What Trump's U-turn means for our forecasts

The announcement of massive reciprocal tariffs on Wednesday last week led many investors to believe that Donald Trump would accept a collapse of the stock markets in order to reduce the high US trade deficit and generate tariff revenues to finance tax cuts. Instead, we stuck to our main scenario that Trump is primarily interested in making deals and is not left cold by the massive increase in recession risks and the sharp drop in stock market prices. We therefore did not change our economic forecasts last week, but merely pointed out that risks had increased.

Trump's U-turn on Thursday confirms our main scenario

Trump's U-turn on Thursday evening confirms this main scenario. Under the new policy, a standard rate of 10% will apply to reciprocal tariffs (with the exception of China) for 90 days, rather than the higher country-specific rates that apply to the EU, for example (20%). Sectoral tariffs of 25% will continue to apply to automobiles, auto parts, aluminum and steel.

Both his actions and his statements suggest that the stock market slump played a role in his turnaround on tariffs: ‘Well, I thought that people were jumping a little bit out of line; they were getting yippy,’. He also seems to be concerned about deals: In his view, a deal can be made with everyone, even with China. The fact that he also mentioned China is noteworthy in view of the fact that he had recently raised tariffs on Chinese goods to 145 percent.

No major changes to our US forecasts

Because we see our main scenario as confirmed, namely that Trump wants to avoid a slump in the economy and the stock markets, we decided against a massive reduction in our US economic forecast at our monthly forecast meeting. We only lower the 2025 US growth forecast from 2.0 percent to 1.7 percent – due to the recent back and forth over tariff policy that increases uncertainty and weighs on US corporate investment. Nevertheless, the economy should remain sufficiently far from the recession threshold, precisely because Trump wants to avoid a recession and the US economy still has a lot of momentum. Gross domestic product has grown by at least 2.5 per cent in each of the last three years.

We had previously expected the Federal Reserve to cut key rates twice by 25 basis points each in the winter half-year 2025/26. Here, too, we are making only a moderate change and expect three interest rate cuts at quarterly intervals from September. The upper limit of the US key interest rate corridor would then be 3.75% in March 2026. The fact that we do not expect a recession and that US consumers expect massively higher inflation in the future due to tariffs argues against aggressive interest rate cuts. To prevent this from becoming a self-fulfilling prophecy, the Fed can only reduce its key interest rate to a level at which its monetary policy still has an inflation-reducing effect.

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