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Tariff turmoil, German rearmament: where will it all end?

Steven Bell
Steven Bell
Chief Economist, EMEA

A resilient economy remains key in a fast-moving world

There’s a lot to talk about as the news is so fast-moving at the moment. We knew that President Trump would be active, but he has outperformed expectations on this measure! Trump’s tariffs are bad for the world economy and the impact on the US is greater than expected.

However, the outlook for the US economy remains positive and we do not believe that the tariff turmoil is sufficient to derail this. Indeed the major negative is simply the uncertainty created for both the consumer and businesses. We also take comfort from slowing US wage rises, which means the Federal Reserve (Fed) can step in if economic growth weakens.

Our unfashionable positive stance on Europe has received a welcome boost from news of German rearmament. We do not believe that this will lead to an economic boom in Europe, but expect that it will continue to outperform forecasts from those who had written-off the region. We also expect recovery in China, as the government focuses on delivering economic growth to strengthen their position in the current trade war with the US.

For the UK, seeking to reverse the trends of unaffordable government spending and falling growth rates, recent developments have been unhelpful. We think that sticking to the current policies will lead to a gradual improvement, but likely not until next year.

In the face of uncertainty, I would like to highlight the performance of gold, which has been acting as a safe haven. However, our forecast of resilient economic growth means that our favoured asset class remains equities.

Big changes in PMI indices

Composite Purchasing Managers’ Indices

Source: Macrobond, as of 25 March 2025 

Uncertain outlook in the US; but slowing wage inflation provides scope for Fed to act

President Trump and his administration have been more aggressive and more market-unfriendly than we expected. Rather than tax cuts and deregulation, the focus has been tariffs. This will damage world trade and growth inside and outside the US.  However, the starting point for the US economy is strong, the rest of the world is gradually recovering so we believe that the risk of recession is low.

Our view is that the direct impact on economic growth of new policies announced is limited. For example, tariffs are likely to have only a modest one-off impact on inflation. More significant policy action is restricted by the scale of the existing Federal deficit and debt burden.

We believe the most significant impact on the economy is in terms of sentiment, with both businesses and consumers becoming less certain about the future. However, this sentiment swing could be reversed, perhaps as economic growth remains resilient, or if the Trump Administration adjusts its rhetoric.

We see the slowing of wage growth as a key positive factor, as it means that the Fed has scope to cut interest rates if growth cools.

Economic surprises: U.S. – weakish and falling

Surprises to consensus expectations on data releases

Surprises to consensus expectations on data releases
Souce: Macrobond, as of 25 March 2025

Europe does not have to see a boom to deliver a growth surprise

German rearmament supported by a major fiscal boost is likely to deliver significantly stronger growth. That will help offset the structural issues of the crisis in the German car industry and loss of cheap energy supplies, that will remain a drag on the German economy for years.

We have already seen a modest recovery in consumer spending in Europe.  European consumers have been very cautious, retaining high levels of savings. As the economic recovery is sustained, we expect to see rising consumer confidence providing a virtuous cycle of lower savings and higher consumer spending to sustain economic growth over the medium term.

European economic news has been delivering consistent surprises for the last six months. That does not signify a boom, but does represent a significant outperformance of expectations, as economic forecasters appear to have written-off Europe.

Economic Surprises: Euro area – strong and rising

Surprises to consensus expectations on data releases

Souce: Macrobond, as of 25 March 2025.

All being well, the UK should have regained control of its deficit issue by next year

Rachel Reeves, the Chancellor, has taken action to demonstrate her determination to resolve the debt and deficit issues and so regain market confidence. As long as the economy is not knocked off course by further events, we see better prospects for 2026.

The Bank of England (BoE) also needs to regain the confidence of the markets, as cutting interest rates on the back of unreliable economic statistics and flawed forecasts has undermined investor trust.

The housing market looks in reasonably robust shape, which should underpin the economy, especially with Labour’s reforms to boost construction, although there will be a temporary setback as stamp duty increases. However, wage inflation remains far too high given the BoE’s 2% inflation target. Getting more people into the jobs market could help to resolve budget, growth and inflation issues.

UK wage growth inconsistent with BoE target

Growth in regular pay, UK private sector

Souce: Columbia Threadneedle Investments, 

US and tech stocks have surrendered much of their 2024 outperformance; we still favour equities overall

Despite the negative newsflow from Washington, the environment still favours equities, with economic growth, falling inflation and interest rates cuts predominating. Our expectations are moderated by valuations, which indicate that equities remain expensive, even after US and tech stocks have given back some of their premium. In the absence of a recession, which we are not forecasting, that leaves equities as our favoured asset class.

Excessive government debt and deficits, as a consequence of the policy response to Covid, overhang bond markets even as yields appear attractive. 

Gold seems a better safe haven. Gold’s price has been boosted since the start of the Russia-Ukraine war by the scale of sanctions imposed on Russia and thousands of entities and individuals. Russia itself has had much of its foreign exchange reserves ‘immobilised’ and may have the associated interest payments confiscated.

Equity Valuations

Value rotation has been large

alue rotation has been large
Souce: Columbia Threadneedle Investments and Bloomberg as of 25 March 2025. 

Equity Indices rebasted to start of 2024

Souce: Macrobond, Columbia Threadneedle Investments, as of 25 March 2025. 

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Tariff turmoil, German rearmament: where will it all end?

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients).

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority. In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws. In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore. In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058. In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association. In UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg. In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland. This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

 

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Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients).

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority. In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws. In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore. In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058. In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association. In UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg. In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland. This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

 

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