A Matter of Confidence
- 24 March 2025 (10 min read)
KEY POINTS
On April 2, the US should release their comprehensive tariff plans, but Scott Bessent presented them as only the start of negotiations: trade uncertainty will remain high for months, with a price to pay in terms of growth, both for the targets of the new tariffs and for the US itself. Using estimates from 2018-2019, uncertainty alone could cost 2 to 4% of US business capex. On the consumer side, our econometric model confirms that Americans continue to be more depressed than what the “objective” state of the economy would suggest. This was true under Biden and remains true now. We suspect the constant bombardment of news on tariffs is not helping. Sentiment matters: even when controlling for “hard” variables, consumer confidence has a measurable impact on spending. It is unlikely to be powerful enough, at this stage, to precipitate the US into recession, but combined with lower equity prices and wait-and-see on capex, the significant US growth slowdown which we expected for 2026 only could materialise faster.
Uncertainty was also very much on the FOMC members’ mind last week. While the market focused on some dovish aspects of Jay Powell’s statements, a careful look at the details of the Fed forecasts suggests that, while the central bank is not yet ready to move to a stagflationary baseline, the downward risk to growth and – probably more clearly – upside risks to inflation, around a still benign central scenario, are taken seriously.
Of course, trade uncertainty is another headwind for Europe. Still, in Germany and France, the source of the significant rise in overall economic policy uncertainty pre-dates trade war 2.0 and is more domestic. The confirmation of Germany’s new government success in decisively shifting the fiscal stance for the next 10 years, and in France the return of clearer political leadership in a context when defence and foreign affairs dominate, could offset some of the external headwinds. Still, the sequence remains problematic: the tariffs are for today, defence spending is for tomorrow.
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