Tariff back-tracking dampens fears

There has been a lot of statements about US import tariffs over the last month. While there have been both tightening and easing, the net result is a significantly lower tariff level, especially after the 145% tariff on Chinese goods was postponed for three months on May 12. Based on 2024 trading patterns, that approximately halved the average US tariff rate from 30% to 15%. It also left the impression among many investors that the Trump administration is more flexible than it initially signalled and not willing to impose large scale damage on the US economy to achieve its trade policy goals. Based on the assumption that current tariff rates will more or less be maintained for the next few years, we only expect a modest effect on economic growth in the US and even less in Europe in our updated economic forecasts (see Nordic Outlook – normalisation with tariff risks, 4 June). However, even if the result is “just” a 10% general tariff with extras on specific industries and on China, that still represents the largest tariff increase in almost 100 years and we do not have a lot of relevant experience about how it will affect the economy. Also, it is clearly still possible that the administration will go back to much higher tariff levels or to using tariffs aggressively to try to achieve its policy goals.

One purpose of higher tariffs could be to reduce the US government deficit. The House of Representatives have passed a so-called “Big Beautiful Bill”, supported by the administration, which will extend old tax cuts and introduce new ones, leading to a budget deficit of close to 7% of GDP by official estimates. The bill will likely have to be modified in order to pass the Senate, but concerns over the lack of sustainability in public finances are clearly increasing, as also illustrated by the downgrade of the federal government’s credit rating by Moody’s in May.

Economic data suggest that there has been a slight negative effect on activity globally from the tariff announcements on 2 April and the uncertainty that has followed since, although the picture is far from clear. PMI’s point to manufacturing holding up or actually improving in the US and Europe despite being most exposed to tariffs, while there is a little more weakness in services. That could reflect weakness in consumer spending, as we continue to see very weak consumer confidence indicators in many countries. However, sales data show that there has not been anything like a sharp decline in actual spending. Lower growth in the service sector could also reflect businesses holding back on their spending on business services.

In terms of inflation, we have confirmation that the spike in the euro area in April was a one-off likely related to the timing of Easter, as headline inflation was back below 2% in May. The ECB delivered yet another 25bp rate cut and reduced its inflation forecast for 2026 to just 1.6%, but President Lagarde sent a strong signal that the rate-cutting cycle is at an end and that temporary factors are driving inflation below 2%. Hence, it now seems most likely that there will not be another rate cut in July, although we still think the balance of risk argues for lower rates and we continue to expect a cut in September

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