Within the US economy, the April US business survey points to a recession-like decline in activity, investment, and hiring intentions, which raises the probability of a recession to around 50%. This increased probability of economic stagnation is entirely due to exogenous forces, which include arbitrary tariffs, disruptions in public spending, changing incentives, and an unsustainable fiscal stance.
The prominent role of sharply higher tariffs on US imports is also driving up US inflation, inflation expectations, and inflation uncertainty. Hence, the unfolding economic downturn differentiates from conventional recessions. Below we break down the economic impact and provide our view on what is to come.
Currencies: A weaker US dollar is here to stay
The deterioration of the US growth outlook and rising recession risks, driven by President Trump’s erratic policymaking, have shifted our view on the US Fed and, consequently, also affect our currency outlook. We see less possibility of a consolidation of the US dollar in the short-to-medium term.
In the safe-haven space, both the Japanese yen and the Swiss franc have benefited significantly from the tariff risks. With the end of deflation in Japan and the Bank of Japan in the midst of normalising interest rates, the yen’s safe-haven character has returned for good. For the Swiss franc, however, the rapid appreciation has increased the probability of currency interventions by the Swiss National Bank (SNB). Although the franc is not excessively overvalued, the speed of the appreciation justifies a reaction. We still believe that outright policy rate cuts are not in scope. All in all, we lower our EUR/CHF forecast to 0.95 in +3 months, indicating the likelihood of some temporary softening due to possible SNB interventions. In the long term, we also stick to our +12-month forecast of the franc appreciating to EUR/CHF 0.92, driven by the franc’s relative price stability and safe-haven benefits.
Europe: Headwinds for growth
The erratic policies of the US are creating some headwinds for growth in the rest of the world. Europe is particularly well placed given its lower inflation and inflation expectations. We expect an increase in public spending and an easing of monetary policy in Europe. The European Central Bank (ECB) has already cut its key rates seven times, by a total of 175 basis points, and signalled at its last meeting that it stands ready to address the emerging growth risk with an appropriate monetary policy response.
We read the ECB’s statement as a willingness to move towards an expansionary monetary policy and adjust our forecast to at least three further rate cuts of 25 basis points each at the forthcoming meetings, bringing the key rate down to 1.5% by September this year.
Gold: The cost of central bank independence
Last week, the full focus of the gold market was on the independence of the US Federal Reserve. Prices surged as high as USD 3,500 per ounce on fears that President Trump could fire Fed Chair Powell, but gave away all their gains after these fears were alleviated. When we outlined the potential pathways of Trump’s presidency, interference with the central bank was one of the bullish wild cards for gold. Last week’s price performance shows how sensitive such a scenario would be for gold. It would come at a huge cost, not least as it would impair the status of the USD and US Treasuries as safe havens. In our view, this status has already taken a hit of late, partly explaining gold’s recent record run.
The run also reflects rising risks of a US recession, which are luring safe-haven seekers back into the gold market. Holdings of physically-backed products, our preferred gauge of safehaven demand, have risen by around 280 tonnes since the start of the year. Roughly a quarter of that has come from China, which has, historically, not been a major market for such products. Renewed safe-haven demand is a cyclical add-on to gold’s structural bull market, which is driven by central bank buying. Therefore, it is very clear to us that gold will remain in high demand from central banks. We reiterate our long-term positive view, acknowledging that excessive euphoria raises the risk of setbacks, which should, however, be short and shallow.
China: The tariff escalation increases growth risks
The Chinese economy grew at a solid pace in the first quarter of 2025. However, given the tariff escalation with the US, this pace is unlikely to be sustained. Part of the drag due to the external shock is likely to be offset by stronger policy support, but initiation could take some time, with policymakers assessing the economic damage first. We expect significantly weaker growth in the coming quarters, while uncertainty about the economic outlook remains exceptionally high.
As the domestic recovery remains fragile and the external tariff shock drastically increases growth risks, we expect the Chinese government to step up its support measures to stabilise the economy. However, the government is likely to take time to assess the damage of the tariff shock. The April Politburo meeting suggested the government is in no hurry to provide an additional support package. First, measures are likely to be taken to alleviate the situation for exporters and manufacturers, followed later by further measures to boost social spending and service consumption. In the meantime, already planned budget spending is likely to accelerate and provide a buffer. However, these measures are likely to only partially offset the external shock. Under the current circumstances, the outlook for the Chinese economy remains highly uncertain. We are sticking to our growth forecasts of 4.2% for 2025 and 3.8% for 2026, with risks tilted to the downside.
Emerging markets: A temporary outperformance
Emerging market (EM) equities are outperforming their developed market (DM) counterparts, but we doubt this lead will be sustained. Investors are rotating out of US equities rather than making a genuine shift towards EMs. Weaker US growth expectations and ongoing trade uncertainty are also weighing on the prospects for a lasting outperformance of the asset class.
EM equities have staged a relief rally since the 90-day tariff pause and were able to maintain a year-to-date outperformance of around 5% vs DMs. Latin America and emerging Europe now even trade at higher levels than before ‘Liberation Day’. In the near term, EM equities may continue to outperform their DM counterparts due to lower valuations, lighter positioning, and tailwinds from a weaker US dollar. However, we do not see drivers for sustained outperformance at this stage. The outperformance is more a result of investors rotating out of US equities, which corrected from stretched valuations, while EMs were already trading at cheaper levels and had lighter positioning. Importantly, there is no evidence of capital rotation into EM assets.
What do we see moving forward?
So here we are, and like many investors around the world, we have had to keep up with Trump, Navarro, and Musk over the past 100 days. Given the economic fallout from the uncertainties, we have almost halved our initial growth expectations for the US in 2025 – to a meagre 1.4%. Growth is likely to stall in Q2, unemployment is set to rise, and the likelihood of a recession has tripled since early January to 50%. In line with the policy shifts, we have cut our USD targets by more than 10% against the EUR and the JPY. In equities, we had already downgraded information technology and the US in March. On a more constructive note, central banks will step in at some stage. For the Federal Reserve, we are pencilling in two jumbo rate cuts as of the summer, after previously calling for no rate cuts at all. The mantra remains to reduce US assets in rebounds and add European and Chinese assets during weakness.