US growth outlook: Tariffs take their toll
US spending growth has disappointed in the first few months of the year and consumer sentiment has been weak, suggesting that the new administration’s policies are having a serious negative impact on consumer spending. According to the Atlanta Fed’s nowcasts for GDP and its components, consumer spending will grow just 0.3% in the first quarter of the year, down from 4% in the last quarter of 2024 and 3.7% in the third quarter of 2024.
In addition to the erratic tariff policies, attempts to reduce government spending are another source of uncertainty holding back consumption. The announced tariffs on imports from China, Canada, and Mexico, as well as imported autos and auto parts, are expected to add six percentage points to the effective US tariff rate. A wave of reciprocal tariffs that are portrayed as a response to foreign tariffs, consumption taxes, or currency manipulation could add another eight percentage points to the effective tariff rate. Higher tariffs have a tax-like effect on incomes and hence on US GDP growth, and tighter financial conditions due to market jitters add another headwind to growth.
Fewer imports can only provide a modest offset. We have lowered our US growth forecast for 2025 and expect GDP to grow by just 2% and the unemployment rate to rise slightly to 4.4% by the end of the year. At the same time, we expect tariffs to have a temporary impact on inflation in 2025, pushing it up to 3.5% before falling back to 2.6% in 2026. We expect the Fed to ignore the temporary increase in inflation and cut rates in September in response to a cooling labour market. Lower inflation in 2026 would allow for more rate cuts in 2026.
Tariffs weigh on auto sector
Starting 2 April 2025, the US announced that it will impose a 25% import tariff on cars and car parts. In Europe, this will predominantly hit German car manufacturers. But the US automotive industry will not be spared either, as it is heavily intertwined with Mexico and Canada. The tariffs are expected to raise US car prices by a mid-to-high-single-digit percentage. This will also impact demand in a US car market that is already suffering from affordability issues.
The impact on individual companies depends on multiple factors, many of which are still very difficult to quantify. Companies with a large US production base and flexibility to shift more production to the US will be less impacted. Companies with high pricing power will be able to pass through part of the tariffs to consumers. However, it is expected that major German car brands could see a 5% - 25% negative earnings impact. How are we handling it? We prefer to stay on the sidelines until we have a bit more clarity on the tariffs.
Industrial metals - assessing the tariff impact
Dating back to President Trump’s first term, industrial metals have been a long-standing tariff target. Back then, he promised to revive the US aluminium and steel industries, which has yet to happen. Following his executive orders in mid-March, the US imposed a 25% tariff on all aluminium and steel imports, eliminating previous country exceptions. A bold move as the US is quite strongly dependent on aluminium and steel imports, particularly from Canada and Mexico. President Trump also ordered an investigation into copper imports, which could lead to the introduction of 25% import tariffs as well.
Compared with his first term, the main difference now is the lack of exceptions. Following the introduction of tariffs in 2018, US importers were able to evade them by sourcing from other countries. As a result, the average implied tariff rate paid by US importers declined significantly after 2018. This time around, such evasion will not be possible, which will push the rate up.
In total, US imported aluminium, copper, and steel was worth USD 125 billion in 2024. Adding in US exports, which could be subject to reciprocal tariffs, the total trade in these metals reached USD 195 billion. When compared to a US output of durable industrial goods of USD 3.4 trillion last year, this suggests that, on a broader basis, the tariffs are unlikely to have a big impact on the US economy. That said, specific industries where the value added of manufacturing is low or the material share of total cost is high will be hit quite hard. We stick to our established views: Cautious on iron ore and Neutral on aluminium and copper.
What does this mean for investors?
The US, which accounts for almost one-third of global consumption, is using its full weight in global trade to pressure everyone else with reciprocal tariffs. This makes sense from the point of view of effectiveness, since in a multipolar world it would be all too easy to avoid the tariffs imposed on a single trading partner, say China. In the latter case, for example, the imports to the US would find an alternative route via Mexico or Indonesia. So everybody is in the line of fire of the US.
The scope for the US to impose tariffs remains huge in Europe, taking the car industry as a proxy. Given the economic blow the tariffs could have on the US economy, we have downgraded US growth but do not see a recession on the cards. The other interesting thing to watch this week is the market action around the announcements. Despite heavily oversold conditions, particularly in US markets, rebounds failed miserably in the past few days. When forced to look for comforting signals in markets, technical analysts tell us that a bottom with broader market participation would be a good sign. But until that happens, markets remain in traders’ country and investors had better wait for the dust to settle.