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The Macro Brief – Tariffs take their toll
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Janet Henry, Global Chief Economist, and Simon Wells, Chief European Economist, assess how US tariffs and heightened uncertainty could affect growth, inflation, and monetary policy.
Disclaimer: https://www.research.hsbc.com/R/101/KhW7wdP
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Transcript
Introduction to HSBC Global Viewpoint
00:00:02
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening. And now onto today's show.
00:00:23
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This podcast was recorded for publication on the 17th of April 2025 by HSBC Global Research. All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Macrobrief Podcast Introduction
00:00:34
Speaker
And remember to like and subscribe to The Macro Brief wherever you get your podcasts.
Impact of Tariff Changes on Global Economies
00:00:45
Speaker
Hello, I'm Piers Butler and welcome to The Macrobrief, where we assess the issues driving financial markets around the world. Recent tariff developments have rocked investors, policy makers and businesses.
00:00:56
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Even with the latest rollbacks, the magnitude of US tariffs is significant for many trading partners, and the global economy is undoubtedly set to suffer. And that's what we're talking about today. What could the impact be on growth and inflation?
00:01:09
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How could policymakers respond? To answer these questions, I'm joined in the studio by Janet Henry, Global Chief Economist, and Simon Wells, Chief European Economist. Janet and Simon, welcome. Thank you, Piers.
00:01:20
Speaker
The last time I was interviewing you both was at our Global Investment Summit in Hong Kong three weeks ago. In the intervening period, I actually was away on leave in Japan. And whilst I was marveling at the 300 km per hour speed of the Shinkansen,
00:01:36
Speaker
Japan's high-speed railway, it's fair to say that the speed of the global economy has been slowing on the back of tariff turmoil. So Janet, if I can start with you, to take from one of your colleagues' puns, is the global economy terrified?
00:01:49
Speaker
Yes, I think it is, it's fair to say. ah it's It's been the the speed of policy changes, that's been extraordinary. ah We don't have much in the way of hard data yet to know what the damage is, but but anything that's being reported at the moment, which is for February and March, ah everyone is looking at it thinking we are looking through the rear view mirror.
00:02:11
Speaker
So yes, um the the tariffs, um the reciprocal tariffs on Liberation Day didn't even last the day. before there was the latest um U-turn. um But it's fair to say that tariffs are a lot higher than we envisaged, even when you last interviewed us in Hong Kong in late March.
00:02:28
Speaker
And so on the back of all this, and perhaps in the sort of relative calm of the sort of 90-day pause, you've had a chance to relook your global economics forecasts and you've changed them.
00:02:39
Speaker
it's It's relatively unusual for your team for you and your team to revise GDP forecasts between your quarterly updates. but you felt compelled to do so at this time. what drove that revision and what are your new forecasts?
00:02:52
Speaker
ah Yes, you're right. It is very unusual. And obviously, you know, key moments I can remember when we were forced to do the same because we're not the kind of house that revises with every data point that comes through. Unlike some. So, you know, global financial crisis was one um with subprime. um Covid was obviously another um when we had to make some big downward revisions um in in the second quarter.
00:03:16
Speaker
um Well, I guess March, April 2020. and And yes, the big changes this time were spurred by one, the tariffs are larger, particularly on China. And we know that we're going to get some new sector tariffs on pharmaceuticals and semiconductors before too long.
Trade Deals and Economic Forecasts
00:03:33
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And the associated um financial turmoil. Yes, we're in the relative calm ah now because we've got a 90 day pause. ah But the cost of capital, debt and equity capital um will be higher. And you've also got that decision making paralysis.
00:03:49
Speaker
Yes, things have calmed a bit since the 2nd of April, but decisions aren't suddenly going to be taken in mid-April that weren't taken you know on the 2nd of April because you're just not sure what's actually going to happen or indeed what the consequence um of the um negotiations trade negotiations with every single trading partner is going to deliver. So ah we've lowered our global growth forecast ah for this year. We'd already lowered it in March because of the tariffs.
00:04:14
Speaker
We now have more tariffs and more financial turmoil. We've lowered global growth from 2.5 to 2.3. And for next year, um we've lowered it ah by by a little bit more, um in fact. And the big downward revisions are unsurprisingly to the US because um the uncertainty is going to weigh on investment spending.
00:04:33
Speaker
And um that will feed through also into weaker hiring and to weaker consumer spending on the back of these higher prices. And um the other big revision is to to China and the rest of Asia.
00:04:43
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the The tariffs on the rest of Asia are are big. So we actually estimate that um even if there's a negotiation, we assume about a 50 percent tariff on China, that that alone would knock about a one and a half percent of Chinese GDP GDP.
00:04:57
Speaker
And while we now expect even more policy stimulus out of China, it still resulted in half a point downward revision um to Chinese growth.
Winners and Losers of US-China Trade Disruptions
00:05:05
Speaker
Now, there is a lot of talk of trade deals between the US and individual countries, but how realistic is that?
00:05:12
Speaker
I mean, don't trade agreements take years to negotiate and put in place? Or put another way, is this 90-day pause long enough to see specific trade deals come about and perhaps resolve some of this uncertainty?
00:05:25
Speaker
These will be no ordinary trade deals, I think it's fair to say, Piers. You know, perhaps we're both of a generation. We remember the the Uruguay round and and and things like that when when things went through the WTO and before that, um the GATT. This is a president.
00:05:43
Speaker
the actually wants to undertake trade negotiations with other world leaders directly. um So it's really hard to to say um for sure. So, you know, for instance, even on the ah the latest probe into semiconductors and pharmaceuticals, there'll be a consultation period and then they will decide um what to do.
00:06:02
Speaker
ah but But yes, um there there there might be negotiations quite swiftly, but I think a lot of leaders of various countries around the world are waiting to be told um what the President of the United States um would like to receive from them.
00:06:16
Speaker
Although, to be fair, they might be told, but they may not necessarily agree. They may not. um They may not. um And I think the difficulty lies in the ah the fact that tariffs in the US administration, the eyes the US s administration, are now viewing them as a multipurpose tool. We knew there were specifics early on regarding fentanyl and immigration.
00:06:38
Speaker
and We also know that he still sees them ah as a revenue raising opportunity, which is why it seems like 10% is the lowest level. You know, what they're negotiating for is to keep them at this new ah lower level of reciprocal tariffs of about 10% because then there would be some some kind of revenue, even though ultimately it's taxing US consumers and US companies um to finance the tax cuts that he wants to give to US consumers and US companies.
00:07:04
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um And then the third part is, you know potentially and seemingly influencing other trading partners to take a tougher line on trade with with China. um That seems to be a part of the negotiation as well.
00:07:18
Speaker
Sort of going down in a little bit more detail, any winners and losers beginning to emerge from all this uncertainty, both at the country and sector level? In particular, who could see gains from the breakdown in US-China trade?
00:07:30
Speaker
Well, everyone will be hurt by the breakdown in world trade. Global growth will be weaker, world trade will be weaker because the US has been the single biggest driver um of world trade growth. But you're absolutely right, there ah will be relative winners and relative losers.
00:07:44
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and If we look, for instance, as we did in our in our recent note, it is the case that ah the US imports a lot more from China than China does from the United States.
00:07:56
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So for some of the products that China exports to the US, there is virtually no other substitute for them, especially if you're talking about something like toys or Christmas decorations. anything we between about 70% and 95% of some of those items actually come from China there is no alternative but also the margins are pretty healthy and i so I suspect they will not fall off a cliff because there will be no other substitute you will see a bit of margin squeeze and price increases ah how they'll be passed through. But um there'll be other products where some other Asian countries might be able to gain a larger share. We identified India, Vietnam would be amongst them, Thailand potentially, and more locally to the US, Mexico.
00:08:38
Speaker
But actually, on the other side, China's mix of products that it imports from the US, one, they're smaller, it's in number, um but also easier to substitute. and Soybeans get more from Brazil and can get more from Argentina if they need to.
00:08:53
Speaker
ah But Brazil are much bigger um source that than the U.S. Aircraft, um Airbus is a substitute for Boeing. So it's easier to substitute what China imports from the U.S.
ECB and European Fiscal Policy Adjustments
00:09:04
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than vice versa.
00:09:05
Speaker
A lot of unintended consequences, I guess. Just ah in your report, you also mentioned financial sector turmoil, although U.S. Treasury yields have come back from their recent peak. Can monetary policy play a role?
00:09:17
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In other words, can the Federal Reserve lower rates to, so to speak, poor oil over troubled waters, or does the prospect of high tariffs give sort of give rise to an inflation constraint which limits their room for maneuver? um Well, it is more the latter.
00:09:33
Speaker
And actually, at the moment when there is so much uncertainty, the Federal Reserve, they know that growth will be weaker as a consequence of this. But the main reason that growth will be weaker, apart from the uncertainty, is, of course, that prices will potentially be higher. Inflation is bad for consumers. Its cost increases are bad.
00:09:51
Speaker
um for customers. And the main part of the the the Federal Reserve's armoury um is its credibility and its integrity. So they need to keep inflation expectations anchored when, like the rest of us, they can't have a firm view on exactly what is going to happen.
00:10:08
Speaker
to the growth inflation trade-off within the US. So yes, we still expect some rate cuts, ah but not as much as is priced into the markets. And for the moment, the Fed is on the sidelines and they will have to wait until they become confident that the economy is slowing and the unemployment is rising before they can look through what are currently a concern about rising prices and rising inflation expectations.
00:10:31
Speaker
Simon, let's turn to you and and Europe. ah The ECB has just made its sixth consecutive cut, another 25 basis points. Was the recent strength of the euro factor in this decision making? suppose more broadly, would we have expected at the start of all this to see how things have turned out in Europe, but possibly much better than people would have would have feared?
00:10:53
Speaker
Well, undoubtedly, the currency was a factor in in the decision. You've seen ah ah since the tariff day announcement, you've seen a ah large appreciation of the euro, not just against the dollar, but in in trade weighted terms. And of course, that has um disinflationary implications.
00:11:11
Speaker
But it's not just that. yeah Big falls in the oil price, big falls in the gas price. Both of those served to lower near-term inflation as well. On top of that, of course, there is ah concern, if you want to put it that way, ah that lots of Asian and Chinese goods that might have been going um to the United States will now come to try and find a market at discounted prices in Europe. Now that might be quite good for some consumers of course, but it further ah lowers the inflation projection. So I think in that sense, yes, it's no surprise that the ECB cut.
00:11:51
Speaker
And and has have we sort of ended up in in a better position? Well, there are some positives. As I say, the energy price shot does give European consumers maybe a bit more money to spend. There is the possibility that European firms may find bigger markets in the United States, notwithstanding the European tariffs because Chinese tariffs are so high.
00:12:11
Speaker
But we have to put this all in Janet's global context. This is a major negative demand shock for Europe. It is a major upheaval to global supply chains.
00:12:22
Speaker
ah Yes, there are some silver linings if you want to look for them, um but you're not going to get me to say, oh, this is a great thing for Europe because it is not. Just to finish on the ECB cut, how close are we to the end of the ECB easing cycle? I mean, at the current levels, it's hard to argue that policy is still restrictive.
00:12:39
Speaker
It is hard to argue that it's restrictive. So back in January, the ECB gave a range of 175 to 225 for the neutral rate, and now we're there. So it was no surprise, at least to me, that it removed the reference of policy being restrictive from from its policy statement.
00:12:54
Speaker
But in terms of are we nearly there? I think given the news on tariffs, that volatility in markets, the asset price moves that Janet has talked about, the lower inflation projection, I think we've probably got at least one more cut in there. So we think they'll cut again in June.
00:13:10
Speaker
That might be it, though. The tone of today's meeting, despite the market reaction, was actually fairly balanced with Lagarde talking about two-sided risks playing up some of these upside risks to growth, of course, particularly potentially from the fiscal side in Europe.
00:13:25
Speaker
So I think, yeah, definitely they're sending a message that rates aren't going a long way down from here. So, yeah, I think we are pretty close to the end of the cycle. Now, you mentioned the fiscal side, and we have seen some significant developments in Europe and ah notably in Germany, but also at the European level to increase spending on defence and infrastructure.
00:13:44
Speaker
But you've highlighted in your report that we should be careful about that because it can take a very long time for that type of spending to be implemented, mainly months if not years to deploy.
00:13:55
Speaker
So is that likely to be a disappointment at some point on the lack of impact that we're going to see in the short term? ah Yes, certainly. I think we need to be looking in in years on this. I mean, it depends.
00:14:05
Speaker
For one thing, this is a, well, this was a seismic move for Europe in terms of fiscal policy. we've got to remember that before the tariff day stuff happened, we were talking about Europe's moment. and But we do have to be realistic. First of all, in terms of the additional headroom given to countries for defence spending, yeah you can change the rules, you can let them borrow more. That doesn't mean they're going to choose to borrow more.
00:14:28
Speaker
They're still constrained by a fiscal trajectory that's challenging. They're still constrained by the market. So even though you've got the potential to borrow, you might not use it. And that's that's one thing that may limit the amount of defence spending that that we see.
00:14:41
Speaker
The other thing is you if you if you ramp it up too quickly, you just suck in a load of imports and that doesn't really raise your growth as well. so There's that. And then on the infrastructure side, and you asked about Germany, yeah, the numbers were big, 500 billion.
00:14:54
Speaker
But you know there are planning constraints, regulatory constraints, political hurdles, NIMBYs, all these things, capacity in the construction industry, all these things will will prevent this money hitting the ground particularly quickly.
00:15:08
Speaker
ah But I think there is an intent um to get stuff done, particularly from the European
Investor Concerns Amid Economic Uncertainties
00:15:12
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Commission. So yeah, over time, um we will see a lift to European growth from fiscal expansion.
00:15:19
Speaker
And that was, of course, one of the things the ECB was considering today. Janet, just to finish, I was going to ask earlier, but obviously, and Simon, do chip in, but you talk to a lot of clients, both institutional and corporates.
00:15:30
Speaker
What are they saying at the moment? are Are you sensing from them that they are beginning to sort of really suffer from all this uncertainty? Yes, it's making their lives potentially even harder than ours because they have to invest money.
00:15:42
Speaker
um So I think it's hard to meet ah many investors that got really high conviction views. Inevitably, anyone that invests money and indeed us is making forecasts, you have to have a central case. But as as people like to say, the tails are fatter than is normally the case with a more normal distribution.
00:16:02
Speaker
This is not a world of normal distributions. Simon, any final thoughts? I mean, I agree completely with all of that. But, you know, most of the time when I speak to firms and corporates, they just look at me and say, why would I invest in this?
00:16:16
Speaker
Yeah, no. I think it's stating the obvious that we'll have you back on the podcast.
Conclusion and Listener Engagement
00:16:20
Speaker
But I do hope that for our listeners and for you, you have a restful Easter break. So many thanks for joining us today.
00:16:27
Speaker
Thank you very much, Piers.
00:16:32
Speaker
Hello from Hong Kong. I'm Fred Newman. I'm Harold van der Linde. And I'm the historian William de Rimpel. Delighted to be joining your hosts for a special edition of Under the Banyan Tree.
00:16:43
Speaker
That's right. We're putting Asian markets and economics in context this week with a healthy dose of history, courtesy of our very special guest. Join us for a one-off exploration of Asia's economies in days long gone by.
00:16:56
Speaker
and what can they tell us about the landscape of today? That's Under the Banyan Tree from HSBC Global Research. Listen, like and subscribe wherever you get your podcasts.
00:17:12
Speaker
Before we go, remember that HSBC clients can keep up to date on our latest research by downloading our app from Apple's App Store or Google Play. We'd love to hear from you if you have any questions or comments about anything we've talked about today.
00:17:25
Speaker
Just email askresearch at hsbc.com. And if you've enjoyed today's podcast, then please like and subscribe and share it with friends and colleagues.
00:17:38
Speaker
So that's all from us this week. From all of us here, thanks for listening. We'll be back next week with another edition of the Macrobrief.
00:18:06
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.