A New Dawn?

A new dawn is an idiom that signifies a fresh start, an optimistic turning point with potential for renewed progress. After two months of chaos and turmoil triggered by the U.S. administration’s hard line on international commerce, signs from recent trade negotiations suggest that the days ahead may bring more progress.

Sharp (though temporary) reductions in levies on China and the agreement reached with the U.K. have reflected America’s willingness to strike trade pacts. The change of direction is welcome, but the new tariff regime will not resemble the old normal. The U.S. has been unwilling to cede ground on universal tariffs, and more threats are looming.

These developments lower the odds of major economies falling into recession, but economic activity will still be weaker than we expected coming into the year. The drag on growth from persistent uncertainty coupled with continued disinflation will allow most central banks to move toward a neutral policy stance.

Following are our thoughts on how top markets are faring.

United States

Trade policy had a noteworthy effect on the first quarter estimate of gross domestic product (GDP). The 0.3% annualized decline in GDP was the result of an outsized gain in imports, a sign that businesses tried to accumulate inventories before tariffs rose. Following downsizing efforts, government spending was also a drag. However, consumer spending and business investment continued their gains. We expect consumption and investment to carry momentum into the second quarter, then soften in the second half of the year. Our forecast, which does not include a recession, builds from a premise that trade tensions do not escalate.
We expect the Fed to remain on hold until September. Cutting sooner would require deterioration that is not yet evident. There are no major strains in the labor market. Firm inflation and the risk of those readings turning higher also supports the case for caution.

Canada

The Canadian economy is starting to buckle under the pressure from trade war and elevated uncertainty. Cracks that appeared in March in the labor market widened further last month. The unemployment rate rose 0.2 percentage points to 6.9%. Private sector employment fell, led by job losses in sectors most exposed to U.S. tariffs. Prime Minister Mark Carney is seeking to boost spending by C$77 billion over the next four years to build a more resilient economy. While this will help provide a floor, it may not be enough to avoid a shallow and short-lived contraction in GDP.
Uncertainty from the trade war prompted the Bank of Canada (BoC) to hold rates steady at its April meeting. A slackening labor market and deteriorating growth prospects will force the Canadian central bank to restart its easing cycle. We see two more cuts by the BoC to 2.25%. The change of direction by Washington on trade, coupled higher fiscal spending, should avoid the need to push rates down further.

Eurozone

The eurozone economy grew at a 1.2% annualized pace in the first quarter of 2025. Growth was boosted by a large abnormal increase in Irish GDP along with the front-loading of export orders from America. Positive real incomes will underpin domestic demand, but exports and investments will be held back by uncertainty over the future of U.S.-Europe commercial ties. Importantly, the German economy returned to growth following a contraction at the end of last year. Germany's industrial production rebounded strongly in March, breaking the two-year streak of consecutive quarterly declines. A very narrow majority in the Bundestag and significant issues between the German coalition partners has raised the political risks around the implementation of the coalition's ambitious stimulus agenda.
Europe’s labor markets continue to hold up. Employment rose by 0.3% quarter-on-quarter in the three months to March 2025. Headline inflation is hovering close to the central bank’s target at 2.2% year over year in April. Core inflation bounced back three-tenths to 2.7%, partly due to the late Easter holiday this year. Growth concerns together with fading inflationary pressures will allow the European Central Bank (ECB) to maintain its focus on making monetary conditions more accommodative. Two more cuts at the next two meetings will end the ECB’s rate cut cycle. U.S.-EU trade negotiations are still in the early stages; failure to find an accord could drive the ECB to ease further to combat the significant risk of a downturn.

United Kingdom

The U.K. is actively pursuing and finalizing new trade agreements. Britain became the first nation to strike the beginnings of a trade deal with the United States this year. It also finalized an agreement with India, following three years of negotiations. Though positive, they are unlikely to be game changers for the British economy. The deal with the U.S. is narrow in scope, and lower tariffs on trade with India will deliver only a modest boost. Further fiscal tightening, elevated borrowing costs and global headwinds will remain drags on growth.
The Bank of England (BoE) has settled into a quarterly tempo in reducing interest rates. In line with expectations, the central bank lowered its policy rate by 25 basis points to 4.25% at this month’s meeting. Recent voting patterns suggest that Monetary Policy Committee remains a divided house, as sticky wages and underlying inflation are complicating the picture. While wage growth is heading in the right direction, it remains well above the gains considered consistent with inflation stabilizing at the 2% target. However, April’s increase in the national living wage could blur the near-term picture. The BoE is likely to stick with its gradual quarterly pace of rate cuts in the remainder of the year.

Japan

Only a few days ago, Japan was near the front of the queue for trade negotiations with the United States. But it seems to have fallen behind in the pecking order because of America’s refusal to walk back auto tariffs. Real GDP growth contracted 0.7% annualized in the first quarter of 2025, highlighting the fragility of the Japanese economy, even before the U.S. tariff shock. Consumption remained in positive territory while net exports proved to be a drag. Failure to secure a trade deal that includes a reprieve from U.S. auto tariffs will put a significant dent on the export-heavy economy, though this is not our base case.
As expected, the Bank of Japan (BoJ) kept its policy rate unchanged at 0.5% this month. Though the central bank maintained its hiking bias, uncertainty from America’s trade policies has pushed monetary policy normalization further into the future. The BoJ revised down growth expectations and pushed back the timing for underlying inflation to reach its 2% target to 2027. A stronger yen as well as the expectation of a weaker domestic wage-price cycle means the central bank will pause for at least the next two quarters. That said, continued upside surprises in inflation and easing trade tensions could accelerate the timeline.

China

In a significant de-escalation in trade tensions, the U.S. and China have agreed to a 90-day tariff rollback which will reduce levies on Chinese imports into the U.S. from 145% to 30%. China will decrease tariffs on the U.S. by the same magnitude, to 10%. Given the challenging discussions in areas like technology and rare earths, along with President Trump’s focus on bringing supply chains home, the current level of tariffs will be the new minimum. Lower levies will limit the hit to Chinese growth, but there are plenty of domestic economic issues that will remain challenging. These include weak consumption, deflationary pressures and the lingering property market turmoil.
In a bid to support the economy, the People’s Bank of China lowered its main policy rate and reserve requirement ratios by 10 basis points and 50 basis points, respectively. The announcement included measures aimed at supporting market sentiment and key sectors. With a better-than-expected outcome from trade negotiations with the United States, the urgency to commit to more sweeping stimulus has fallen. That said, domestic growth constraints will continue to drive the PBoC and the government to stick to their incremental style of easing.

Australia

Changes to U.S. trade policy pose a risk to an otherwise domestically resilient Australian economy. The main channel of transmission will be through a broader global economic slowdown. A tight labor market and an expansionary fiscal policy will help counter external trade shocks and underpin domestic demand. With Australia facing only the 10% universal tariffs, slowdown in demand from China presents the biggest downside risk to growth of this commodity-dependent economy.
Lower energy prices together with a larger influx of goods from trade war-affected nations will pave the way for further temperance in inflation. Core inflation is now within the Reserve Bank of Australia’s (RBA) 2%-3% target band. While higher wage growth will keep services inflation sticky, we do not think it will be a hurdle in the path of central bank lowering policy rates. We expect the RBA to cut rates at its next two meetings, which would mark the end of its rate-cutting cycle.

Information is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Under no circumstances should you rely upon this information as a substitute for obtaining specific legal or tax advice from your own professional legal or tax advisors. Information is subject to change based on market or other conditions and is not intended to influence your investment decisions.

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