The deadline for the tariff negotiations imposed by President Donald Trump was reached on August 1. Japan and the EU reluctantly reached an agreement on trade terms with the United States. Both were subjected to 15 percent import tariffs on most product categories. The level was lower than feared, and therefore the negotiation results were seen as a relief and a way to reduce uncertainty. However, the outcome of the negotiations left many issues unresolved for all parties.
The US is still negotiating with China and Mexico. Tense relations with Canada led to the imposition of 35 percent tariffs on Canada. Trump imposed 50 percent tariffs on Brazil and 25 percent tariffs on India. The general tariff is 10 percent for countries with which the US has a trade surplus, and for most other countries it is 15–20 percent. Exceptions have been made for certain strategic product groups.
However, the final word may not have been said regarding the tariffs. The legality of Trump’s decisions is still under judicial review, and technical negotiations on details are ongoing with many countries. In the coming months, it will become clear how consumers and industry will adapt to the new cost environment.
Economies Have Fared Better Than Feared
Despite the increase in political risks, global economic development has held up during the first part of the year. The US economy grew at an annual rate of 3 percent in the second quarter, which was more than expected. China’s economy grew at a rate of 5.2 percent, and the euro area economy achieved 1.4 percent annual growth.
Inflation ticked up slightly: in the euro area from 1.9 percent to 2.0 percent, and in the United States from 2.35 percent to 2.67 percent. Central banks are now pausing further monetary easing.
The impact of tariffs is weighing on the euro area’s economic outlook, and Germany’s investment program is unlikely to provide a decisive boost. The weakening of export prospects was immediately reflected in the depreciation of the euro against the dollar, and this trend may continue depending on changes in foreign trade. The European Central Bank (ECB) may still have to cut its policy rate in the fall.
The Fed has taken a wait-and-see approach regarding the inflationary effects of import tariffs. The policy rate remains clearly above the current rate of inflation and long-term inflation expectations. Trump has pressured Fed chair, Jerome Powell, to lower the policy rate, and the bond markets are pricing in a level of about three percent by the end of next year.
Stock Markets on the Rise
Several stock markets, including those in the United States, Brazil, the UK, Germany, Japan, and Australia, reached all-time highs in July. Stock gains ranged from 0.7 percent in Europe to 4.8 percent in China. Novo Nordisk’s 30 percent plunge pushed the MSCI Nordic stock index down by 4.5 percent.
There were no larger-than-feared drops in corporate second-quarter earnings. The earnings of S&P 500 companies that have reported so far grew by about five percent, and the strong performance of the Magnificent 7 companies continued. The results of European Stoxx 600 companies are expected to have grown by a couple of percent. For the rest of the year, earnings growth of 6–7 percent is expected in the US, while in Europe earnings are expected to remain flat.
The strengthening of the euro since the beginning of the year came to a halt, and the euro weakened by more than three percent against the dollar in July. Long-term interest rates rose slightly by about 0.2 percentage points.
Figure: Over the long term, the dollar has strengthened, and tariffs continue to threaten the currencies of key trading partners.
