-focused policies in the future. As for Europe, Germany’s fiscal package is undoubtedly a game-changer, but its full impact will not be felt this year. To have a lasting, sustainable effect on European growth, it must be accompanied by structural reforms that reduce regulatory burdens and enhance competitiveness and innovation. So, for this year at least, we still expect the US to grow faster than Europe.
Date of report: March 31st 2025