The ‘Liberation Day’ tariff plan President Trump rolled out on April 2nd was far more aggressive than we and markets expected. Inflation will rise and growth will be dented more than we originally anticipated, with a mild U.S. recession risk now on the table in coming quarters. See below for details, but for 2025, we lower U.S. GDP to 0.5% growth from 2.1% while Europe falls to 0.6% from 1.0%. Meanwhile, in China, we forecast 4.3% from 4.4% previously.
A key area on which to focus now includes shifting stimulus drivers around the world. For example, the U.S. is in a unique position in that it has both a fiscal headwind from DOGE (around 60 basis points in 2025) and the negative impact from tariffs (approximately 250 basis points in 2025). By comparison, both Europe, Germany in particular, and China are accelerating fiscal tailwinds, helping offset drags from tariffs (Exhibit 5) . So, the asynchronous global recovery is shifting from the Americas to Europe and Asia, an important change, we believe.
Looking at the bigger picture, Liberation Day accelerates our Regime Change thesis, which has been driven by heightened geopolitics, bigger fiscal deficits (now growing more in Germany and China), a messy energy transition, and stickier inflation. This is a new era where, as General David Petraeus has been saying, we have shifted from benign globalization to one of great power competition.
For markets, diversification, non-correlation, operational levers, and upfront yield will matter more. Credit is likely to bend not fully break, we believe, while Public Equities will likely be de-rated until there is more visibility on policy and growth. We see a weaker dollar, but do not see wildly higher bond yields. Our key themes, including Intra-Asia Trade, Security of Everything, Productivity, and Collateral-Based Cash flows, will all gain momentum in this new world order.
Acknowledgements
Miguel Montoya, Ezra Max, Brian Leung, Richard Bullock,
Bola Okunade, Asim Ali, Allen Liu, Rebecca Ramsey
