In my view, the upending of the global trade system occasioned by the Trump Administration’s tariff agenda will more likely than not see a global recession by year-end.

The backdown by the Trump Administration in its aggressive approach to China may diminish that risk somewhat, even if the erratic character of trade policy formulation leaves the nature and indeed utility of any China “deal” diminished.

This is true more generally of an alleged willingness on the part of some countries to “do deals”. Even completed deals will result in “nth best” outcomes for the architecture that underpins international trade. At best, such agreements will only mitigate rather than eradicate the “stagflation-lite’ implications of the “Liberation Day” announcement.

For one thing, higher prices and lower activity growth relative to the pre-existing baseline (prior to the Trump ascendancy) will still result.

That certain countries and trading blocs – China, the EU and Canada – may still retaliate only compounds the likely global stagflation-lite consequences. Such measures put the global economy in circular firing squad mode.

Second, the aforementioned erratic character with which the proposals have been implemented will mean that an uncertain economic environment will persist for an extended period.

Businesses will put investment plans on ice, and households will likely reduce consumption expenditure and increase savings.

The fact that tariffs will (at the very least) mean an exacerbation of the short-term “stickiness” in inflation will mean that a number of central banks may be limited in how far they can reduce policy rates in response to declining economic activity growth.

Bond yields, too, may not be as responsive to central bank rate cuts. The already gargantuan US budget deficit requires massive bond issuance to fund it at a time when bond markets are spooked by the inflation implications of tariffs and foreign central banks are reluctant to place increasing amounts of their foreign exchange reserves in US Treasuries. Recent developments in Germany also imply a greater deficit proclivity, which again will require bond issuance to fund.

Click here to read Stephen Miller’s full opinion piece.

Stephen Miller

Stephen Miller is GSFM’s market strategist. His expertise in international economic and policy analysis, as well as domestic and global economic and financial market developments, has resulted in him becoming a regular commentator on central banks, rates and inflation.

Information provided is general information and is for educational purposes only, and does not include, or constitute as, financial product advice.