Trump tariffs: How markets reacted and the impact on the economy

On 2 April, President Trump announced a baseline 10% tariff on all imports, effective 5 April 2025. This tariff will remain in effect until trade deficits and nonreciprocal treatments are resolved. Additionally, individualised reciprocal tariffs will be applied to countries with the largest U.S. trade deficits starting 9 April, with rates varying based on trade practices.

The tariffs were much higher than most on Wall Street had expected. Consequently, most equity markets have sold off today. As US markets opened on Thursday, the S&P 500 was down more than 3% and the Nasdaq fell more than 4%. European equity markets are down just under 2%, while broad-based weakness in Asia led to a 1.5% drop in the Hang Seng.

Bonds rallied, with the US yield reaching 4.04% and the Bund yield declining to 2.66%. Surprisingly, the dollar, which tends to do well during economic shocks, is under pressure.

According to the Budget Lab at Yale, a non-partisan policy research centre, the tariffs would lead to the highest US effective tariff rate in over 100 years.

Impact on the economy

Most economists predict that tariffs will negatively impact GDP growth. Given that they are more severe than anticipated, we expect growth forecasts to be revised downward further.

Although global growth has shown resilience this year, there has been a noticeable slowdown due to deteriorating sentiment. The newly imposed tariffs are likely to exacerbate this trend.

The inconsistency in trade policies is creating uncertainty in global trade, which is dampening both business and consumer confidence. Consumers, in particular, are bracing for higher inflation as a result of the tariffs, which will negatively affect their real disposable income—a key driver of the economy.

If the revenue generated from tariffs is redirected into consumer tax cuts, it could mitigate some of the negative effects by sustaining consumer spending power. However, if the revenue is used to reduce the fiscal deficit, the economy could face a double blow.

Lastly, on the inflation front, Goldman Sachs estimates that higher tariffs will likely increase consumer prices, raising their core inflation forecast by 0.5 percentage points to 3.5% year-on-year by the end of the year. Nevertheless, we believe this impact will be temporary, as slower growth could reduce demand, easing price pressures and eventually driving inflation lower.

Potential back stops to the global economy

There are potential policies that could counteract the slowing growth impulse, such as fiscal stimulus from China and Europe, and further interest rate cuts led by the Fed. We will have to wait and see when, and if, these responses are enacted, but it is important to keep them in mind as potential backstops to the global economy.

Of course, lowering tariffs would be the best outcome, but the outlook for that remains extremely unclear.

There is considerable speculation about whether these tariffs are a negotiating tactic and whether we might see them reduced in the future. While there is some sympathy for this view, it is also possible that we could see retaliatory tariffs from affected countries, which would deepen the trade war.

What have we done?

This evolving policy landscape, coupled with doubts about how long tariffs will remain in place, clouds the investment environment. So, we need to deal with the facts on hand. The tariffs are significant, and the outlook is extremely unclear. As it stands, this will have a negative impact on consumer and business sentiment, which will become a negative growth impulse for the global economy.

Slowing global economic growth is not good for equity markets. Accordingly, we have trimmed equity exposure and will be underweight relative to our Strategic Asset Allocation, holding the proceeds in cash while we assess the further announcements and incoming data.

Our portfolios currently hold a significant allocation to government bonds, providing a buffer against the downside risks to global growth amid this turbulent environment.