US data regarding consumption, inflation etc don’t suggest stress in the US, and by extension, the global economy. The recent negative US GDP print is a function of over-importing ahead of tariffs, more than anything else. Equity market returns are again positive (albeit Euro-driven), and bond markets have somewhat stabilised. Is the world getting over the tariff shock? Probably. Is the tariff shock over? By no means. Unlike times of financial or external crisis (e.g. Lehman, Dot.com bubble, pandemic etc), policy-driven economic cycles take longer to manifest. Even as markets and headlines return to (more) normal, economists are upping their probabilities of a US recession and reducing their growth forecasts. Meanwhile, companies are bracing for higher costs and some are cutting jobs.
Financial markets have quietened down somewhat in the past few weeks, as professionals were reassured by US Treasury Secretary Scott Bessent that the basic tenets of investing still hold:
Equities are now by and large flat since the beginning of the year in USD terms, and arguably back to expensive territory. Still, it’s important to notice it’s Europe that is outperforming. In Euro terms, US stocks are down 11.2% for the year, against +7.9% for Europe and +3.5% for the UK.
US borrowing costs have slightly fallen as well, as demand for new US Treasuries remains healthy.
But not all is “normal”, as the divergence between US borrowing costs and the US Dollar persists, highlighting worries.
These worries are not so much about the end of the US Dollar’s dominance and its stature as a global reserve currency (which we will reiterate is very far from being challenged), but about rumours of a “Mar-a-Lago accord”, which could see
Gold at all-time highs certainly doesn’t spell “normal”.
What investors and businesses need to keep in mind is that at any given time, the economy is subject not to one but many cycles. Credit cycles, valuation cycles, technology cycles, policy cycles etc. When things become extreme for one cycle, the particular narrative of that cycle tends to dominate the discussion, also affecting the other cycles.
Normally, markets are more subject to credit boom-bust cycles, where a financial market crash drives economic performance (think 2008, 2000, early 1990s, etc). This time, they are not. Nor are they affected by an extreme externality, like the pandemic or a war, which would affect the economy in a direct way.
Rather, it is the policy-driven cycle which dominates others. A policy cycle has very different dynamics than a financial crash or an externality. In the case of a crisis, markets and economic indicators come off sharply. Markets usually rebound after a policy intervention, while it takes a couple of years for economic indicators to come back to normal.
In a policy-driven cycle, policy decisions tend to play out in the span of years, if not decades. Think of the “Nixon shock”, the 1971 US withdrawal from the Gold Standard, which ushered in a decade of high inflation and subdued real growth – but gradually. Or Reagan’s 1985 Plaza Accord, which destabilised the US Dollar two years after and caused Japan’s crash after nearly a decade. He was the first in a line of three deregulatory presidents (Bush Sr. and Clinton followed) overseeing a credit boom, which didn’t cause a crisis until 2008.
Read more on our recent geoeconomic piece
So, unlike 2008, where virtually everything crashed at the same time, this policy-driven cycle causes different sets of data to behave differently, muddying the picture we have of the economy (and allowing all sorts of narratives to justify themselves).
Market data sets are volatile and uncertain, but one would have to focus on just the dislocation between the lower US Dollar and the high borrowing costs to find anything out of the ordinary.
So, let’s turn to economic data. After all, the White House’s policies are more likely to affect the economy over the longer term than the markets over the shorter term. Markets always have the safety net of central banks, whereas the real economy doesn’t.
Sentiment data, especially around consumption, suggest that US consumers are very worried (regardless of income level) and are pricing in higher inflation outcomes, even in the longer term.
“Fast” economic data, on the other hand, like Purchase Manager Indices, for example, retail sales, personal income and spending etc don’t suggest a particular reason to worry.
Even the slow and hard economic data don’t give out a distress signal. Inflation remains in check for the time being, aided by the lowest oil prices since the pandemic.
Last week's negative US GDP print (the first since 2021) is really a misfire. Consumption data (70% of the economy) was better than expected. However, in a typical GDP calculation, imports count against growth. As imports surged ahead of tariffs, it was growth calculations, rather than actual growth, that took a hit.
So, with market volatility climbing down and “hard” economic data not sounding the alarm, should we be at ease?
No.
As we said, in a policy-driven cycle, things tend to play out slowly. Firms on the ground recognise that. Despite better-than-expected results in the tech sector, Apple still said that tariffs would cost $900m just in one quarter. UPS fired 20,000 people since it expects fewer Amazon shipments from China. Amazon, which sees the stress, decided to warn consumers about the costs of tariffs on their product, sparking a fierce reaction from the White House before backtracking. It is no wonder that the National Federation of Independent Businesses, the US small business association, sees a 90% probability of a recession this year.
Economists also recognise that repercussions are slow. Estimates suggest that the US will not see a material slowdown in growth until Q3-Q4 this year and into the next.
“Moving fast and breaking things” may work for Silicon Valley, but it’s hardly a recipe for the economy. Why? Because the economy doesn’t have the growth capabilities of a tech company, even the mature ones. So, economies are left with those things that were “broken”. Presently, markets treat tariffs as rhetoric. But as they become real, they upset a very complicated global economic ecosystem, with unforeseen consequences.
George Lagarias – Chief Economist
| Global Stocks | US Stocks | UK Stocks | EU Stocks | EM Stocks | Japan Stocks | Gilts | GBP/USD |
| +2.9% | +3.3% | +2.2% | +3.1% | +3.3% | +2.5% | -0.1% | -0.3% |
Stocks rose for the second consecutive week as optimism around the de-escalation of trade tensions drove markets. A stronger than expected jobs report also led to a rally late in the week. Markets also shrugged off a weaker-than-expected US growth print on Monday, which showed that US GDP contracted for the first time since 2021, but demonstrated solid consumption growth.
US, EU and emerging markets stocks rose the most, by 3.3%, 3.1% and 3.3% in GBP terms, while the UK and Japan posted slightly smaller gains of 2.2% and 2.5% respectively. Industrials and technology sectors were among the top-performing sectors, while energy stocks were the only sector in the negative.
10-year government bond yields increased modestly, by +6, +2 and +5 basis points in the US, UK and EU respectively.
Gold fell -2.0% due to the perceived lowering of uncertainty around trade. Oil prices fell sharply, by -6.4%, as OPEC+ announced a significant acceleration in supply.
US GDP contracted by 0.3% in Q1 2025, missing the expected growth of 0.4%. The decline was explained by a surge in imports as businesses and consumers stockpiled goods ahead of tariffs. Economists are warning of a possible recession. Consumer spending rose in March, particularly on cars, but growth is slowing. Leading indicators such as the Conference Board's consumer confidence index plunged in April. It fell to 86 (-8 points), the fifth consecutive monthly decline and the lowest level since May 2020.
China's factory activity contracted at the fastest pace in 16 months in April, a factory survey showed on Wednesday, keeping alive calls for further stimulus as Donald Trump's "Liberation Day" package of tariffs snapped two months of recovery. China's official purchasing managers' index (PMI) fell to 49 in April from 50.5 in March, the lowest reading since December 2023 and missing a median forecast of 49.8 in a Reuters poll. The IMF, Goldman Sachs, and UBS cut China's 2025 growth forecasts, doubting Beijing's 5% target.
UK house prices declined by 0.6% MoM in April, the largest since March 2023, bringing the average price to £270,752. Annual growth slowed to 3.4% from 3.9% in March, missing the forecasted 4.2%. The decline follows a rush to complete purchases before the March 31 stamp duty deadline, with demand now resetting. Despite the slowdown, market analysts expect modest price rises through 2025 due to constrained supply and stable demand.
The UK purchasing managers' index (PMI) was 45.4 in April, indicating a contraction in the manufacturing sector (PMI figures below 50 mean a contraction in activity). Survey participants noted a fall in export business as demand from the US, Europe and mainland China declined. Increased trade volatility due to US tariff policy announcements was also pointed towards as a headwind. The figure was a slight improvement over the previous month’s reading of 44.9, but remains close to its lowest levels recorded in the last three years (43.0 recorded in August 2023).
The global liberal trading and economic system is being reset by the US for a third time in the last 54 years, to reduce economic competition from China and increase the US manufacturing capacity.
As geopolitical tensions rise and economic systems face strain, history offers valuable lessons for modern businesses. In this article, George Lagarias, our Chief Economist, looks at what business can learn from ancient power struggles and offers six tips for companies to stay resilient, adapt to change, and keep moving forward in a world shaped by shifting power dynamics and economic disruption.
The latest news and analysis on the changing markets and economic environment.
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