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The honeymoon period following the election of President Donald Trump waned as investors began to digest the economic impacts of global trade wars and rising tariffs. US stocks, especially the NASDAQ, underperformed with declines of 11%. In contrast, European stocks outperformed. The German market rallied 11%. This reflected the flight of capital from US markets where the possibility of recession had increased. Investors also accessed China through a surge in Hong Kong shares which were up 15%. The Australian dollar rose against the US dollar and most of its Asian peers. As a country dependent on global trade, its currency fell against other developed nations. Commodities were mixed. Gold continued to rally (up 19%) over sovereign debt concerns and copper finished up 26%. Meanwhile, thermal coal fell 17%. US 10-year treasuries rallied in response to heightened recessionary risks. This also reflected some improvement in the country’s fiscal outlook.

 

In February, Trump began announcing the application of global tariffs on trading partners. It is still too early to see the real effects of these measures on the US economy. What has been evident are sizeable increases in respective US trade deficits, reflecting a flood of imports into the country to avoid the start of the tariff implementation date. Further, sentiment indices are showing a hesitant consumer with March numbers well down on December. A consensus appears to be forming that growth will be lower and inflation higher as the economy adjusts to this new reality. Federal Reserve Board (FED) President Harker identified concern over the economic outlook with businesses and consumers more cautious amidst building inflationary pressures.

 

The Chinese economy remains problematic. Authorities are resolute in their aim for 5% GDP growth. Industrial profits were down 3.3% in 2024, reflecting lackluster economic growth. Manufacturing growth is weak even in the presence of support measures. Tariffs for entry into the US will place further pressure on this sector. In response, announcements have been made to lift household income and consumption growth. This includes support for equity and property markets, childcare subsidies, the promotion of new services and income support for low-income earners.

 

The December quarter generated a 2.8% annualised growth rate for the Japanese economy, building on 1.2% from the September quarter. Business spending and exports, including tourism, were contributors. Wage growth lifted 4.8% in December, the highest since 1997 and the RENGO negotiations saw a 5.5% increase which augers well for confidence and spending. Inflation continues to rise, reaching a 2-year high. The Bank of Japan (BOJ) raised rates 0.25% to 0.5% in January and further rate hikes are likely.

 

The UK central bank cut rates 0.25%. With disinflation in Europe underway, the European Central Bank (ECB) cut twice by 0.25%, in January and March. Disappointingly for the UK, the Bank of England (BOE) adjusted its growth forecasts for 2025 to 0.75%, half its previous level. Furthermore, the BOE extended by six months the time necessary to move inflation to target. UK unemployment has moved up to 4.4%. Notwithstanding pending trade frictions, the European economy has a more optimistic outlook in the short term with potential rate cuts and fiscal support. Over the period, France appointed a new prime minister, Francois Bayrou and Friedrich Merz looks set to form a new government in Germany.

 

In a close decision, the Reserve Bank of Australia (RBA) made its first 0.25% cut to the benchmark rate after a recent high of 4.35%. Consumption was beginning to show signs of a gentle rebound so this will help that momentum. The RBA remains hawkish in terms of further cuts. Wage growth has been moderating though the labour market remains tight. As a trade exposed open economy, tariff led-global inflation has the potential to contribute to higher inflation. The nascent recovery in consumption is made more precarious as consumer sentiment readings show Australians are expecting further rate cuts in the face of cost-of-living pressures.