No disconnection between the US and China, “just” a historic trade war
20 MAY, 2025
By LBP AM
Author: Xavier Chapard, strategist at LBP AM.
The trade negotiations between the United States and China this past weekend have led to a much larger reduction in bilateral tariffs than expected. For 90 days, “reciprocal” customs duties will fall from 145% to 30% on US imports from China, and from 125% to 10% on US exports to China.
This is a positive development that, overall, confirms a trend towards de-escalation. It suggests that the point of maximum uncertainty has probably passed and that the risk of a global recession is clearly diminishing. However, the impact of tariffs and lingering uncertainties remains substantial, as the average US tariff could end up at 13%, instead of the previously forecasted 15%—a figure still well above the 2.5% in place at the beginning of the year. Therefore, we maintain our scenario of a global slowdown from mid-year onwards, particularly in the United States, along with an increase in US inflation by the end of the year.
At the same time, the trade deal between the US and the UK—the first of a series of bilateral agreements—suggests that structurally significant tariffs of at least 10% are likely to remain in place. Uncertainty will also persist, given the erratic nature of US policy and the fact that the pause in additional “reciprocal” tariffs is, for now, only temporary.
As for short-term economic data, the current situation has not yet deteriorated significantly, while confidence is partially recovering from the shock in April, which is supporting the rebound in markets. Confidence should continue to normalise, albeit to a limited extent, thanks to reduced political risk. However, we still believe that US activity and inflation data will worsen as summer approaches. In this context, the absence of a clear trend may dominate market sentiment over the coming weeks.
US inflation in April once again came in slightly lower than expected, with headline inflation slowing from 2.4% to 2.3%, and core inflation remaining stable at 2.8%. In addition to a fall in energy and food inflation, the increase in goods prices was once again limited in April, while service prices eased due to a drop in travel demand. However, goods prices are likely to accelerate from May/June, two months after the tariff increases.
In May, the ZEW index (a barometer of German investor expectations) regained half of the previous month’s drop. Nevertheless, German investors believe that the economy has stopped recovering this month and remains in poor condition. In the US, banks report that credit conditions for companies worsened slightly in the first quarter, suggesting that the economy is likely to slow down in the coming months.
In the UK, the labour market has been slowing more noticeably this year, which should give the Bank of England confidence to continue with its “gradual and cautious” interest rate cuts, despite the rebound in activity in the first quarter and the increase in regulated prices. Wage growth (excluding bonuses) slowed from 5.9% to 5.6%, and the unemployment rate rose to 4.5% in the first quarter, while the number of employees fell by 33,000 in April.
