Written by Shane Balkham
Last week, the US imposed additional tariffs that could increase the effective average tariff rate on all imports into the country. Before the Trump administration returned to power, the average tariff rate was around 2.7%, now after the proposed increases it could be between 6.9% to 8.4%. However, within 48 hours Trump had reversed course and indicated that goods that are exempt from tariffs under the United States Mexico Canada Agreement (USMCA) would be given another 30-day reprieve. This is the same agreement that Trump himself orchestrated in his first term as President.
Implementing tariffs, then raising tariffs, before walking back on those threats, creates uncertainty. As the pandemic showed, supply chain disruptions can create significant growth problems. This has been weighting negatively on the US stock market. Last week the S&P 500 fell -4.1% in GBP terms and year-to-date the index is down -5.0%.
While China is imposing retaliatory tariffs of its own, China has set a 5% GDP growth target for 2025 and raised the fiscal deficit goal to 4% of GDP. The annual inflation target has been lowered to 2%, the lowest since 2003, as the country grapples with deflationary pressures. Equity markets reacted positively to these announcements, helping China deliver the strongest gains last week. However, the latest annual inflation rate of -0.7%, which fell short of market expectations, underscores the persistent deflationary pressures and casts doubts on China’s ability to achieve its targeted growth.
Leading the way is Europe, with Germany’s new government announcing plans to increase investment. After years of budget cuts, Germany is now adopting an attitude of whatever-it-takes and breaking chains of historical austerity in favour of a significant overhaul of infrastructure and defence spending. The fiscal pivot by Germany could represent a watershed moment for Europe. At the heart of this transformation is the historic reform of Germany’s budgetary rules to allow defence spending above 1% of GDP to be excluded from the country’s rigid debt-brake mechanism1. It is a clear response to growing geopolitical instability and a commitment to military preparedness.
Alongside the defence spend, there is a €500 billion fund for infrastructure spending. The fund will channel investment into transport, energy networks, and housing over the next decade, hopefully laying the foundations for a new cycle of economic expansion. After years of sluggish growth, Germany is now looking to set itself on the path to recovery. The MSCI Europe ex-UK index rose +2.1% in GBP terms last week and is up +13.0% for the year to date.
The military commitments will be welcome news to Ukraine, who suffered without the aid of the US, as the conflict intensified with Russia seizing back territory in the Kursk region. Ukraine had hoped to use the control of the Kursk region as leverage in negotiations with Russia. President Zelenskyy will be in Saudi Arabia this week in crucial talks that are aimed at persuading the US to resume military support.
This year has clearly demonstrated the importance of global diversification. While we still see multiple attractive pockets of opportunity, the geopolitical and economic landscape is uncertain and ensuring that you have an appropriately diversified portfolio, across geographies and asset classes, is as important as always.
1In Germany the federal government and the 16 states are obliged to balance its books and are prohibited from taking out extra loans. No other G7 country has such strict limits on new borrowing. The rules were introduced in 2009 as a reaction to the Global Financial Crisis, to act as a brake to financial capacity and hopefully avoid a repeat of the Global Financial Crisis.
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