Economic Impact of US Tariffs: Growth, Employment, and Global Rebalancing

Tariffs and Economic Growth

• 📉 Tariffs are identified as detrimental to economic growth, with uncertainty being a significant negative factor.
• ⚠️ The current economic climate faces a higher cost of capital due to lower equities and higher bond yields, which will likely dampen investment spending and decision-making.
• 💼 A weaker period for hiring is anticipated, with an expected rise in the unemployment rate.
• 💸 Higher inflation from tariff prices is projected to squeeze real incomes, leading to weaker consumer spending growth.

Long-Term Impacts and Global Reconfiguration

• ⏳ The stop-start nature of tariff policies and the daily uncertainty about which sectors or countries will face new tariffs cause significant damage.
• 🎯 While the intention is to relocate manufacturing to the US, manufacturing accounts for less than 10% of US employment, suggesting the damage to the other 90% from weaker spending could be substantial.
• 🌍 The US President's goal to reduce the US-China relationship will have knock-on impacts globally, leading to significant shifts in global trading relationships and reconfigurations over the next two years.
• 📈 This situation has already triggered more policy stimulus in China and Europe, with European rearmament and a focus on supporting domestic demand being medium-term trends.

Trade Deficits and Financial Flows

• ⚖️ Balancing the trade deficit is unlikely without a multi-year recession, a scenario not currently forecast.
• 🏦 There's an inconsistency in policy goals: a narrower trade deficit, lower bond yields, and a weaker dollar cannot all be achieved simultaneously.
• 💰 A government deficit of 8% of GDP, combined with other policy aims, means something will have to break, forcing a prioritization of major objectives.
• 🏭 Building plants in the US currently involves paying tariffs on building materials, making US production more expensive and reducing the competitiveness of US industry globally.
• 🌐 If the US narrows its external balances, there will be less foreign savings available to reinvest into US Treasuries, potentially leading to shifts in global financial flows towards other regions like Europe.
• 🇪🇺 Over the medium term, particularly into 2026, savings are expected to flow into European investments, driven by German infrastructure spending and European rearmament.