Trump announces import tariffs and raises the likelihood of a U.S. recession – 04/04
On Liberation Day, the United States imposes at least 10% retaliatory tariffs on all imports, with countries like China and Vietnam nearing the 50% commercial tariff threshold. Following the tariff program, most experts believe that the uncertainty generated by the tariffs has increased the risk of a U.S. recession over the next 12 months, as well as inflationary risks comparable to pandemic levels. As a first response, China announced several restriction measures against U.S. products, further increasing uncertainty regarding the global economic impact.
For the United States, we believe the tariff measures will result in significant inflation, higher interest rates for longer, and a high probability of economic recession. With direct impacts on domestic prices, we expect CPI to reach levels close to 5% over a 12-month cumulative basis. Thus, in a context of higher inflation and still-solid labor market signals, we believe the FED’s optimal strategy is to maintain interest rates at their current level for a longer period. It is important to note that we now believe the likelihood of a U.S. recession has become the base case, prompting us to revise our 2025 growth projection to 0.5% (from 2.1%) due to the impact of uncertainty, particularly on consumption and investment. However, given FED Chairman Jerome Powell’s acknowledgment of more persistent inflationary effects this year, we are revising our 2025 Fed Funds forecast to 4.50% (from 4.25%).
For other economies, including Brazil, we believe the potential effect of the tariffs is disinflationary, with Chinese and European stimulus supporting global growth. We consider three downward forces to dominate the tariff dynamics in other countries: 1 – appreciation of local currencies; 2 – less attractive commodity prices; and 3 – oversupply of goods that will likely be redirected to other markets. For Brazil, we believe the impacts could be even more positive, especially considering competitive advantages over Southeast Asian countries. Thus, especially given the impact of a weaker dollar, we are revising our 2025 exchange rate forecast to R$5.85, from the previous R$6.00.
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