Back
Table of contents
During the second quarter of 2025, one of the eight key themes I highlighted at the start of the year is taking centre stage—US President Donald Trump’s tariff-driven economic policies. In this edition of Peregrination, I explore how this is shaping the global economy.
Trump’s tariffs: A global shockwave
Trump’s tariffs had a significant impact on the markets and global geopolitics in the first quarter of 2025. In past issues of Peregrination, I have talked about the narrowing growth gap between the US economy and its developed market peers. The US has done exceptionally well over the last few years, slowing down in a very orderly fashion, from about 3% annual gross domestic product (GDP) growth to around capacity growth of 2%. Concurrently, we have seen the United Kingdom (UK), European Union (EU), and Japan emerge from their growth slumps of almost zero per cent growth.
When Trump came into office, there were three main agendas to his mandate: tariffs, immigration and US fiscal spending. Most of these policies are potentially growth-negative, meaning they will negatively impact US growth prospects and increase inflation. However, as Trump starts to implement his policies, especially his blanket implementation of tariffs on key trading partners, we are seeing any existing global economy tailwinds swiftly turning into headwinds.
High-frequency data, like the Purchasing Managers’ Index (PMI), is showing that economies are already responding to Trump’s tariffs. When the PMI dips below 50, it indicates that an economy is contracting, whereas when it is above 50, an economy is expanding. For example, Europe and the UK have both been well below 50 but were recently starting to reach the 50-level mark – however, since Trump’s tariff announcement, this number is hanging in the balance. In contrast, over the course of 2024, the US PMI has been running close to 55. Now, it is starting to move down towards 52 and will likely hit 50 fairly soon. The fact that Trump’s tariffs are already impacting the numbers suggests that a significant global slowdown is not far off and will likely hit the US harder than other economies.
Announced on what Trump called Liberation Day in the White House Rose Garden, the markets were spooked by the US’s implementation of blanket global tariffs. This is because they will not simply result in the normal slowdown of the economy but increase the likelihood of a US recession. At the beginning of the year, indicators suggested that the risk of a global recession was a little higher than 20%. Those indicators have now increased the probability to approaching 60% and as we all know, if the US goes into a slowdown, the rest of the world will quickly follow.
To weather the storms, global economies will have to act sooner rather than later, and “box clever” to ensure they keep their head above water. Countries like Germany have already seen the writing on the wall. As such, in the first quarter Germany’s Chancellor Frederick Merz announced a plan to significantly increase the country’s fiscal spending to the value of €500 billion to boost Germany’s ailing economy and weather the storms being caused by Trump’s tariffs. This is the biggest fiscal spend in Europe, a move we expect will provide a significant growth opportunity for Germany and the EU going forward.
What is trump trying to achieve?
Given the severity of Trump’s tariffs, many are asking what he is trying to achieve. Trump believes that US trade with the world is inequitable. The US economy, being 90% service-based, imports most of the goods it needs from trading partners that can supply what they want at the best possible price. With only 10% of the US economy being produced by home-grown manufacturing, the US still needs to import consumer goods, manufactured products, as well as food and raw commodities, including clothing, electronics, motor vehicles, and pharmaceuticals. This has created a massive trade deficit for the US. Trump wants this turned into a trade surplus, or at the very least, to reach a neutral position. US manufacturing and exports therefore need to offset the country’s imports.
Trump’s trade deficit concerns are not a new issue. With the US being a mature economy, it has been decades in the making. The US’s biggest trade deficit is with China, which is why Trump’s focus has always been on China in terms of tariffs. After his announcement on 2 April, tariffs for Chinese goods were hiked to 64%, then 104%, and again to 125%, before being raised, yet again, to 145%, as China and Trump continue to play tit-for-tat in a trade war. Trump has also targeted other significant trading partners like the UK, the EU and Canada, as well as emerging market (EM) economies that may have smaller trade balances with the US.
EMs may, however, find themselves at a slight advantage as they have organically started to diversify themselves out of significant risk. In the mid-80s, the emerging markets saw about 30% of their trade go to fellow emerging market peers and 70% of their trade go to developed markets. Over the last 40 years, however, that has started to change and now 50% of their trade is with emerging market peers and only 50% with developed markets. This means that emerging markets are more open to trade with each other and will be able to negotiate alternative trading agreements beyond the US. So, while there is an initial shock, as the world adjusts, EM economies will have alternative trading options.
Because the markets reacted, or overreacted, to Trump’s tariff announcement, there is a real risk that if he doesn’t soften his tone, the US will enter a recessionary environment. The last time we saw tariffs like this was in 1937 after the Great Depression. This is a drastic step in trying to protect the US economy. However today, the US is an economy that is structurally very different so what worked in 1937, may not work again. While the risk of a US recession is still below 50%, it could climb if Trump continues on his current path.
On the flip side
On the flip side of the conversation, increased tariffs will mean more fiscal revenue for the Trump administration. Some of the numbers quoted suggest that tariffs can potentially contribute around $3 trillion to federal revenue over the next 10 years. This will give Trump the ability to cut corporate taxes from 25% to 15% as promised, a move that will stimulate US corporate earnings, which will be passed onto markets.
This argument, however, is not being welcomed by the US consumer who will feel the pain of tariffs the most by paying more for any imported product. While companies could potentially choose not to pass tariff costs onto consumers, this is unlikely as it will hurt company earnings and be negative for markets in general.
Implications for the consumer
Given the impact of Trump’s policies on global markets and inflation, especially in the US, we will be keeping a close eye on the health of the US consumer and how Trump’s policies will impact them. Increased tariffs will result in increased pricing, which will drive up inflation and dull demand, thereby lowering trade which in turn will further fuel the slowdown; hurting the US consumer the most.
Trump faces further headwinds as the US Department of Government Efficiency (DOGE), headed by Elon Musk, is responsible for hundreds of thousands of people being laid off, many of them Trump supporters. This may contribute to his popularity dwindling ahead of the next elections. This coupled with the market reaction, pressure from business, and Trump realising that he might run out of political capital contributed to his announcement to pause most tariff increases for 90 days.
When looking at US consumer expectations, we see that they are expecting significantly higher unemployment over the next year. According to the University of Michigan Consumer Survey, the long-term average of this indicator has been 20, and it has now shot up to 60. This is similar to levels we last saw during the 2008 financial crisis and the 2002 recession. Job losses are indicative of a slowdown, which is why markets are pricing in a higher likelihood of recession.
The latest CEO Confidence Index, a measure of overall CEO confidence, has fallen very sharply, again from a very high level. Weekly bankruptcy filings are also approaching levels last seen during the COVID-19 pandemic and the 2008 financial crisis. These indicators all show that pressure is building, and the brunt of any fallout will be felt by businesses and consumers, who make up the US voter base.
Europe’s and Germany’s tariff troubles
The EU, and Germany in particular, is also going to feel Trump’s policies. Germany, the world’s third largest economy, has an export-driven manufacturing model, making exports a major contributor to its GDP growth. As such, tariffs are now going to add to their headwinds of lower industrial output and job losses.
In an attempt to stimulate growth and mitigate against Trump’s policies, German politicians have announced a fiscal scheme to help the German economy weather this storm, which is a positive step forward for the country and the EU.
Despite Trump wanting to protect the US economy, the initial inflationary impact of tariffs will be felt more by the US than other countries. For the rest of the world, the impact on prices will more likely be neutral or we may even see disinflation because of a lower demand for goods and services. And as the fear of a recession grows, the price of oil has already fallen sharply, which will also have a disinflationary effect on goods and services. The European Central Bank has noted that it is anticipating further rate cuts given this environment.
The US Federal Reserve is in a more difficult position. It has already paused rate cuts, despite Trump wanting it to cut rates further. If inflation does rear its head again over the next 12 months, the Fed will probably try and keep rates steady or even start hiking them again, further contributing to a slowing economic environment.
Trade isn’t dead – It’s evolving
Despite what sounds like a message of doom and gloom for the global economy, what must be remembered is that tariffs and trade wars do not mean the end of global trade. While these policies have sent shockwaves through global markets, and we are in for a tough 12 months, markets will, in a relatively short time, find their equilibrium and start to normalise. Countries will adjust, companies will adjust and the global economy will get back to capacity growth over the next few years.
If Trump realises this and eases up on his rhetoric, the severity of a slowdown will be minimised. Should he soften his stance on tariffs, the markets will respond more positively almost immediately, as we saw on the 10 April when Trump put the implementation of tariffs to all countries, except China, on hold for 90 days.
While tariffs suggest that Trump is trying to create an environment for increased US manufacturing output, it is going to take time. This will be one of his biggest challenges. Can he turn the tide before the US economy enters a recession? The risk is that he drives the US economy and global economy into slowdown, but he doesn’t achieve his desired outcome before the mid-term election.
It is also unlikely that the US will be able to compete on price with other manufacturing economies, as US labour is more expensive. Ultimately, the threat of Trump losing power may lead to him softening tariffs, which will reduce the impact of the current storm.
In summary
At the beginning of the year we expected a slowdown in economic growth. We anticipated that the US economy would come off very high levels, with a pickup of the other major economies. After the last quarter, however, we have cut our global growth forecast for the next 12 months by over 0.8% for the next year, taking it from 2.5% to 1.7%. This is something we will continue monitoring.
We haven’t made any changes to our three-year views, because, as mentioned, this type of shock has an initial impact and then the world finds a new equilibrium and reverts to longer-term capacity growth, which is about 2.5%. We expect headwinds for 12 months before the world economy finds its new normal.
The slowdown is coming from the US, because that is where the impact will be felt most. We have therefore cut growth quite significantly for that economy from 2% to 0.8% for the next 12 months. China’s economy is also expected to slow, and we are expecting growth to fall from its current level of 4.5% to 3.5%, which is significant.
Peregrine Wealth’s investment outlook
As Vladimir Lenin, revolutionary and head of government in Soviet Russia, said, “There are decades where nothing happens and there are weeks where decades happen.” The events at the end of the last quarter saw markets turn much more quickly than anticipated, as Trump implemented a decade’s worth of reforms in an extremely short period of time.
It is in times like these that the importance of Peregrine Wealth’s investment philosophy is reinforced. The world has gone through many crises, and they are always caused by different factors. What they all have in common, however, is that they create environments where fear and emotion take over. This emotion is what creates an opportunity for disciplined investors.
Looking at the four pillars of Peregrine Wealth’s investment philosophy, we see how they are holding us in good stead during this volatile economic time:
Diversification: This has protected our investments against market shocks.
Always looking for value: As markets respond emotionally, we can now look for opportunities when there is a sell-off in many markets, meaning we can pick up high-quality assets at good value.
The future is uncertain: This notion has been reinforced a number of times in the first quarter and will probably continue to be reinforced under the Trump administration, meaning we are prepared for any eventuality.
The importance of asset allocation: Peregrine Wealth is using this volatility to buy quality assets that we want to hold for a long time, at good value. We are looking for assets that will benefit us as the world starts to normalise and get back to equilibrium and capacity growth. This will ensure that our clients who have a healthy level of shock-absorbers in the form of cash in their long-term portfolios can now start to increase their growth exposure.
While we believe that the risk of a recession is still below 50%, if this downward spiral continues, it will create further opportunities for us to eventually go overweight in equity when the time comes and the cycle turns. While our mindset is always about capital preservation, we are open to opportunities. It is our job to manage the risk presented through these cycles to ensure our clients benefit from the myriad high-value investment options on offer.
While this is a volatile time in the markets, Trump’s policies will not impact our ability to deliver on portfolio growth. In fact, it may present us with excellent alternatives.