Financial Forecasts May 2025: "De-escalation?"

Amid the pause on reciprocal tariffs, the reassurances on the independence of the Fed, the rollback on tariffs for smartphones and cars and the admission that the 145% on China is unsustainable, there is a certain return to reason ahead of the forthcoming crucial deadline of 9 July. Our core scenario still integrates the fact that tariffs will remain in place. While we currently have more scenarios than certainties, some remain clear. First, world trade will be massively affected: the WTO has just revised its growth forecast from 2.7% in 2025 to a contraction of 0.5% at best, a decline not seen since COVID. Second, the decoupling between China and the US is irreversible and will accelerate despite possible concessions.In the end, it seems that the US will reach trade agreements (first with India, Japan and the UK, more difficult with Canada and Europe, and even more hypothetically with China). Still, we should be left with a 10% floor rate, sector-specific tariffs, possibly 10-15% on Europe, and a level close to what was discussed during the election campaign (60%) on China. We will thus be in a trade war unseen for a century, with tariffs still 5 to 10 times higher than those that existed before Trump’s arrival.We will likely see a stagflationary effect on the United States: we maintain our forecast of around 1% growth and inflation hovering around 4% (3.8% for the PCE at year-end) with an unemployment rate around 4.9%. The Fed should wait until September to lower rates, if only to solidify its independence and credibility against the administration's attacks, while awaiting the materialization of the economic shock.China is much better equipped to withstand the United States (which accounts for less than 15% of its exports, from which it no longer depends for energy, now importing only 13% of its food compared to 21% in 2016, etc.) and should maintain growth above 4%, supported by a falling yuan (expected at 7.35%) and a proactive policy mix.The impact on Europe is expected to be around -0.2% to -0.3%, with growth at 0.8% this year, including 0.6% for France (up from 0.5% previously, thanks to resilient consumption with confirmed gains in purchasing power).We are changing our call on the ECB, which would lower rates not just to 2% in June but continue further to reach 1.50% in September. As for the FED, we are also changing our call from 2 to 3 rate cuts this year (September, October and December) and maintaining a 3% target for April 2026.We remain cautious about US stocks in the short run, and tensions on the US bond market could continue. The US dollar is expected to keep falling, reaching 1.21% by year-end, with the euro more closely correlated with safe-haven assets, like the Swiss franc and gold, which continue to soar.The pause on tariffs does not mean there will be no tariffs. And the uncertainty will continue for another 1,280 days, or maybe more...