Halfway through 2025, negative sentiment related to tariffs still looms over the US economic growth outlook, and the impact of US fiscal policy remains unclear. Other economies are also facing growth concerns, but relevant countries have greater room to adjust monetary policy, and Europe and China are expected to introduce fiscal policies to stimulate growth.
Looking ahead to the second half of the year, growth is expected to continue to slow, and inflation is at risk of rising due to tariffs and geopolitics. In such an environment, active asset allocation strategies are more important, especially focusing on hedging inflation and diversifying investments.
Trade uncertainties impact economic growth prospects
Extended reading
US tariffs are confusing, local businesses wait and see until policies become clear
Tariffs lead to trade tensions, the World Bank lowers its global economic growth forecast to 2.3%
Eurasian and emerging market stocks may benefit
The impact of trade conflicts is threatening global economic growth prospects. Rising production costs will erode corporate profits, and tariffs on consumer goods are expected to weaken actual purchasing power, impacting consumer spending, which accounts for 70% of US GDP, so US economic growth faces downside risks. The US labor market has eased from extreme tension, and the buffer capacity provided for economic shocks has been significantly weakened compared to the global epidemic.
The progress of trade negotiations between the United States and its major trading partners (especially China, the European Union and Japan) except the United Kingdom remains unclear, but the market seems to underestimate the difficulty of the negotiations. The lack of signs of substantial progress or delays may further dampen business and consumer confidence.
While fiscal measures such as deregulation and tax cuts could pose additional upside risks to economic growth and inflation, the Federal Reserve faces a difficult balancing act between inflation risks and supporting a weak economy, a situation that is expected to continue in the second half of this year.
As long-term U.S. Treasury yields continue to rise, the market focus has shifted to the issue of the U.S. government’s expanding fiscal deficit, which is particularly evident after Moody’s recently downgraded the U.S. sovereign credit rating. Although the current Trump administration’s legislative measures to increase spending and cut taxes are part of the reason for the rise in U.S. Treasury yields, the weakening demand for U.S. Treasury bonds by foreign investors is also an important reason. This is because the market’s attitude towards the U.S. outlook has become more negative and there are concerns that the imposition of tariffs will eventually push up inflation.