The scene after the storm

100 days after Donald Trump’s inauguration as US president and five weeks following the announcement of the tariff hikes, there is a feeling of tense calm in the economy and the financial markets, as we wait to see how the negotiations between the major trading blocs develop. Nothing has been definitively broken, but the deterioration of confidence among economic agents, investors and even traditional political allies has been significant. In economics, as in so many other facets of life, there are repairable damages and others that are more difficult to restore, especially when uncertainty and predictability are gone. Beyond any hope that can be taken from the occasional recovery in financial asset prices, we cannot forget that, today, the effective US tariff remains 23% (3% prior to «Liberation Day»). Therefore, with the economy entering a new era, as the IMF has pointed out at its latest bi-annual meeting, the risk of changes in the economic paradigm of the last few decades remains on the table, and this could potentially affect economic and financial variables, as well as affecting key questions such as the dollar’s role as the global reserve currency.

For now, the growth data for Q1, although of little use for extrapolating future trends, paint a picture of a global economy that was still showing strength and resilience before the storm, despite the difficulty of filtering out the distortions caused by agents bringing forward their decisions. In the US, the increase in imports in the run-up to 2 April (+9% quarter-on-quarter) caused a slight drop in GDP for the period January to March (–0.1% quarter-on-quarter), and this could be reversed in Q2. Meanwhile, the better than expected growth recorded in the euro area (0.4%), China (1.2%) and Taiwan (2.4%) reflect the other side of the coin in trade flows. Taken together and in chronological order from January to March, the data indicate that the world economy was still in the process of landing, growing by around 2.7% versus the 3.2% recorded in 2024. However, we are now entering unknown territory, as we wait to find out the extent of the decline in trade in the middle of the year, as well as the effects of uncertainty on consumers’ and businesses’ decisions. That said, it is also true that the sharp drop in the oil price (–17%) and the gas price (–30%) since January will counteract the decline in growth for many countries. Moreover, the sharp depreciation of the dollar gives economic policy outside the US a greater degree of freedom to respond to these new shocks, especially in emerging countries.

Therefore, what we already know is that the global slowdown is going to be more intense than we were anticipating a few months ago, that the risk of stagflation in the US is not insignificant and that the asymmetrical nature of the shock triggered by the trade war (a supply-side shock in the US and demand-side in the rest of the world) will lead to different economic policy responses in each region, especially in the monetary sphere. If the final balance is a scenario in which trade agreements are reached and the average US tariff is reduced to the 10-15% range, we could find ourselves within the IMF’s baseline scenario, with weak global growth (2.8%) but avoiding a global recession. More adverse scenarios could also arise, with a significant deterioration in trade relations, which would trigger a more severe economic slowdown, losses in the financial markets and a more sweeping response from governments and central banks in order to contain the systemic risks. In any case, the key will lie in the final result of the negotiations between China and the US, as this will affect supply chains, international savings flows and will oblige all other countries – especially connecting countries (Vietnam, Mexico, etc.) – to optimise their trade relations with both economic powers in order to defend their competitive advantages. In this context, the thermometers for taking the temperature of the negotiations and the potential adoption, if necessary, of more aggressive negotiating strategies on the US administration’s part will be the evolution of the yield on the 10-year US bond (with 5% as a threshold level) and the behaviour of the dollar. Trump can overcome most of the indicators, except that of the financial markets. What happens with US inflation will also be key, bearing in mind that the mid-term elections are just around the corner. In short, there are many pockets of risk threatening the global economy right now, as it continues to grapple with geopolitical risk (with the conflict between India and Pakistan as a new source of uncertainty) while sitting on a mountain of debt (324 trillion dollars, or 325% of global GDP).