Global Economic Overview – April 2025

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• Global

  US President Trump's 90-day moratorium on the imposition of high ‘reciprocal’ tariffs has not immunised global markets from volatility. At the time of writing, the S&P500 index is 6% down on the year so far and Chart 1 shows the extent to which US stocks have underperformed most of their developed market counterparts*. Why is this? A benign explanation is that the current global uncertainty has left investors less willing to pay valuation premiums for American equities, especially the 'magnificent 7'. Another reason might be that with the imposition of US tariffs, markets fear greater downgrades to the US economic outlook than those to other economies, particularly bearing in mind the material expansion in EU fiscal policy.

  Chart 1: The S&P500 index has generally underperformed its peer group so far this year

  

  *In local currencies; in e.g. EUR the US has underperformed even more Source: Investec Economics, Macrobond

  But most concerningly the sell-off could reflect a longer-term portfolio rebalancing away from the US. Indeed there have been several recent instances of the ‘sell America’ trade, when US stocks, bonds and the dollar have suffered simultaneous daily declines. In April so far, this has occurred in at least three US sessions (Chart 2). Typically one would expect a 'risk off' move to consist of easing bond yields, (probably) a fall in equities and a rise in the dollar. Broadly this synchronised selling occurred after events that put the credibility of US policy in doubt, most recently when Trump questioned the future of Jerome Powell as Fed Chair. At this juncture it is not clear whether this will become a persistent trend.

  Chart 2: US assets have sold off concurrently on at least three days since ‘Liberation Day’

  

  Source: Bloomberg, Investec Economics, Macrobond

  Setting aside the direct macro impact of current events, could financial market volatility itself prompt policy responses from central banks? Central banks are attuned to market turmoil and the risk that extreme movements result in specific asset classes becoming dysfunctional with knock-on effects to the real economy. Indeed the BoE pushed back a planned (Quantitative Tightening) long gilt sale earlier this month to avoid aggravating already nervous conditions. But despite high volatility and some spread widening, there have been no signs of extreme stresses in markets as there were in March 2020 (Chart 3). As long as this remains the case, we expect central banks to adopt a surgical rather than a sledgehammer approach to markets.

  Chart 3: Bid/ask spreads in ‘off the run*’ 10y Treasury notes – March 2020 and recent

  

  *Off the run bonds are the 10y note three months older than the benchmark Source: Investec Economics, Bloomberg

  Our global growth forecasts are a touch weaker than in March, now at 3.0% for ‘25 & 3.1% for ‘26 (from 3.2% for both years). These are based on the current Trump tariff regime staying in place, with no return to ‘reciprocal’ tariffs. Previously we had assumed a 10% universal US tariff, so most changes are modest e.g. the US and the eurozone. By far the biggest tariff rises are for China, so the downgrade to Chinese growth is the largest (see below). Our views are similar to those recently published by the IMF. Downside risks still exist of course, notably via the threat of an all-out trade war. But it is also feasible that relatively prompt bilateral deals are struck with the US, resulting in a less onerous tariff regime and a smaller drag on global GDP.

  Chart 4: Our 2025 and 2026 global growth forecasts are a touch weaker in aggregate

  

  Source: Investec Economics, Macrobond

  We have lowered our view of 2025 Chinese GDP growth to 4.1% from 5.0% and that for 2026 to 4.1% from 4.2%, despite a firm outturn of 5.4% (yoy) for Q1 this year. Clearly the new US (additional) headline tariff of 145% has effectively closed American markets to many Chinese exporters. But goods exports to the US amount to a relatively modest 3% of GDP. Also many of these are tariff exempt or subject to a lower rate (e.g. 25% on cars). Note too that China exports indirectly to the US through components contained within goods from other countries. Our analysis suggests such ‘hidden’ exports to the US dwarf ‘direct’ exports (Chart 5). China will also doubtless seek to undercut competitors in seeking third-party markets, thus limiting the downside to its growth.

  Chart 5: US dependence on Chinese exports is much greater including ‘indirect’ imports

  

  Note: China creates indirect exposure via exports of inputs to other economies before goods reach the US
  Source: OECD input/output tables, Investec Economics, Macrobond

  Market events since Trump's 'Liberation Day' on 2 April suggest that American exceptionalism is being challenged. We would point out that in late-2008, when Lehman Brothers collapsed and the US was at the epicentre of the Global Financial Crisis, the greenback strengthened as investors viewed it as a safe haven (Chart 6). We have downgraded our USD projections up to end-2026 (see relevant sections) to reflect the latest wave of dollar aversion. Beyond this though, it is premature to attempt to draw conclusions on whether current dollar weakness reflects a temporary lack of confidence in the USD or forms part of a wider realignment of shifting geopolitical tectonic plates.

  Chart 6: The US dollar was a safe haven over most of 2008

  

  Source: Investec Economics, Macrobond

• United States

  Events of recent weeks have revealed that Mr Trump does indeed have a pain threshold and that financial markets can act as a check on the President’s intentions. Indeed, as mentioned above, the concurrent selling of US equities and bonds appear to have ‘encouraged’ Mr Trump to announce a 90-day delay to his reciprocal tariff plan (ex-China). Although this resulted in a short-term boost to US assets, the rally has only been enough to stem the declines since 2 April (Chart 7). There is even talk that the US might have lost its safe-haven status. We think it is too early to conclude this, but the risks have clearly risen and considering recent events we ourselves have pushed our USD forecasts lower.

  Chart 7: Since Liberation Day there has been a ‘sell US’ move in financial markets

  

  Source: Investec Economics, Macrobond

  It is no real surprise that the 90-day pause did not fully calm investors’ fears, given that Mr Trump in tandem raised Chinese tariffs, taking the reciprocal to an additional 125%, on top of existing tariffs (including the +20% fentanyl levy). On Liberation Day the former was ‘just’ 34%. As such, even with the 90 day pause, we estimate the average effective tariff rate to be slightly higher than it was on 2 April. We would also note that the pause did not apply to the 25% steel, car and aluminium tariffs, or the 10% baseline. Further driving investor angst is that is still not clear how this will all play out – the endpoint is not in sight. Trade adviser Navarro did suggest that the US could sign 90 deals within 90 days, but we think that is optimistic. So far 19 of the 90 days have elapsed, and no deals have been signed.

  Chart 8: Average US tariff rate broadly similar now to Liberation Day, despite 90-day pause

  

  Source: Investec Economics, The White House, Tax Foundation

  What happens after the 90-days remains to be seen, but we are operating on the assumption that reciprocal tariffs are delayed indefinitely. We still predict US growth to be hurt by the tariffs in place however, downgrading our 2025 US GDP forecast to 1.7% from 1.9% and to 1.5% from 1.6% for 2026. Some of this downgrade stems from an uncertainty effect. Underpinning our forecasts is the expectation that the US will experience an economic slowdown due to White House policy but will avoid a recession. Thus far hard economic data has held up relatively well (such as the recent retail sales and March payrolls print). But things can change quickly, and if a sharper economic shock occurs, we will revisit our forecasts.

  Chart 9: There is a vast amount of uncertainty over what Q1 GDP will be

  

  Source: Investec Economics, Macrobond

  When it comes to interest rates, the Federal Reserve is in a bind: if it lowers interest rates, it could risk its price stability mandate, but in keeping rates restrictive it risks missing its maximum employment goal. When looking at current data, one could conclude the Fed is making good progress on bringing inflation back to target (Chart:10). Recent reports have been encouraging, with softer energy and shelter price inflation dragging headline CPI inflation lower. However, this is past data - the policy backdrop has now changed and what matters is how inflation evolves from here. We estimate tariff policy will add 1.5%pts to inflation. Inflation expectations matter too, and these are trending higher.

  Chart 10: CPI data has been promising, but past performance does not guarantee future results

  

  Source: Investec Economics, BLS, Macrobond

  On the labour market, non-farm payroll data have remained solid, but again, this is old news. With federal job cuts and slower economic momentum in the pipeline, the labour market is likely to loosen. Therefore, when deciding on policy a question arises as to which side of the Fed’s dual mandate predominates? For now, we suspect inflation, given Powell’s recent comments that ‘without price stability, we cannot achieve the long periods of strong labour market conditions’. As such and given our expectation that the US will avoid a recession, we maintain our call for just one Fed cut this year, in Q4. If the economy was to slow more than expected, however, then rates would be cut more quickly.

  Chart 11: March’s NFP gain far exceeded what would be needed to satisfy population growth

  

  Source: Investec Economics, BLS, Macrobond

  But this also assumes the Fed can set policy from political pressure, something now being called into question. Trump has not been discreet in his recent dislike for Fed Chair Powell, repeatedly calling for lower rates, but his remarks that Powell's 'termination cannot come fast enough' spooked markets. Indeed, replacing Powell before his term ends in May 2026 with a Chair willing to succumb to political pressure to cut rates is likely to dent central bank credibility and risks de anchoring inflation expectations. For now the sharp negative market reaction to Mr Trump’s threats to remove Mr Powell have kept the President in check, with the latter dialling down the rhetoric in recent days. However, Trump has made clear his desire for lower rates and we doubt this will be the last attack on Powell.

  Chart 12: Market fears that Powell could be ousted have settled down…for now

  

  Source: Kalshi, Investec Economics

• Eurozone

  Europe has been on President Trump’s tariff radar, but as things stand extra US tariffs on the EU are limited to the 25% tariffs on steel and aluminum and cars with the 10% baseline tariff for most other goods; the more severe reciprocal tariff (20%) has been postponed. For its part the EU has delayed its own countermeasures until 14-Jul to allow for talks. How far these can go remains to be seen given differing positions on non-tariff barriers. For example the EU will not countenance changes to VAT, safety standards or agriculture, issues which the US has flagged. Meanwhile the US has rejected a ‘zeroing-out’ of industrial goods tariffs. Given these complexities we see additional tariff delays to allow for further trade discussions. As things stand we calculate the new average US tariff on EU goods as 10.1%.

  Chart 13: Current US tariffs on the EU are much higher than before but still look manageable

  

  Source: Investec Economics, Macrobond

  The impact on EU20 GDP should be manageable: our forecasts are now 0.9% (‘25) and 1.5% (‘26), 0.1%pt downgrades. But risks are skewed to the downside. It is far from certain that the US and EU will agree a deal to prevent the reciprocal tariff being imposed in July. The impact of uncertainty on spending and investment should not be underestimated, nor the indirect impact of weaker global growth as goods exports represent 33% of EU20 GDP. Estimates from ECB members seem to be coalescing around a ¼% hit to GDP in 2025, but reports have suggested a worst-case scenario may be c.1%pt. Indeed, our own modelling indicates that such an estimate is not implausible.

  Chart 14: EU20 GDP growth could be muted in 2025, but we forecast recovery in 2026

  

  Source: Investec Economics, Macrobond

  We see tariffs as being disinflationary, given an expected slowdown in global demand. The effective embargo the US has placed on Chinese goods may cause China to look to Europe for its cheap exports. The strengthening in the Euro will put downward pressure on inflation too. These forces come at a time when inflation is already abating: importantly, the latest ECB wage tracker indicates wages easing further this year. But there are other forces at play complicating the picture. The ramp-up in defence spending across Europe, alongside the fiscal stimulus in Germany, will mitigate some of the risks to growth and demand in the medium term. Meanwhile, any EU retaliation to tariffs come July could materially change the inflation outlook.

  Chart 15: The ECB sees wage growth falling sharply this year, relieving price pressures further

  

  Source: ECB, Investec Economics, Macrobond

  For the ECB, the world has changed since its March meeting when the prospect of an April policy pause was raised. Instead, a 25bp cut was unanimously backed this month and even a 50bp cut mentioned. For policymakers rising downside growth risks are a concern. The tone on the tariff impact on inflation also seems to have changed, veering towards it being disinflationary from a rather vague message previously. The euro is a factor, with €:$ currently 9% above the $1.04 assumption used in the March staff projections. Consequently, June’s updated estimates will almost certainly see the 2% inflation target met this year. Given this and the risk backdrop we now expect rate cuts in June and July, taking the Deposit rate to 1.75%. We see a pause thereafter, but much will depend on tariffs.

  Chart 16: Additional ECB easing is expected amidst downside risks

  

  Source: Investec Economics, Macrobond

  As noted in the global section, one market topic that has been evident this month is the ‘sell US’ theme. This has seen EUR denominated assets benefit. For example, the Euro has gained 5% against the USD and 3% on a trade-weighted basis this month. Euro-area sovereign bonds have outperformed, with 10y Bund yields having fallen 26bps, against a 6bp rise in Treasury yields. Nor has this move been limited to Bunds, with 10y yields on average down 25bps. That poses the question: are euro assets now being viewed as an alternative safe haven to the US? This is possible, to a degree. But In reality it would be hard for EUR to replace USD as the global reserve currency.

  Chart 17: The Euro and European sovereign bonds have all rallied in April

  

  Source: Investec Economics, Macrobond

  For one European debt markets do not possess the same depth as Treasuries with total sovereign debt outstanding totalling $12trn* versus $26trn. Second, credit quality varies across the Eurozone too. But recent developments raise questions over US credibility and the potential for a gradual long-term trend to hold more euro assets. Looking purely at official FX reserves, EUR holdings make up 20% against the USD’s 58%, so there is some scope for an increase. We have built some of this thinking into our Euro forecasts, alongside our view that fiscal expansion in Europe is bullish for fundamentals and the Euro in the medium term. As such we have pushed up our end year €:$ targets to $1.17 (’25) and $1.20 (’26) from $1.08 and $1.15 respectively.

  Chart 18: USD holdings dominate foreign exchange reserves (% allocated total, IMF COFER)

  

  *Converted at current FX rate
  Source: Investec Economics, Macrobond, IMF

• United Kingdom

  After a disappointing period of stagnation in H2 2024, monthly data up to February imply that UK GDP accelerated strongly in Q1. In fact, with zero further GDP growth in March (and no revisions to back data), Q1 GDP growth could be as high as 0.7% quarter on-quarter – clearly above the 0.4% or so that currently constitutes ‘potential’ GDP growth for the UK, as per the OBR. In practice, we think GDP may well have dipped a little in March, leaving Q1 GDP growth at 0.6%. Even so, this is a clearly stronger outturn than the OBR and the BoE staff had predicted in March (+0.2% and +¼%, respectively). We too would have been minded to lift our 2025 GDP forecast but for the news on US tariffs.

  Chart 19: Monthly data point to a strong start to the year for UK GDP

  

  Source: ONS, Investec Economics, Macrobond

  With policies as they are now, we calculate that US tariffs on the UK have risen by 10.2%pts. This direct effect is close to what we had previously assumed so warrants no forecast changes. But the average tariff rate rise on all other US trading partners bar the UK is, at 20.7%pts, substantially higher. This stands to weigh on economic growth elsewhere, lowering the demand for UK exports to the rest of the world indirectly by more than we previously thought. Add to these negative extra tariff impacts those of heightened uncertainty about where global trading rules will end up and jittery markets, and the upgrade we would otherwise have made to our 2025 GDP growth forecast disappears: we still predict 1.1% growth. Our 2026 GDP growth forecast is now 0.1%pt lower than before, at 1.6%.

  Chart 20: Investment intentions have weakened as economic policy uncertainty has surged

  

  Source: CBI, Economic Policy Uncertainty, Investec Economics, Macrobond

  That policies remain as they are though is far from clear. The US has flagged certain other sectors such as pharma as under review, which could mean more tariffs. But on a more positive note, the US stance may soften in negotiations. The UK seems to be making more headway than other countries in this respect, with both London and Washington optimistic a deal can be struck. If the UK achieves preferential treatment, then firms in other countries may choose to fulfil US demand from the UK, which could even be a positive for UK GDP. It will be a fine line for UK negotiators to tread though not to jeopardise relations with the EU – the UK’s bigger trading partner (Chart 21) – through concessions they offer to the US.

  Chart 21: The EU is a larger export market for the UK than the US – for goods and services

  

  Source: ONS, Investec Economics, Macrobond

  Amid the market ructions since US President Trump’s ‘Liberation Day’ tariff announcements on 2 April, the UK asset performance has sat in between that of its US and German counterparts: in contrast to the sell-off in 10y US Treasuries, Gilts have rallied, but yield falls have been smaller than for Bunds. Similarly, Sterling has, in trade-weighted terms, seen neither the marked weakening of the US dollar nor the sharp appreciation of the Euro (Chart 22). This is not entirely surprising: with general government debt of 101% of GDP, the UK’s debt does not carry the same safe-haven status as Germany where debt is 64% of GDP. Nor is GBP’s usage in international transactions as prevalent as that of EUR. Hence it has not kept pace in FX either.

  Chart 22: UK assets’ post-Liberation Day performance is between that of US and German ones

  

  Source: US Treasury, BoE, ECB, ICE, Investec Economics, Macrobond

  When it comes to markets’ perceptions of the outlook for monetary policy, however, there has been less of a distinction made between the UK and the Eurozone, judging by the change in 2y yields between 1 Apr and now (-33bps vs -30bps, respectively). This has brought market pricing for the UK Bank rate this year close to our own long-standing forecast, which is for cuts to 3.75% by end-‘25 and additional cuts to 3.00% by end-‘26 (Chart 23). The markets’ shift to pricing in more rate cuts reflects the changing inflation outlook. The MPC had indicated in March that although it saw more rate cuts as probable, a ‘gradual and careful’ approach would be taken to discern whether inflation pressures are subsiding.

  Chart 23: Markets have shifted to pricing in more UK rate cuts, close to our long-standing view

  

  Source: Investec Economics, Macrobond

  On this, our own updated forecasts foresee, much as before, a clear rise in inflation in April. That though mainly reflects higher utility bills, which alone should boost the inflation rate by 0.7%pts. This, and various other administered price rises, will not come as a surprise to the MPC. Thereafter though, we expect price pressures to fade slightly faster than we previously thought, helped lower energy prices as well as a stronger sterling: we now predict GBPUSD at $1.35 and $1.38 at end-‘25/end-’26, respectively (EURGBP: 87p & 87p). This leaves our 2025 and 2026 inflation forecasts at 2.9% and 2.1%, respectively, both 0.2%pp lower than we had anticipated last month (Chart 24). The MPC too might shift in a similar direction and become more confident to dial down policy rates.

  Chart 24: After a temporary jump in April, we expect UK inflation to subside faster than before

  

  Source: ONS, Investec Economics, Macrobond

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