4 April 2025
Liberation Day – When an unprecedented tariff salvo plunged the world into a (temporary?) full-fledged trade war
Summary
Read the full report
In summary:
On 9 April, the US import tariff rate will hit its highest level since the 1890s at 20.6%. Some retaliated, others negotiated. The environment will remain fluid, increasing the cost of uncertainty.
The 10% universal minimum tariff and record tariff rates on 50 countries announced on 2 April exceeded analysts’ expectations. Chinese goods are now facing a 59% tariff, while Vietnam, Thailand, Indonesia, Taiwan and India face tariffs soaring from 18.5-40.4pps. Meanwhile, the UK, Singapore, UAE and Saudi Arabia will see modest increases (between +3.4-5.6pps). The EU faces a +20pps tariff rise (average tariff to 13.3% after sectorial exclusions). Bilateral deals could lower this to 11.8% by Q4 2025. China announced +34pps tariffs on all US imports: this could cause a USD64bn annual export loss. A reciprocal retaliation from the EU on all US imports excl. LNG could result in an annual export loss of USD26bn. Israel, Vietnam, India, and Thailand, Vietnam to name a few opted for (resp.) cutting tariffs, seeking a trade agreement or increasing imports. Like a fog of war, it is unclear what the final tariff landscape will look like, but the cost of uncertainty is high as tariff arbitrage is now off the table for most companies – until the dust settles.
Global GDP growth will slump to a mere +1.9%, the lowest level since 2008; global trade of goods to enter a recession (-0.5% in volume). With US inflation to peak at 4.3% by summer, central banks are in a pickle.
US corporates have stockpiled enough for about six months of total consumer demand. However, two-thirds of the rise in import costs will be passed on to the consumer. US inflation is expected to peak at 4.3% by summer, tying the Fed’s hands until October (rate at 4% by end-2025 and 2.75% by mid-2026). The US recession is expected to stay mild (cumulative decline of -0.5% Q1-Q3), with a weak +0.8% in 2025. Europe cannot escape lower growth due to higher trade restrictions and a weaker US economy, despite the German fiscal stimulus and higher defense spending. We cut forecasts to +0.8% in 2025 and +1.5% in 2026. The ECB is likely to bring rates down to 1.5%, -50bps more than expected. China is set to enhance policy support with at least RMB800bn in additional fiscal stimulus (i.e. 0.6% of GDP) which should keep growth afloat (+4.6% in 2025, +4.2% in 2026).
With a US recession looming ahead, government bond yields and stock markets have reacted strongly and will continue to fall.
Capital markets started to price in a recession, with global stock indices dropping by around 2-6% on the first day – even if an actual recession would tank stocks by at least 10pps more and credit spreads would have to widen further. The USD fell by 1.8% against the EUR and most other currencies on the first day, which, taken together with the stock market reaction highlights that markets expect US companies to suffer the most from Liberation Day. Government bond yields also dropped as recession fears outweighed inflation risks. With a US recession now being our baseline and lower terminal rates for the ECB and the Fed than current market pricing, government bond yields and stock indices could fall further. However, the exact timing is hard to predict as volatility will remain high amid forthcoming trade deals and counter-tariffs.
Authors
Ana Boata
Allianz Trade
Allianz Trade
Lluis Dalmau
Allianz Trade
Françoise Huang
Allianz Trade
Allianz Trade
Ano Kuhanathan
Allianz Trade
Allianz Trade
Subscribe to our newsletter
Weekly on Allianz markets, macro, sector & insurance research by Ludovic Subran