Tariffs, falling consumer sentiment, and foreign exchange volatility created heightened uncertainty in markets over March. Slowing growth in the US and rising uncertainty across various fronts have shifted investor sentiment from exuberant to cautious. The key US share market index, the S&P 500, entered 2025 with strong expectations but had contracted by the end of March. This decline was driven by valuation adjustments rather than changes in earnings projections. As markets tend to “overshoot,” it is quite possible that we will see further valuation contraction in the months ahead.
During March, unpredictability and confusion around President Trump’s tariff policies raised concerns and added to escalating geopolitical risks. President Trump’s tariff threats reignited retaliation warnings from China and increased nervousness amongst traders and investors. Economic data sent mixed signals: in the US, data tended towards the weaker end of expectations, whereas in Europe and China, data was slightly better than expected.
With heightened volatility, the S&P 500 (-5.75%) and Nasdaq (-4.91%) posted large monthly declines, while the Dow lost -4.2%. Other global markets were weaker. Australia’s ASX 200 was off 4.02%, Japan was down -3.3%, the UK was -2.52%, France -3.96%, and Germany -1.55%. China was the sole major market to print a slight uptick (+0.45%).
Most commodity markets were only slightly up, but gold and copper were shining. Oil was a touch higher, but gold rose again in the month – see below chart – to reach new record highs, as did copper. We remain optimistic about the gold price, and consider its strategic attributes of liquidity, diversification, limited supply and strong demand, plus good long-term performance, as justifying its retention.
The Australian dollar remains mired in weakness around the USD0.6280 level, off almost 4% over the last 12 months. Bond markets were mostly unchanged, and the US 10-year Treasury ended the month at 4.23%, and the Australian 10-year bond at 4.40%. German Bunds were an outlier, with yields rising sharply on changes to Germany’s fiscal positioning.
We expect most tariffs will remain in place through the rest of the year and beyond, although relying on assumptions (especially where President Trump is involved) is risky. We broadly expect a 20% tariff on China, 10% tariffs on the European Union, around 5% on Canada and Mexico (with some goods not subject to duties), and a 5% effective rate on most of the rest of the world. We expect matching tariff retaliation from many foreign countries against the United States.
The consensus forecast for global GDP growth in 2025 is around 2.7%. Downward revisions for the US during March were offset by slightly firmer economic outlooks for China and India, while we note upward revisions to the growth outlook for the Eurozone on the back of prospects for enhanced fiscal spending.
Regarding monetary policy outlooks, we expect more easing from the US Federal Reserve (Fed) given softer growth, while we see less monetary easing than previously from the European Central Bank (ECB). Softer US growth and a more dovish Fed are likely to result in less US dollar strength than previously anticipated. The Reserve Bank of Australia (RBA) is likely to remain on hold until after the Federal Election on 3 May.
Key Themes – Tariffs, USD, US Exceptionalism
The potential economic impact of the trade war is becoming apparent. While the consensus 2025 global GDP forecast is mostly unchanged, the component parts have shifted slightly. For the United States and Canada, we expect slower growth and more dovish central bank monetary policy due to tariffs. At the same time, fiscal stimulus in Germany has improved the Eurozone’s medium-term growth prospects and prompted a less dovish ECB. Modest fiscal stimulus in China could also see a stabilisation in China’s economy.
We expect less US dollar appreciation: the degree of “tariff fatigue” could limit the extent of USD safe-haven support over the next several quarters. In addition, softer US growth and a dovish Fed could lessen the greenback’s gains over the medium term, given that growth, fiscal policy and monetary policy trends are turning more supportive of foreign currencies.
Is US Exceptionalism Fading?
As the details of trade and tariff policy become somewhat clearer, we may also be gaining insight into the potential economic impacts of tariffs. US activity data in early 2025 hints at slower growth, likely reflecting increased uncertainty even before tariffs take effect. Real consumer spending fell in January, while February retail sales barely rebounded after a large January decline. February payrolls rose more modestly than expected. The February CPI report was benign, although we expect a modest acceleration of inflation as a flow-on effect of tariffs as the year
progresses.
Given that growth slowdown is occurring against only a moderate uptick of inflation, the Fed will continue to ease monetary policy, and markets expect a 25 basis point (bps) rate cuts in June, September and possibly December, with the Fed funds target range reaching a low of around 3.75% by year end.
Overall, we characterise our 2025 outlook as one of softer US growth and more dovish Fed policy. For 2026, as the initial tariff impacts fade and US fiscal policy becomes more expansive, we see a rebound in GDP growth and steady Fed monetary policy.
Australia
Prime Minister Anthony Albanese has called for a Federal Election to be held on 3 May. An increasingly uncertain political, fiscal, and global backdrop suggests it is more likely the RBA will pause the easing cycle in April before cutting again after the election.
The FY2026 Commonwealth Budget projected a similar fiscal and economic outlook to that in December’s Mid-Year Economic and Fiscal Outlook, but appeared “rushed” and contained few positive new ideas. The Budget’s flagship policy was very modest income tax relief and extended subsidies on health and electricity bills. There was little to cheer for those who hoped for some economic or strategic leadership.
Australia’s monthly CPI was flat in February, with year-ended growth easing to 2.4% year on year. Growth in the trimmed-mean, the RBA’s preferred measure, eased 10 bps to 2.7% year on year.
International Outlook
With respect to the international outlook, developments have been mixed, although there has been encouraging news for select major economies, most notably in Germany and the Eurozone, and to a lesser extent China.
Europe
With respect to the Eurozone, a landmark shift in German fiscal policy has contributed to a brighter outlook for German economic growth. Germany has traditionally been the Eurozone’s most fiscally cautious economy and, since 2009, has incorporated a “debt brake” as part of the country’s constitution. In recent years, debt brake laws have required the federal government to limit its structural budget deficit to no more than 0.35% of GDP and required German states to run balanced budgets except for times of national emergency or recession. However, after two years of German economic contraction and as geopolitical developments have heightened European security concerns, Germany’s Chancellor-in-waiting, Merz, has engineered a remarkable fiscal stimulus.
The key elements of Germany’s new fiscal measures include:
- Excluding defence spending more than 1% of GDP from the constitutional debt restrictions.
- Allowing Germany’s 16 states to borrow as much as 0.35% of their GDP, as opposed to being required to run balanced budgets.
- Establishing a special, off-budget infrastructure fund that will be empowered to borrow as much as €500 billion over 12 years, or just under €42 billion per year.
As far as defence spending goes, in 2024 Germany spent around €90 billion, or ~2% of GDP. To the extent an exemption of defence spending from the debt brake frees up room for spending that previously counted against the deficit limits, it could create potential space for ~1% of GDP for spending in other areas going forward. Should the federal government and states be able to fully utilise the constitutional changes, that would equate to a fiscal stimulus of 1.35% of GDP, while the infrastructure fund would equate to another 1% of GDP. That suggests a potential German fiscal stimulus of around 2.3% of GDP over the next several quarters.
German overall fiscal stimulus could amount to more than 3% of GDP over the next several years. For the Eurozone, German fiscal stimulus worth 3% of GDP is equivalent to a Eurozone fiscal stimulus of 0.7%-0.9% of GDP over the next few years. We view more expansive fiscal policy as a net positive for the Eurozone economy, and while tariffs may offset a portion of looser fiscal policy, most market analysts have lifted their Eurozone GDP growth forecasts for 2025 markedly.
China
China is also exhibiting tentative signs of outperformance relative to the US. Economic activity in China was relatively upbeat over the first two months of this year as the economy benefited from modest fiscal support introduced in the latter part of 2024. China’s retail sales rose 4.0% year-over-year in the January-February period, more than expected, while the 5.9% gain in industrial output was also better than anticipated. At the annual National People’s Congress in early March, Chinese authorities signalled that fiscal policy support will continue, albeit in a drip-feed fashion. China announced a GDP growth target of around 5% for 2025 and set a goal for the official fiscal deficit of 4% of GDP. The latter represents a notable change and is the widest general government fiscal deficit target in more than three decades.
The expansive fiscal stance suggests the Chinese government is focused on reviving domestic consumption, the nation’s top priority. While boosting domestic demand will not be easy and purely spending more money will not be enough to reverse a decades-long slowdown in household consumption, the trend direction is encouraging and has prompted an upward revision of China’s growth forecasts. Escalating trade tensions and rising US tariffs will restrain China’s economy to a certain extent, but we expect the economy to grow close to target in 2025.
Taken in aggregate, the outlook for key international economies has turned more positive at the same time as the outlook for the US economy has dimmed. Economic surprise indices for the US, China and Eurozone have also trended in a direction recently that suggests outperformance is more present in the Eurozone and China, and not as perceptible in the US. This change in growth narrative is a shift and introduces the possibility that post-pandemic US exceptionalism may be starting to diminish.
USD Dominance Diminishing
The evolution of trade tensions along with changes in the economic outlook still point to overall US dollar strength, but to a lesser degree. Foreign exchange markets may be experiencing a period of tariff fatigue. While tariff headlines have continued and further tariffs have gone into effect, implementation continues to see delays, which has also prompted delayed retaliatory responses from US trading partners.
During periods where markets have experienced extreme tariff uncertainties, the USD has tended to strengthen amidst increased foreign exchange volatility. To the extent that market participants become somewhat more accustomed to the trade wars as part of the economic landscape, the USD will probably enjoy less safe-haven support. Reduced safe-haven flows, in our view, could restrain the trend of USD strength and likely add support to the strategic case for holding gold.
