Tariff chaos overshadows a strong US economy

Market & Trading Calls

• US Economic Strength Continues: the US economy continues to outperform, with 2024 headline GDP expanding at 2.8%. In Q4, while headline growth came in a bit below expectations, household consumption (70% of GDP) surged to a 4.1% q/q annualized gain, marking the highest pace of expansion in over a year.
• Three Economic Scenarios for Tariffs: if broad-based tariffs remain in place for an extended period of time, two outcomes are possible – either inflation rises, but reshoring supports job growth and sustains GDP growth (>=2%) or inflation spikes without reshoring, dragging growth down to 1 – 1.5%, albeit inflation would also ease back towards 2%. The third and most likely scenario is a middle ground, with tariffs on China persisting for some time while those on Canada and Mexico are resolved quickly, allowing US growth to finish at 2.5%, but keeping inflation in a range between 3 – 3.5% this year.
• Canada and Mexico Negotiations: the White House has shown a willingness to negotiate quickly with its North American partners. We expect a resolution over the next month as negotiations commence, minimizing economic disruption and maintaining trade stability.
• China Trade Tensions to Persist: Unlike Canada and Mexico, tariffs on China are expected to persist and possibly increase in a move to pressure CCP officials. Trump remains skeptical of Chinese commitments following a failure to follow through on a trade deal made during his first term. Trump administration officials would also like to pressure China’s sizeable current account surplus.