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MACRO OUTLOOK Q2/2025: BE CAUTIOUS AMID ESCALATING TRADE WAR SPIRAL

The reciprocal tariffs announced by the Trump administration on April 2 have brought the effective US tariff rate to 22.4%, a level not seen since the 1900s. This is beyond the expectations of many parties, leading to great concerns about the growth prospects and stability of the global economy in the coming time.
Except for China's tough stance that has caused the trade war to continue to escalate between the two world powers, most countries have chosen to approach through negotiations or respond in part but still prioritize negotiations such as Canada or the EU.
In the short term, prolonged policy instability will lead to many consequences that make consumers and businesses around the world cautious in consumption and investment. According to estimates by some organizations, the Trump administration's tariff policy could reduce US economic growth by 0.9 percentage points, China's economic growth by 1.2 percentage points (not including the scenario of an additional 50% tariff due to retaliation), Japan's and the EU's economic growth by 0.7-0.8 percentage points and 0.3 percentage points, respectively, compared to forecasts before the April 2 announcement. It should be noted that these estimates are for reference only because they depend on models and assumptions, which can change rapidly in the coming time.
Currently, the impact of the tariff policy is only limited to psychology and expectations. Therefore, there has been no specific response from central banks. Pressure from tariffs and risks of slowing growth have led the market to expect the Fed to cut interest rates five times in 2025, while the ECB and BOJ are cautious in adjusting interest rates, waiting for economic data and the results of upcoming negotiations with the US. Meanwhile, the PBoC made its first move by raising the reference exchange rate, a sign of the possibility of devaluing the yuan to respond to the trade war.
On the fiscal front, the EU and Germany will implement the largest fiscal expansion packages since the pandemic, focusing on infrastructure and defense investment. However, the impact on growth in 2025 will be modest due to the implementation delay, and calculations show that the impact of this fiscal package is not enough to offset the damage caused by the tariff policy. With the Trump administration raising import tariffs on Chinese goods to 104% on April 9, the Chinese government is expected to come up with stronger fiscal measures to mitigate the negative external impact.