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
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, ONS and Macrobonds of 25 March 2025
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
Souce: Columbia Threadneedle Investments and Bloomberg as of 25 March 2025.
Equity Indices rebasted to start of 2024
