The global economy shows symptoms of ‘tariffitis’
The figures for US GDP in Q1 reveal a contrast between the strength of domestic demand and trade flows that were anticipating the introduction of tariffs, while the euro area has shown accelerated growth. However, this boost could soon run out of steam: the tariffs and their consequences will begin to have a negative impact. For now, there are no clear signs of a slowdown in trade flows, but with uncertainty at peak levels, the global economy is expected to enter into a slowdown, with more risks to the downside and more questions than answers.
According to the initial estimate, in Q1 2025 the US economy shrank by 0.1% quarter-on-quarter (the first negative growth since 2022) and the year-on-year rate of change moderated by 0.5 pps, to 2.0%. However, the impact of Trump’s policies is starting to weigh on the economy. The contraction was primarily due to a rise in imports (+9.0% quarter-on-quarter), in anticipation of the now infamous «Liberation Day», while public spending declined (–0.4%). On a positive note, domestic demand continued to grow at a steady pace: investment grew 1.9% quarter-on-quarter, with a particularly marked acceleration in capital goods, while private consumption remained buoyant (0.4% vs. 1% in the previous quarter) in the context of a strong labour market.
In the euro area, GDP grew 0.4% quarter-on-quarter in Q1 2025 (vs. 0.2% in the previous quarter), with the year-on-year growth rate standing at 1.2%. While imports have acted as a headwind in the US, the latest data indicate that exports have served as a tailwind on this side of the Atlantic. All the major economies, with the exception of Spain (see the Spanish Economy - Economic Outlook section of this report), have accelerated their growth rate this quarter, particularly Germany (which grew by 0.2% quarter-on-quarter vs. –0.2% previously); France grew 0.1% (vs. –0.1%) and Italy 0.3% (vs. 0.2%). In China, GDP grew by 1.2% quarter-on-quarter in Q1 (vs. 1.6% in Q4) and the year-on-year rate remained at 5.4%. Despite the slowdown, the pace of growth has been robust in a quarter in which exports have accelerated and the support from fiscal policy has supported an expansion.
Given the choreography and magnitude of the tariff hikes imposed by the US administration, they will continue to have economic implications around the world, as well as knock-on effects on financial markets and on agents’ confidence. On the one hand, despite having suspended the «reciprocal» part of the tariffs for 90 days, the White House has kept in place the universal floor of 10%, as well as sector-specific tariffs. On the other hand, in the protectionist escalation with China there is currently no truce in sight. Meanwhile, beyond the turbulence in financial markets (see the Financial Markets - Economic Outlook section of this report), the increase in uncertainty began to take its toll on agents’ confidence. In the US, although economic activity is holding up, economic sentiment continues to deteriorate. The US composite PMI fell in April due to a significant decline in services, while the manufacturing sector has stabilised. Of particular note is the deterioration in the sub-components related to expectations, particularly on the services side, which are at their lowest levels since late 2022. On the consumer confidence side, the Conference Board’s index hit its lowest level since 2020 and the OECD’s equivalent index has been showing a downward trend since late 2024.
In the euro area, the composite PMI fell in April to 50.1 (vs. 50.9 previously), a fall also explained by the deterioration of the services component, although the composite indicator has managed to remain above the 50-point threshold for the fourth consecutive month. On the positive side, the German economy has shown consistent signs of improvement in the early part of the year: in April, the Ifo Industrial Climate Index consolidated the increase recorded in the previous month (+0.2 points, to 86.9). In China, the official manufacturing PMI stood at 49.0 points (vs. 50.5 in March), a sharp month-on-month decline that places the indicator at its lowest point since the end of 2023. The fall in the Caixin manufacturing PMI was more moderate (going from 51.2 points in March to 50.4 points in April), but both point to a sharp slowdown in the manufacturing sector, with particularly visible setbacks in the sub-components relating to new orders.
The chaotic days that followed the the US administration’s announcement of the «reciprocal» tariffs raised fears of severe turbulence in trade flows. Although we are likely to see a material reduction in the flows of goods over the coming months, particularly between the US and China, the impact so far is still limited. In fact, between the end of January and the beginning of April, there has been an increase both in cargo ship arrivals and in the volume of imports arriving in the main US ports, clearly driven by US importers anticipating the tariff announcements. On the other hand, there are fluctuations in freight charges. Since the beginning of April, the price of shipping a container from Ho Chi Minh (Vietnam) to Los Angeles (the largest US port and the most important point of entry for goods arriving from Asia) has surged by 60%, while the price from Shanghai, following a brief increase, has remained at a level close to what was observed up until March.
In its spring forecast report, the IMF noted that tariffs are a supply-side shock for the country that applies them and a demand-side shock for countries that find themselves on the receiving end. Consequently, the impact on global growth is clearly negative, although in the case of inflation there are forces acting in opposite directions. Thus, the IMF revised its growth forecast for the US down to 1.8% for 2025 and to 1.7% for 2026 (–0.9 and –0.4 pps, respectively, from the previous forecast), while for the euro area the adjustment was more modest, to 0.8% for 2025 and to 1.2% for 2026 (–0.2 pps vs. the previous forecast). China’s growth is anticipated to be 4.0% (–0.6 and –0.5 pps). The IMF also revised upwards the forecast for global inflation in 2025 and 2026 to 4.3% and 3.6% (+0.1 pp), respectively. For 2025, inflation is expected to be 3.0% for the US (vs. 1.9% previously), 2.1% for the euro area (vs. 2.0% previously) and 0.0% for China (vs. 1.7% previously). In addition, the institution notes that the tariffs could also have a negative impact on growth in the medium term, by reducing innovation and competition. Amid an outlook marked by lower growth, rising financing costs and higher public spending on defence, the IMF predicts that public debt could exceed 100% of GDP by the end of the decade.
