Global economy withstands Trump's tariff storm for now

New Straits Times

2 days ago

For all the drama surrounding US President Donald Trump's trade tariffs, the world economy is holding up better than many had expected.
The latest data from the United States, China and, to a lesser extent, Europe are showing resilience and the global economy as a whole is still expected to grow modestly this year.
This is in part due to US buyers and foreign sellers bringing forward business, while many of the import duties unveiled by Trump remain suspended.
While that effect may prove short-lived, Trump's decision to pause tariffs and some glimpses of progress in trade talks, particularly between the United States and the European Union, have fuelled cautious optimism.
"We are seeing a bit of a sugar rush in industry, with manufacturers bringing forward production and trade," said Holger Schmieding, an economist at investment bank Berenberg.
"The other thing is that we have evidence that Trump pedalled back on tariffs. The bet in markets and, to some extent, in the economy is that he barks but doesn't bite."
Investment banks and institutions generally expect the US to avoid a recession this year and the global economy to keep growing.
The International Monetary Fund downgraded its global GDP growth forecast by just 0.5 percentage points last month to 2.8 per cent.
This is roughly in line with the trend over the past decade and a far cry from the downturns experienced during the Covid-19 pandemic, the 2008 financial crisis or even the turmoil that followed the Sept 11 terror attacks in 2001.
No one is venturing a prediction on where the trade negotiations will eventually settle, particularly with a US president who sees himself as unstoppable.
Last week alone, separate US courts first blocked and then reinstated Trump's tariffs — creating a degree of legal uncertainty that will do little to facilitate trade deals between the US and those threatened with the levies.
While the EU celebrated "new impetus" in its trade talks with the US, negotiations with China were "a bit stalled" according to US Treasury Secretary Scott Bessent.
Companies are counting the cost of the ongoing impasse.
A Reuters analysis of corporate disclosures shows Trump's trade war had cost companies more than US$34 billion in lost sales and higher costs, a toll that is expected to rise as ongoing uncertainty over tariffs paralyses decision-making at some of the world's largest companies.
Carmakers from Japan's Toyota to Germany's Porsche and Mercedes-Benz are bracing for lower, or lower-than-previously-expected profits if they have not given up making predictions altogether, like Volvo Cars and Dutch-based Stellantis.
This is likely to result in a hit, especially for Japan. The US is Japan's biggest export destination, accounting for 21 trillion yen worth of goods, with automobiles representing roughly 28 per cent of the total.
"While the worst shocks may be over, there's still a lot up in the air," Xingchen Yu, a strategist at UBS's Chief Investment Office, said. "We don't really know what a new normal for tariffs would look like, unfortunately."
But so far the global economy has held up pretty well.
China's output and exports are resilient as its companies re-route trade to the US via third countries.
Even in Europe, manufacturing activity was at a 33-month high in May, rebounding from a slump induced by more expensive fuel following Russia's invasion of Ukraine.
Confidence was also buttressed by the prospect of greater fiscal spending in Germany, a missing ingredient for European growth for the past couple of decades.
The robustness of the world economy has surprised even professional forecasters.
A measure produced by US bank Citi that tracks the degree to which global economic data has surprised to the upside is now at its highest in more than a year.
Economists though still fear a triple whammy in which the front-loaded boost to the goods sector is unwound, while US household purchasing power is squeezed by higher prices and companies put off investment and hiring.
At the margin, however, this scenario is starting to appear a little less likely after Trump's pause on tariffs.
"The balance has slightly shifted towards more optimism, albeit with uncertainty and volatility," ING's global head of macro Carsten Brzeski said.