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The last month saw a continuation of the trend of reaccelerating US growth and weak data in Europe. Following President Trump’s inauguration, he quickly imposed tariffs on Canada, Mexico and China, but postponed the tariffs on Canada and Mexico for a short time to allow for negotiations. He subsequently revealed his reciprocal tariff policy, the “Fair and Reciprocal Tariff Plan”. Given that most major US trade partners already have free trade agreements or existing retaliatory structures, the impact of this on growth and inflation should not be large. However, at the core of how big these tariffs might ultimately be is the issue of value-added-taxes – their inclusion is potentially a very large negative for global trade. Markets however are assuming this is another tactic to bring trade partners to the table in an effort to normalise trade relationships. It will take time to examine tariff codes from more than 200 countries, and while there is no deadline for the plan, the Director of the Office of Management and Budget is directed to submit a report within 180 days, suggesting a long timeline.

US
The latest payroll report saw annual benchmark revisions to labour data, population, labour force and labour force participation rates. All saw upward revisions, the net result being a slightly lower unemployment rate 4.0%. The labour market will see a reduced supply of labour due to the administration’s immigration crackdown and appears to be seeing an acceleration in hiring plans, which in turn are reflective of what appears to be a reacceleration of economic activity. Market expectations for further rate cuts from the Federal Reserve (at least one more rate cut priced for 2025, with a 50% chance of two cuts) may need to be revised further.

One potential negative that bears close attention is delinquency rates on credit card and auto loans, which have been steadily creeping higher. This concern might gain more traction as US budget negotiations move forward. The latest draft budget resolution from House Republicans includes major spending cuts, with $1.5tln specified and a $2tln goal, in order to have some offset for the $4.5tln cost of other “tax cuts”, which are predominantly the extension of the TCJA. It seems inevitable that these cuts will target Social Security and Medicaid, which would further stress already indebted consumers.

Europe
Europe’s challenges continue. From an economic perspective, although there was a small bounce in Euro area PMIs, this comes from very depressed levels and is not yet confirmed by the European Commission’s Business Climate Indicator, which remains moribund. The German economy hasn’t grown since 2019, potential growth prospects are also falling, public investment as a percentage of GDP is at the bottom of the EU ladder, both households and corporations are saving, the only domestic sector not saving being the government – but even that will turn to contraction as the debt brake is about to be re-applied unless the new government can take action.

Adding to Europe’s woes, the Trump administration appears willing to do a deal with Russia to end the war in Ukraine, without including European leaders in the negotiations. It is very clear that Europe will need to spend significantly more on its own defence in years to come, which means adding to already high deficits for most European nations. Should governments attempt to offset this higher defence spending with cuts elsewhere, the impact on growth would be quite negative as the economic multiplier for defence spending is quite low.

China
The last month saw confirmation that China’s nominal GDP growth last year was the lowest in a decade. The issue may be more systemic than cyclical – China’s population began shrinking in 2022. Declining and aging populations produce less and save more. While the recent policy announcements should draw a line under the cyclical weakness of the last few years, albeit with a murky short-term outlook due to trade concerns, it seems clear that China’s trend rate of growth is declining.