US President Donald Trump's chaotic tariff policy has created additional uncertainty in the global economy and volatility in the financial markets. After an initial one-month delay, additional import tariffs of 25% were imposed this week on the largest US trading partners – Canada and Mexico – with car imports, which account for an average of a fifth of both countries' exports to the US, exempted for a month. Further exemptions have not been ruled out. Tariffs on Chinese imports were also raised by another 10%, bringing the total increase since Trump took office to 20%. This was followed by measured responses from China and Canada.

The introduction of import tariffs and countries' responses to them may weaken global economic growth and push up price levels, especially for US consumers themselves. Yet it is uncertainty that hampers growth the most. Manufacturers' sentiment in the US has remained moderately positive since the start of the year, even though businesses are increasingly concerned about the lack of clarity over the new Trump administration's tariff policy. In the latest Institute for Supply Management (ISM) business survey, a growing number of US managers acknowledged that customers are starting to defer orders until there is a clearer understanding of US import tariffs. In February this triggered the first drop in US manufacturing orders since Trump's election in November.

Import tariffs may push up US inflation

The Trump administration's actions have so far been distinctly inflationary – the introduction of import tariffs and attempts to crack down on immigration could accelerate the pace of US inflation. In recent months inflation expectations have risen in the US among both businesses and consumers, reaching their highest level since the autumn of 2023 in February, and among manufacturers their highest level since mid-2022. In January annual US inflation had already climbed to 3% and, if the tariffs remain in their current form, it could stay above 3%. The impact of the tariffs on consumer prices will also depend on the extent to which US companies want to protect their profits and pass the import tariffs on to end consumers.

At the same time, alongside greater negativity in US macroeconomic data, investors and economists have recently shifted their focus away from inflation and towards growth, turning their attention to the tariffs' negative impact on the economy. This also prompted a rapid shift in investor sentiment from positive to more cautious, and led market participants to change their view on the direction of US interest rates. Only two weeks ago market participants expected no more than one rate cut of 0.25 percentage points in the US in 2025. At present, judging by futures prices in the financial markets, investors are already anticipating three rate cuts of 0.25 percentage points by the end of the year.

Unlike at the start of Trump's previous term, when the US budget deficit was close to 3% of gross domestic product, the US deficit is now close to 7%. The new Trump administration may therefore have a greater interest in using tariffs as a source of budget revenue. Additional tariffs currently apply to more than 40% of US imports which, assuming demand remains unchanged, could generate almost 300 billion US dollars in revenue against a US budget deficit of more than 2 trillion. In reality this figure will most likely be far lower.

Tariff risks for Europe too

A review of trade relations is under way in the US until April, after which tariffs may be applied to particular groups of goods and could affect European products as well. In early April the US also plans to equalise tariffs reciprocally between the US and other countries. In the EU's case this could mean higher tariffs on cars. EU countries' exports to the US amount to more than half a trillion euros, or a fifth of all exports outside the EU (around 3% of GDP). In addition to the threat of tariffs, risks for European manufacturers could come from exporters in other countries which, fleeing US tariffs, may seek an outlet for their products on the European market. This could harm the euro area economy, whose growth this year is already expected to be below 1%.

Will there be a recession in the global economy?

The chaos surrounding US import tariffs has once again raised the question of whether the US, the euro area and the global economy could fall into a downturn. For now there are not sufficient grounds to expect a recession. First, the state of the US economy is fairly good. Despite the weakening of certain sentiment indicators in February and lower household spending at the start of the year, demand remains strong, and service providers in the US have not yet lost their optimism either. Second, although Trump has begun his new term with countless tariff threats, more positive changes on the tax side could follow later in the year. That could improve business optimism. Meanwhile, in the euro area and China we will most likely see higher budget spending, which could partly offset the negative impact of the tariffs.

This week Germany's incoming government announced a dramatic change of fiscal course, abandoning the ceiling on defence spending and pledging to channel 500 billion euros into infrastructure spending over the next 10 years. This could substantially improve Germany's growth prospects and help it emerge from a stagnation that has already lasted two years. China's government also announced this week that it is determined to keep economic growth at the 5% level. Without support from exports, this could mean greater fiscal stimulus for domestic demand.

About CBL Asset Management

IPAS CBL Asset Management, a subsidiary of Citadele bank, is one of the leading and most experienced financial asset management companies in the Baltic States, employing globally recognised investment fund managers. It has been managing investment portfolios since 2002. In 2003 it became one of the first companies in Latvia to begin managing second-pillar pension savings. CBL Asset Management has the largest team of managers in Latvia, which, drawing on its managers' experience and modern technology, regularly analyses financial and capital markets and macroeconomic trends, and invests pension savings both in major international and local Latvian companies and in bonds from a range of countries.