Simplify the complex with clear and concise market insights direct from our investment experts every week.
Global outlook with Dermot O’Leary, Chief Economist
What is the fallout from the US government’s tariff announcement?
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Markets have been surprised at the scale and breadth of the tariffs announced by the US President, as well as by the methods used to arrive at the various rates applied. World equities are down nearly 9% in local currency terms. Further destabilisation has resulted from the instant Chinese response, which added an additional tariff of 34% on all US imports. Canada has also reacted by imposing a 25% tariff on motor imports.
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Generally, economists advise non-retaliation, which may be unpopular in political terms. Despite the market reaction, it is unlikely that the US will reverse course, but deals may be done with individual trading partners.
What is the average tariff rate being applied?
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On average, the tariff rate is about 25%, a level that hasn’t been seen since the Great Depression of the 1930s, and which then exacerbated the global downturn. On a country-by-country basis, tariffs vary from a 10% baseline to almost 50%. More products could be added in the future. The suddenness of the increases has not been seen since the 1860s, when tariffs were introduced to fund the Union armies in the American Civil War.
What will the impact be?
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The main substantive predictive outlook on tariff impact has been provided by an OECD report published last month, which factored in the consequences of a 10% tariff. The report estimates a 0.3% fall in global output within three years. It’s worth bearing in mind that this estimate does not include the effect of uncertainty on growth. In the current situation, we can say that the impact of tariffs will be to increase inflation in the short term. In the medium term, however, the effect will be deflationary because tariffs will drag down domestic demand.
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GDP forecasts have already been cut in the US over the last month; absorbing the recent news will entail further cuts to forecasts across all global regions. Earnings forecasts will also have to be cut; the scale of the reductions will only become apparent over time.
How will Europe react?
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It’s clear that there will be a European response, but that it will aim to minimise any further negative fallout for the region. This week or next will bring a reaction to the initial set of tariffs on steel and aluminium, targeting certain sectors.
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Reaction to the tariffs announced on April 2 may encompass a broad suite of products or specifically target the services sector. The latter move – for example, a headline-grabbing ‘Google tax’ – would have significant consequences for Ireland. Also fundamental from an Irish perspective are future developments concerning tariffs on medical devices and pharmaceuticals.
Markets and macro insights with Bernard Swords, Chief Investment Officer
What are the positive aspects to the outlook?
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We can see that markets are adjusting to the effects of tariffs. While the volatility will not end, we may be close to forming a clear picture of the worst-case scenario for the global economy. The responses from affected countries and subsequent US reaction will round out our overall assessment.
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The European Central Bank may still cut interest rates on the assumption that any resulting rise in inflation will be transitory. Forecasts for growth are now more negative than previously, yet not sufficient to cause a significant shock to the global economy. Consequently, we will maintain the current asset allocation and monitor developments to see if they require an alteration in asset mix.
What is the outlook for investment opportunities?
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At the moment, we view the market correction as a buying opportunity and we are investing excess cash in portfolios at the moment. In general, the falls in equity markets were driven as much by de-risking as by investors selling down tariff-affected sectors. The weakest performers last week were the high beta sectors, IT and Communication Services, which are not, in fact, the most affected by the tariffs.
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When we gain clarity and confidence regarding general economic as well as earnings forecasts, then these sectors should start to recover and will provide the best opportunities. We are reviewing the regional and sectoral exposures in our equity portfolios to see if we can reduce the impact of tariffs on returns (we cannot eliminate it altogether).
What new information became available last week?
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While the April 2 announcement took centre stage last week, we did get good inflation data from the euro area, where the core rate dropped from 2.6% year-on-year to 2.4%, well on track to reach target levels by the end of the year. Encouragingly, most of the drop in inflation came from services. In the US, we got the main business surveys (the ISMs). Both dropped in March, with the Manufacturing Survey going below 50, although still higher than in Q4 2024. The employment sub-index was the weakest component in the non-Manufacturing survey, and this was affected by the DOGE measures reducing the number of Federal Employees.
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Hard data from the US continues to be robust. Non-Farm Payrolls came in at 228k, well ahead of the 140k forecast. Even allowing for the downward revision to last month’s figure, it is still a strong number.
The week ahead: what to watch out for
This week the main data release will be the inflation data from the US (both CPI and PPI) and from the euro area, we will get the Retail Sales report.
