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11 Mar 2025 | 3 minutes to read
US President Trump’s flip-flopping on tariff and trade policies is causing stock market volatility and uncertainty for businesses and countries alike. New 25% tariffs on imports from Canada and Mexico were granted a one-month reprieve, then effected, before almost all goods were then inexplicably exempted just two days later. Tariffs on Chinese imports, however, were doubled to 20% having been imposed at 10% in February. More announcements on perceived trade imbalances are expected in April, with the European Union potentially in the firing line. Trading partners are retaliating; China slapped tariffs on some US agricultural goods at a rate of 10 to 15%.
Trump believes “a little short-term interruption” outweighs the risks of the economic turmoil caused by attempting to repatriate jobs and wealth to the US. But as importers pay tariffs and will likely pass on their cost to consumers (who in turn may demand higher wages as compensation), restrict competition and disrupt otherwise highly efficient supply chains, the spectre of higher American inflation looms large. Advocates of tariffs believe US-produced goods will become cheaper, encouraging more domestic investment and production – creating American jobs.
Meanwhile, the US labour market added 151,000 jobs in February but retail, hospitality and residential construction all declined. The Non-Farm Payroll report noted an uptick in Americans with multiple jobs and those involuntarily doing part-time rather than full-time work. Federal government employment declined by around 10,000, auguring the impact of the newly-formed Department of Government Efficiency. Federal layoffs may not peak until September when those accepting severance packages will be able to claim unemployment.
Germany’s Chancellor-in-waiting Friedrich Merz’s new €500bn plan to increase military and infrastructure spending sent borrowing costs soaring last week. It comes as President Trump wavers over the US’s future role in NATO and agitates for ‘freeloaders’ to pay their way. The coalition led by Merz has agreed in principle to release Germany’s so-called ‘debt brake’ capping debt at 0.35% of GDP. Borrowing more would in time raise Germany’s debt-to-GDP ratio from around 63% towards 80%. The news pushed Germany’s borrowing costs on its 10-Year Bund over 2.9%, having been as low as 2.39% just weeks ago, as investors adjusted to the reality of more debt coming to market. The plan requires a formal vote to pass. EU leaders also discussed seeding an €800bn defence fund.
Meanwhile, the ECB cut its benchmark interest rate by 0.25% to 2.5% as inflation cools amid a challenging outlook for growth.
The UK Treasury presents key measures to the Office for Budget Responsibility (OBR) this week, with expectations high that Chancellor Reeves will have no choice but to cut welfare and public spending in the Spring Statement on 26 March to meet Labour’s self-imposed spending rules.
Labour may target health-related benefits which have soared since the Covid-19 pandemic in an attempt to reduce debt as a share of the economy and only borrow to fund investment, not to cover day-to-day spending. Since Labour’s October Budget, economic growth has stalled, business confidence faltered, and inflation and borrowing costs risen. With looming US trade tariffs adding further uncertainty, tough decisions lie ahead.
China announced a 2025 growth target of ‘around 5%’ and a 7.2% increase in defence spending at its annual National People’s Congress (NPC) last week, as it faces a trade war sparked by the US. Recognising a need to rekindle domestic confidence and stimulate the economy, Premier Li Qiang also announced a loosening of China’s fiscal deficit from 3% to around 4% of GDP – described as ‘a more proactive fiscal policy’ to ‘stabilise employment and prevent risks’ and meet ‘long-term development goals’. Policymakers’ so-called ‘Work Report’ also revised China’s inflation target from 3% to 2% - the lowest target since 2003 – which some economists see as an admission of defeat in the face of deflationary pressures. The report also announced Rmb 4.4trn (around $600bn) in special local government bonds and Rmb 1.3trn for infrastructure and other major investments. Markets reacted positively on the day of the news: Hong Kong’s Hang Seng index rose by +2.6% and China’s CSI 300 index by +0.4%.
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