International economic perspective

In the Trump political whirlwind with threats of tariffs, it is important to get a perspective of the reaction and development globally. What are the current trends and how are other countries reacting to a potential global trade war? The global economy can potentially grow 2.7% this year; however, following downward revisions to the U.S. growth outlook due to tariffs, there are upwardly revised forecast for the Eurozone as well as for China. For the Eurozone, the more optimistic outlook comes down to fiscal stimulus. After Germany’s election, despite coalition talks still in progress, Germany will lift its debt brake policies and allow for wider fiscal deficits. Looser German fiscal policy should support local spending activity over the medium term but also Eurozone-wide growth prospects. Positive effects may be realized in 2025, but most of the benefit will be felt next year.

There is also fiscal policy as rationale for a more constructive outlook on China. China’s economy is riddled with vulnerabilities and challenges due to the political system that restrain potential growth. Fiscal developments as more of a marginal benefit, with 2025 GDP forecast at 4.7%. Chinese authorities have pushed ahead with modest fiscal loosening, and during the National People’s Conference (NPC), officials cited boosting domestic demand as the top priority. Fiscal support will help boost consumption, although new U.S. tariffs will dampen the overall positive impact.

Fiscal support also now leads to believe that the European Central Bank (ECB) and People’s Bank of China (PBoC) will take less dovish stances on monetary policy. Consequently, the revised ECB terminal rate forecast higher and also believe PBoC policymakers will take a more gradual approach to lowering Reserve Requirement Ratios and other lending rates.

Less dovish stances from the ECB and PBoC, combined with existing view that FX markets are experiencing tariff fatigue, leads to believe the U.S. dollar may not strengthen as much as previously envisaged. A narrower Fed-ECB and Fed-PBoC rate gap may support both the euro and renminbi over the medium term, while tariff fatigue may anchor additional foreign currencies through the end of this year and into 2026. Nominal growth and interest rates still favor the U.S. and, in turn, should still be consistent with a stronger greenback over the quarters ahead. Even though a sense of tariff fatigue may be present, an uncertain tariff and U.S. trade policy backdrop can still provide a degree of safe-haven support to the dollar. Tariff-sensitive currencies can still underperform, specifically the Canadian dollar and Mexican peso, should another trade escalation unfold. Recent auto tariffs are likely to apply further pressure on both currencies, while each central bank is also still in monetary easing mode. Rate differentials combined with geopolitical and trade tensions should also weigh on both the Canadian dollar and Mexican peso.

As far as Banxico monetary policy, Mexico’s central bank met recently for a the second assessment of monetary policy in 2025. Similar to the first meeting, Banxico policymakers lowered the overnight rate by 50 bps; however, one key difference was that the decision to cut rates by 50 bps was made unanimously. The unanimous decision tilts Banxico in a bit more of a dovish direction. While policymakers soft-committed to another 50 bps cut in May, the unanimous nature of this week’s decision introduces the real possibility that Banxico could cut 50 bps in June as well. As of now, financial markets are not fully priced for a 50 bps rate reduction in June, so the Mexican peso could see depreciation pressures build as markets adjust to central bank rate expectations. Policymakers cited slow growth and further disinflation as rationale for easing monetary policy. Momentum across Mexico’s economy was soft toward the end of 2024, and tariffs should compound the subdued activity. It is possible that Mexico’s economy will enter a recession in 2025 and will experience essentially no growth this year. Combined with relatively stable financial markets, Mexico’s central bank should have further policy space for rate cuts.

The U.S. auto industry, yet to fully recover from the pandemic, is facing renewed headwinds due to the prospect of a trade war on the horizon. The Trump administration unveiled plans to enact 25% tariffs on motor vehicle and part imports to the U.S.. The Trump administration is exempting cars, light trucks and auto parts that are USMCA compliant from the additional 25% duties at this time. Around 93% of vehicle imports from Canada and Mexico are USMCA compliant, but the tariff still applies to non-U.S. content in the vehicle, of which our equity analysts estimate around 35% of parts in U.S.-made cars are non-USMCA compliant today. These tariffs, should they be fully implemented, are set to make a big impact on the American auto industry, where nearly half of all vehicles sold in the U.S. every year are imported.

Motor vehicles and parts comprise the second-largest category of U.S. imports, second only to computer and electronic products. Of the motor vehicles the U.S. imports every year, over 80% are imported from just five countries. The nation’s closest neighbors, Mexico (23%, $50.0B) and Canada (13%, $28.4B), together comprise over a third of total auto imports. The East Asian countries of Japan (19%, $40.8B) and South Korea (17%, $38.0B) together account for more than a third of imports as well. Many of the other imports come from Germany (12%, $25.6B) and other European Union countries.

The globalized nature of the U.S. auto market broadens the supply chain disruption of these tariffs. A potential reorganization of supply chains would be no simple task, and it would take significant time to shift toward more domestic production of autos. It is estimated that it takes about 12 months to relocate products to existing plants and about three years to build a new production plant. Relying more heavily on domestic production is not a quick fix for the threat of tariffs, as costs to produce vehicles domestically have risen as well. New contracts at unionized automakers that were negotiated in the past year likely will raise production costs to vehicles, according to some automakers, though the extent of this being passed on to consumers is still to be determined.

There is a sense of global tension and uncertainty due to the tariff threats from the Trump administration. Trump seems to be correct that many countries are taking advantage of the U.S. and it is time to change that, but it will likely become a painful transition with inflation pressure and geopolitical uncertainties. Despite that, it seems to be the right course as trade should be fair.