Hold on tight

Please note: All data referenced in this article is sourced from LSEG Datastream unless otherwise stated, and is accurate at the time of publishing. 

April was a white-knuckle ride for investors, as the US administration unveiled a barrage of tariff announcements on friends and foes alike, triggering chaos in financial markets. More than that, when presidential tweets on policy or opining on the central bank chief are rarely far away, news on the economy can get buried amid the noise.  

That said, as US employment and consumer data, along with leading activity indicators, increasingly reflect the impact of higher tariffs, their effect on investor sentiment could increase. As such, just how healthy are leading economies?  

US economy: strange brew 

The US has been ticking along nicely for some time, chalking up strong annual growth. However, there are signs that momentum slowed in March, prior to the administration’s tariff hikes, although not enough to suggest a harsh landing is close.  

Following Trump’s so-called ‘Liberation Day’ on 2 April, it is now much tougher for businesses and consumers to plan, given all the uncertainty over where tariff levels will ultimately settle. This will likely hit sentiment and economic output. Adding to the cloudy outlook, was the significant weakening in the dollar in April. With over 90% of US imports paid for in the currency, its depreciation will hit the purchasing power of goods importers. 

Turning to the prospects for interest rates, cuts are likely in the near term. However, the president’s swipe in April at the delay in the central bank trimming rates, and the security of its chief’s position, clouds the pace of such moves. More to the point, the independence of the institution’s actions will be questioned whatever it does.     

Europe: slow and steady can be appealing 

Europe’s economies continue to grow, if weakly, with macroeconomic activity even showing signs of a slowdown in Germany and France in March. Although German lawmakers have approved a surge in defence spending, that should aid the economy, the outlook for the bloc seems mediocre at best.  

The odds of a global recession may be rising, in the face a redrawn US tariff map. That said, given the trade tensions between Washington and Beijing, Europe’s position may be better than it looks. Indeed, any slowdown in the region should be helped by more rate cuts in 2025.  

China: cloudy prospects 

Reflecting 2024’s weaker domestic economic backdrop, Chinese consumer prices are continuing to slip. However, the first three months of 2025 hint at stronger growth momentum and higher-spending consumers. That said, the country is far from regaining its economic mojo. 

Clearly China faces many structural issues, such as a troubled property market, high consumer debt and an ageing population. America’s decision to hit the country particularly heavily with tariffs creates a fresh challenge. There have already been some seeds of hope on that front, though. The US has given a partial reprieve on some electronic goods, which should help. Along with much dry powder that Chinese policymakers can deploy, growth in the second quarter could be better than initially feared.   

Trouble ahead? 

Barclays Private Bank manufacturing and services activity surveys for developed markets this year have been below the median reading seen since 2010. The prospect of Trump’s Liberation Day tariffs added to the more morose mood. But, despite the pessimism over economic prospects, most equity market valuations remain relatively high. Given all this, the surveys are likely to get weaker before they get better.  

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