As the implications of escalating Trump-led tariffs reverberate across global markets, Cyril Regnat, Head of Markets Research, Christopher Hodge, Head US Economist, Jesus Castillo, Economist, Eurozone and Southern Europe, and Emilie Tetard, Cross Asset Strategist, from the Natixis CIB Research team, bring you their latest insights into the evolving situation.
This article was written following a webinar on 12/02/2025
Cyril Regnat
Christopher Hodge
Jesus Castillo
Emilie Tetard
Navigating uncertainty in the US
Economic growth is expected to slow slightly in 2025 compared to last year. In 2024, growth was well above potential, reaching approximately 2.8% year-on-year. The Natixis CIB view is that this will normalize to around 2% in 2025, aligning more closely with potential growth. A key factor in this outlook is the increasing disparity within the consumer sector. High earners have benefited significantly from sustained high incomes and a rising stock market, which has driven spending throughout 2024. Conversely, consumers at the lower end of the income scale have also seen an increase in purchasing power over the past two years, primarily due to wage gains. However, wage growth for hourly workers decreased from about 5% in 2023 to approximately 3.8% in 2024. While 3.8% is still robust, it is important to note that the lowest third of spenders in the U.S. economy are not experiencing the same level of wage growth they previously enjoyed. Additionally, with pandemic-era savings largely depleted, lower-income consumers are beginning to feel the strain.
Looking to inflation, the labor market is a key player. Recent trends show that a decrease in labor churn is helping to keep downward pressure on wages, which supports a positive outlook for inflation. While we remain cautiously optimistic about inflation this year, the recent spike in the Consumer Price Index (CPI) raises some concerns about whether inflation will stabilize at uncomfortably high levels.
There is a real risk that inflation could stabilize around 2.5% year-on-year. This situation would pose challenges for the Federal Reserve, especially with the ongoing uncertainty related to Trump’s trade policies. Additionally, immigration policies could put upward pressure on wages, adding complexity to the inflation picture. As a result, there are several risks suggesting that inflation may stay stubbornly high.
Although hitting a 2% inflation rate might be tough due to seasonal factors in Q1, we do believe there will be continued progress throughout the year. A major influence on how much progress we see will be the policies from the Trump administration that have yet to be put into action.
Looking ahead : In the short term, tariffs could put an upward shift on consumer prices. Longer term, a decrease in legal and illegal immigration will put upward pressure on wages – but we will likely not see the impact of this until 2026.
European Economic Context and Potential Tariffs
As the Trump administration continues to navigate its trade agenda, the reality is that we know little about the President’s actual intentions, and thus the potential impact of new tariffs. Historically, the US has imposed fewer tariffs on European goods, leaving Europe with valid reasons to voice concerns about trade fairness.
While the specifics surrounding the products and countries that will be targeted remain unclear, machinery, transport equipment — including automobiles — and pharmaceuticals are among the categories likely to be affected. Countries with the largest exposure to U.S. markets, such as Germany and Italy, would experience the most severe impacts.
European policymakers must carefully consider their options. Retaliatory measures may be a natural reaction, but the European Commission has indicated that it will cautiously assess the situation. The social and economic stability of various industries within Europe is at stake, particularly among companies that have the option to relocate operations to the U.S. to escape the impacts of tariffs.
To mitigate potential damage, Europe could adopt a targeted approach, focusing on non-essential goods that would minimize adverse effects on the European market. Instruments established during previous trade negotiations could be leveraged to respond effectively to any tariff increases from the U.S.
Our baseline scenario suggests that President Trump is leveraging tariffs as a negotiation tool rather than a definitive policy shift. This perspective suggests that, while tariffs may be announced, they might not be fully implemented, as the administration weighs the economic repercussions. If the U.S. economy begins to feel the pain of these tariffs, it is likely that the administration would reconsider its approach to avoid significant economic downturns.
The alternative risk scenario anticipates a more aggressive stance, with a 10% increase in tariffs on European goods. Under this scenario, forecasts indicate a potential reduction in GDP growth of approximately 0.4 percentage points in 2025. This adjustment would translate to a GDP growth rate of around 0.4% in 2025, down from previous expectations, and would have a cascading effect, leading to a GDP reduction of about 0.9% from the previously anticipated 1.2% growth rate.
The potential for increased tariffs also raises concerns about inflation. It is expected that such measures could cause inflation to rise slightly in 2025, with projections moving from 2.1% to 2.3%. However, by 2026, inflation is anticipated to decrease to 1.6%, down from 1.8%. Despite these fluctuations, the overarching sentiment is that the economic impact of tariffs will be disinflationary for Europe.
In light of these scenarios, the European Central Bank (ECB) may find itself compelled to extend its rate-cutting cycle. Current projections suggest that the ECB could lower rates further, potentially reaching around 1.5% by the end of 2025. This would imply five additional rate cuts rather than the three currently anticipated.
We don’t believe that an escalation of tariff disputes is in anyone's interest, as it could lead to detrimental economic consequences on both sides of the Atlantic. As Europe prepares to navigate this uncertain terrain, the focus will be on maintaining economic stability while responding effectively to any tariff-related challenges that may arise.
Equities Outlook Amidst Market Volatility
Markets have been heterogenous, with lots of hesitations, at the beginning of the year, driven largely by inflationary pressures and central bank policy uncertainty.
Risk perception index remains at a median level, with the VIX hovering around 16, indicating a moderate level of market anxiety but not yet entering a state of stress. This heightened uncertainty has led to a cautious approach among investors, as they revise their expectations of interest rate cuts by central banks against potential inflationary scenarios. While a rate-cutting cycle is still anticipated, the timing remains uncertain.
Investors are becoming increasingly cautious about the risks posed by rising inflation, which could negatively impact both equities and bonds. But, without concrete evidence of growth slowdown at this point, the overall global outlook remains optimistic (the central soft landing scenario is still considered as the most likely outcome).
Current market dynamics reveal a significant divergence between U.S. and European equities. While the 7 major U.S. tech stocks have experienced a slight decline (of around 2%) since the beginning of the year, European equities have surged, with indices like the SX5E up approximately 9%, also recently helped by a strong earnings momentum. The shift from U.S. tech stocks to European equities reflects a broader rotation among investors seeking opportunities in cheaper segments. This divergence raises critical questions about the sustainability of the global equity trend.
On the hedging / diversification strategies, traditional correlations between equities and bonds are still unstable, complicating the risk management landscape. As a result, gold has emerged as a viable hedge against geopolitical and inflationary risks, touching all-time highs recently.
As we move further into 2024, the key questions for investors revolve around timing and strategy. The landscape is fluid, and market conditions can change rapidly. While the current focus is on navigating inflation and potential tariff impacts, staying adaptable and vigilant will be essential for successfully managing portfolios in these uncertain times.
