Analysts warn that the outlook remains clouded, but uncertainty reigns over just how much worse things could get. Some argue that the worst is behind us, while others suggest that the real damage is still unfolding. Following the tariff shock unleashed by US President Donald Trump in April, the global economy has so far proven more resilient than many had feared. However, as Bloomberg notes, the most interesting part may be yet to come. The true impact of trade disruptions often emerges with a lag, so the most consequential effects may still lie ahead.
With average tariffs now at 15%, the United States continues to threaten the world with the highest trade barriers seen since the 1930s. This situation keeps global markets on edge.
According to Raghuram Rajan, India's former central bank governor and ex-chief economist at the International Monetary Fund, the United States could trigger a "serious demand shock.' In response, many central banks are already considering cutting interest rates to offset the economic impact of higher import costs.
Most countries have now agreed on tariff terms with the US leader. While analysts note that the resulting rates are largely within acceptable bounds, there have been some surprises. These include a 39% tariff on Swiss goods and a hike in import duties on select Canadian products to 35%.
If the announced tariffs take effect in a few days, while auto tariff deals with the EU, Japan, and South Korea remain intact, the average US rate will rise to 15.2%, up from the current 13.3%.
Bloomberg Economics warns that such a sharp hike in tariffs could slash US GDP by 1.8% and boost core inflation by 1.1% over the next three years.
In response, Asian markets dropped by 0.7%. Meanwhile, the STOXX 600 index in Europe fell by more than 1%, and S&P 500 futures slipped by nearly 1%. However, these moves are milder than the sharp sell-offs seen in April.
Uncertainty around tariffs remains high. The Trump administration is reportedly weighing separate tariffs on pharmaceuticals, semiconductors, critical minerals, and other industrial goods in the near future.
The tariff turmoil has significantly complicated the Federal Reserve's policy path. After keeping interest rates steady at 4.25%-4.50%, Fed Chair Jerome Powell stated that if inflation proves to be more persistent due to cost pass-through to consumers, the central bank would respond accordingly.
Many analysts caution that the full impact of Trump’s tariff blitz may take time to materialize. According to Bloomberg, it is more likely to unfold gradually than to trigger an immediate downturn. The White House intends to generate revenue from the new tariffs, reduce the trade deficit, and encourage manufacturers to bring their operations back to the US. In this climate, both businesses and consumers should brace for higher costs.
