24-05-2025
US-China Truce Fuels Optimism, Rate Cuts On The Horizon
(220704) -- BEIJING, July 4, 2022 (Xinhua) -- A staff member walks past the Shenzhen Stock Exchange in Shenzhen, south China's Guangdong Province, Sept. 21, 2020. (Xinhua/Mao Siqian)
A potential soft landing for the global economy is now the base case scenario, with a 50% probability, according to Standard Chartered's latest macro outlook, led by Rajat Bharatcharya, Senior Strategic Analyst. The easing of US-China trade tensions and expected policy responses in major economies are supporting this view, although both downside and upside risks remain on the radar.
Soft Landing Scenario (50% probability): Truce Fuels Optimism, Rate Cuts on the Horizon
The report highlights that the recent US-China tariff truce has significantly lowered the risk of a hard landing for the US economy. Though tariffs remain high and could still hamper growth while stoking inflation, the shift in focus towards trade deals, tax cuts, and deregulation is expected to lift consumer and business sentiment.
'As the job market cools, we expect the US Federal Reserve to cut rates by 75 basis points over the next 12 months, beginning in the second half of the year,' said Bharatcharya. 'Fiscal and monetary stimulus in China and Europe, particularly Germany, will also help broaden the global growth base beyond the US.'
Downside Risk (25% probability): Trade Shocks May Still Trigger Recession
Despite the optimism, the risk of a mild recession in the US remains if consumer and business confidence deteriorates, especially in the event of renewed trade friction. Bharatcharya warned that even accelerated rate cuts may not be enough to prevent a downturn if real activity data turns south.
Another downside threat: a surge in US bond yields if tax cuts are unfunded, potentially triggering a sell-off in the US dollar and hurting sentiment globally.
Upside Risk (25% probability): Deregulation and 'Grand Bargain' Could Ignite Global Growth
On the flip side, there's also a 25% chance of a 'no-landing' scenario where the US economy avoids a slowdown entirely. This would require strong private sector momentum spurred by deregulation, tax cuts, and strategic trade agreements – including a potential 'grand bargain' with China.
'This would lift domestic consumption in China, spur European investment, and lead to a more balanced global economy,' Bharatcharya noted.
Market Focus Shifts to Hard Data
While the US-China truce has helped ease global trade uncertainty, investors are now watching closely for incoming US labour and activity data to assess the underlying strength of the economy.
'The spotlight is now firmly on 'hard' data, especially job openings and unemployment rates, to gauge if policy actions have helped or further weakened the labour market,' Bharatcharya said.
Macro Policy Themes
US Tax Cuts and Tariffs:
Despite tariff rollbacks, the average US tariff remains elevated at 16.4%, the highest since 1937, according to Yale's Budget Lab. This is projected to trim US GDP by 0.7% and push inflation up by 1.7%, adding urgency to implement tax cuts and deregulation. A moderate fiscal stimulus is anticipated, constrained by bond market sensitivities.
Germany's Fiscal Push and the ECB:
Europe's growth trajectory hinges on Germany's EUR 500 billion infrastructure plan, recently approved by parliament. While Eurozone service sector activity slowed in May, the German fiscal package and improving trade relations are expected to reduce pressure on the European Central Bank (ECB) to cut rates. Standard Chartered anticipates one more 25bps rate cut in June, followed by a pause.
China Stimulus to Continue:
Despite the trade truce, China remains under deflationary strain and faces headwinds from persistent US tariffs. Beijing is expected to maintain accommodative policies, including further cuts in bank deposit rates, to meet its 5% GDP growth target.
Standard Chartered's macro outlook reflects cautious optimism amid evolving trade dynamics. 'The US-China truce removes the immediate threat of a global trade war,' said Bharatcharya. 'But policymakers must now focus on delivering structural reforms and targeted stimulus to sustain growth.'
As markets brace for upcoming economic data, central bank moves, and geopolitical developments, the path forward remains finely balanced between soft landing hopes and potential macro shocks. Related
