World economy will slow sharply despite US-China tariff truce: Fitch
But the world economy still faces a sharp slowdown induced by the most severe trade war since the 1930s, said Fitch in its June 2025 GEO.
Fitch now forecasts world GDP growth at 2.2% in 2025, an upward revision of 0.3pp since the April GEO. We have also raised our forecasts for growth in 2026 to 2.2% from 2.0%. These rates are well below the 2.9% recorded in 2024 and the longer-term average of 2.7%.
We have raised the US growth outlook for 2025 to 1.5% from 1.2%, with recession risks receding. But there are signs of an underlying slowdown in final domestic demand, and we expect consumption to slow in 2H25, stated the top ratings agency.
China's 2025 growth forecast has also been raised to 4.2% from 3.9%. We revised up eurozone growth to 0.8% from 0.6%.
"Our latest estimate of the US Effective Tariff Rate (ETR) is 14.2%. Our base case assumes it will rise slightly further in the coming months, approaching the 18% rate assumed in the March GEO," it stated.
"This is well below the 27% rate assumed in the April GEO. Our latest GDP forecasts remain weaker than in the March GEO, however, reflecting extreme volatility in US trade policy in recent months which has increased uncertainty and will further weigh on growth," it added.
The tariffs have reduced US business and consumer confidence and prompted a spike in US imports in 1Q25 as US residents sought to front-run tariff increases. Inventories also rose sharply. There is little evidence of any impact on the US CPI so far, but upstream producer price and survey measures of price pressures have risen.
There have been downward pressures on US financial asset prices as reflected in equity market volatility, a weakening dollar and higher long-term 30-year government bond yields.
In China, fiscal easing is the key policy lever to offset the US tariff shock. But broader dollar weakness and ongoing falls in local-currency export prices could also help Chinese exporters to gain market share in other countries as China's effective exchange rate falls, said Fitch in its report.
For Germany, US tariff hikes – including on autos – are yet another adverse external shock. But there have been some encouraging signs on domestic demand recently, and fiscal policy should help growth to recover in 2026.
The Federal Reserve is likely to be cautious about cutting rates as US growth slows, and we still expect only a single rate cut this year in 4Q25. Tariffs will push up inflation, labour force growth is slowing sharply, and some inflation expectation measures remain high.
"Recent oil price volatility adds further upside inflation risks. We have raised our 2025 annual average oil price assumption by $5 to $70 a barrel," said Fitch Ratings in its report.
"The ECB appears more comfortable with recent progress on wage and price disinflation, and we expect a further cut in rates to a below-neutral 1.75% in September," it added. -TradeArabia News Service
Copyright 2024 Al Hilal Publishing and Marketing Group Provided by SyndiGate Media Inc. (Syndigate.info).
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Zawya
2 hours ago
- Zawya
Platinum prices have limited upside after June's stellar rally
LONDON - Platinum prices have limited room to rise further after a record quarterly rally, analysts and traders said, with Chinese imports expected to soften and South African output to recover against a backdrop of still-muted auto sector demand. Prices of the metal surged 36% in the second quarter as a rise in Chinese imports and a drop in supply from major producer South Africa followed earlier heavy flows into NYMEX exchange stocks on fears platinum would be hit by U.S. import tariffs. In June alone, prices jumped 28% as hedge funds and speculative traders piled in, notching their strongest month since 1986 and hitting an 11-year high of $1,432.6 an ounce. "Platinum has broken out of a decade-long range, and, in doing so, has put itself on the radar of professional and retail investors alike who now think 'Hey, this is really undervalued fundamentally'," said Tai Wong, an independent metals trader. "But there has been a lot of volatility at the highs, and the market will want to see bigger demand from China and/or exchange-traded funds for a sustained move higher," he added. After strong deliveries of platinum to NYMEX stockpiles between December and March on fears the metal would be hit by April's reciprocal U.S. tariffs, tight near-term availability led lease rates to spike, forcing industrial users to buy instead of borrow. While platinum group metals were eventually excluded from the April tariffs, another probe ordered by Trump in mid-April into potential new tariffs on all U.S. critical minerals imports meant uncertainty continued. Meanwhile, data from the world's largest PGMs producer South Africa showed mined output of the metals fell 24% in April, capping what Morgan Stanley referred to as "exceptionally weak" production data for the first four months of 2025. China's platinum imports were also strong in the quarter, at 10 metric tons in April and 10.5 tons in May. That followed research from industry group WPIC showing Chinese platinum jewellery fabrication rose 26% in the first quarter. Put together, those factors made up "an explosive mixture for higher prices", one trader said. BULLS RUNNING OUT OF PUFF But explosions tend to be short-lived, and analysts question whether there is enough underlying support to sustain a stronger rally. Metals Focus sees the global platinum market in a deficit of 529,000 ounces this year, but the resulting reduction in above-ground stocks will still leave them at 9.2 million ounces, equal to 14 months of demand - a fairly comfortable buffer. While uncertainty over U.S. trade policy on platinum lingers, raising import tariffs for the metal would ultimately be counterintuitive, says Wilma Swarts, director of PGMs at Metals Focus, as North American supply falls short of the region's demand. Platinum lease rates, which touched 22.7% in June, have since fallen back to 11.6%. Mine supply in South Africa meanwhile is expected to show signs of recovery in the second half, with overall global mined output seen down just 6% in the year as a whole. "There were definitely some challenges with the rains, power and water disruptions in southern Africa between January and March, but nothing major or out of ordinary," said Johan Theron, spokesperson for Impala Platinum. And strength in physical demand for platinum in China only lasted until prices topped $1,050 in early June, according to one trader. China's June import data, due on July 20, is expected to show a decline after very strong platinum deliveries in the previous two months. That leaves the platinum market vulnerable to one of the last decade's most bearish factors - waning demand from the auto sector, which uses the metal as a component in catalytic converters for combustion-engine cars. CAR TROUBLE Long-term pressure on the platinum group metals from the expansion of electric vehicles persists, while global trade disputes have further dampened the auto sector's mid-term outlook. Auto production forecasters have removed as much as 10 million units from production projections over the next four years, and lower vehicle production will lead to weaker PGMs demand, Metals Focus said. The consultancy is forecasting auto sector platinum demand to decline by 2% this year after a 3% fall last year. Nornickel, the world's largest palladium producer, says any further rise in platinum prices could lead catalyst producers towards more substitution of the metal for palladium. Price spreads between the two metals of more than 30% would encourage that, it said. Platinum was 22% more expensive than palladium on Thursday. But while analysts and traders are cautious about further gains in platinum prices, they are not expecting them to correct. StoneX analyst Rhona O'Connell said some of China's high April-May platinum imports could be in part a bargain-hunting exercise. "China is renowned for buying material that is out of favour," she said. "And although the electrification of the vehicle fleet is advancing apace, the internal combustion engines and the diesel sector are still in place." Analysts see prices stabilising at levels above those seen before the rally, supporting miners' margins as the market heads for a third year of structural deficit. (Reporting by Polina Devitt and Anushree Mukherjee; Additional reporting by Felix Njini and Anastasia Lyrchikova; Editing by Veronica Brown and Jan Harvey)
Zawya
2 hours ago
- Zawya
US fiscal folly could create big, beautiful debt spiral: Klement
(The views expressed here are those of the author, an investment strategist at Panmure Liberum.) LONDON - The U.S. tax and spending bill passed on July 3 is expected to add more than $3 trillion to the country's deficit over the next decade. If the current debt trajectory continues unabated, it could set off a slow motion debt spiral that could endanger the Federal Reserve's independence. The sobering long-term debt projections of the Congressional Budget Office may actually understate the likely impact on U.S. debt-to-GDP levels of President Donald Trump's "One Big Beautiful Bill". The CBO based its estimate on the assumption that temporary increases in government spending and tax cuts will sunset at a projected date. But this new budget bill, which extended previous tax cuts and other measures, has shown that this sunset often never arrives. Thus, the long-term projections in the U.S. Treasury's annual financial report may be more realistic since they assume the current rate of government spending will continue indefinitely. In the Treasury forecast, the U.S. debt-to-GDP ratio is projected to increase to over 200% in 2050 compared to the CBO's estimate of around 145%. Scarier still, the Treasury forecasts that the U.S. debt-to-GDP ratio will reach 535% by 2100 if current spending plans continue. Proponents of tax cuts argue that they boost GDP growth and thus will slow the rise in debt-to-GDP, but the CBO estimates that the House Bill will only increase real GDP by an average of 0.5% over 10 years or 0.04% per year relative to the CBO's January 2025 projections. The Tax Foundation estimates that the Senate Bill will boost GDP growth by 1.2% in the 'long run'. That hardly makes a difference compared to an expected debt increase totalling almost 10% of GDP. RISING RISK PREMIUMS If today's debt dynamics persist, the risk premiums in the U.S. Treasury market will almost certainly climb over the long run. Economists Martin Ademmer and Jamie Rush have analysed the drivers of 10-year Treasury real yields since 1970. They concluded that investors typically demand more risk compensation as the U.S. deficit increases, especially when there is competition from an ample supply of safe assets globally. Thus, Treasury yields rise. Their analysis concludes that these two factors together lifted the natural 10-year real yield for Treasuries by 1.3 percentage points between 2005 and 2023. If the deficit projections for the next decade are realized, this trend should continue. With all this in mind, it was notable that U.S. Treasury Secretary Scott Bessent said last week that he would not boost long-term Treasury bond sales given today's high interest rates. Since the pandemic, the average duration of U.S. government debt has declined significantly as the Treasury has favoured bills over longer-term instruments in an effort to keep interest expenses under control. One reading of Bessent's comments is that the Treasury is concerned about the country's ability to continue servicing its long-term debts if it borrows at today's elevated yields, a message that could push Treasuries' risk premium even higher, making long-term borrowing even less tenable. GREEK TRAGEDY This reminds me of a similar episode in which a heavily indebted country faced a sudden spike in its already large deficit. As investors lost trust in the country's ability to pay back its debt, long-term yields rose, which in turn forced the government to issue debt at shorter and shorter maturities. This signalled to the market that the government would struggle to pay the existing debt, and this pushed long-term government bond yields even higher. The country's debt entered a doom loop. The country in question: Greece after the 2009 financial crisis. To be clear, I do not expect the U.S. to experience a similar implosion. There are crucial differences between the U.S. and Greece that should prevent this, not least the ability of the U.S. to devalue the dollar and inflate away some of its debt. Greece, as a euro zone member, had no such flexibility. But the new U.S. budget increases the possibility that the U.S. could face a similar debt drama, only in slow motion. If long-term Treasury yields remain higher for longer, the Treasury is apt to continue shortening the duration of its debt. This, in turn, could create a vicious cycle by making government interest expenses more volatile, further imperiling U.S. fiscal health and making longer-term debt even riskier. OFF RAMPS There appear to be three main off ramps for the U.S. One: politicians could become fiscally prudent and significantly reduce the deficit to a sustainable level. This seems unlikely given both parties' recent track records. Two: the Treasury could impose capital controls to artificially increase demand for Treasuries. As I have written previously, this move would likely spell the end of the dollar as the main global reserve currency. Three: the Fed could create artificial demand for long-term Treasuries by scooping up bonds itself – that is, restarting quantitative easing – to keep yields low. The danger with this form of QE, however, is that it represents fiscal dominance, where the central bank loses control over monetary policy because of imprudent government actions. How such a development would play out is impossible to predict, especially when it involves a global superpower, but it's fair to assume the Fed won't want to find out. (The views expressed here are those of Joachim Klement, an investment strategist at Panmure Liberum, the UK's largest independent investment bank). Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. ROI delivers thought-provoking, data-driven analysis of everything from swap rates to soybeans. Markets are moving faster than ever. ROI can help you keep up. Follow ROI on LinkedIn, and X. (Writing by Joachim Klement; Editing by Anna Szymanski and David Gregorio)
Zawya
2 hours ago
- Zawya
China urges caution - and speed - on assisted-driving technology
China's automakers are outpacing foreign rivals in their push for assisted-driving technology, eager to woo motorists hungry for rapid innovation. Yet, Beijing has a nuanced message for its rising stars: move fast - but be careful. Regulators this week have been finalising new safety rules for driver-assistance systems as Beijing sharpens scrutiny of the technology following an accident involving a Xiaomi SU7 sedan in March. That incident killed three occupants when their car crashed seconds after the driver took control from the assisted-driving system. While Chinese officials want to prevent carmakers from overselling the capabilities of such systems, they are also threading the needle between innovation and safety to ensure their automakers don't lose out to U.S. and European rivals. Setting clear regulations for assisted-driving tech without slowing its advancement could give China's industry an edge over global competitors, analysts say. This approach is in stark contrast to the U.S. market, where companies pursuing autonomous cars have expressed frustration that the government has not implemented a regulatory system to validate and test the technology. Markus Muessig, auto industry lead at Accenture Greater China, said China's regulators and industries have long followed former Chinese leader Deng Xiaoping's "feel the stones to cross the river" philosophy. The expression means to steadily explore new, uncertain technologies, which "has proven very successful for this market," he said. Current Chinese regulations allow systems that automatically steer, brake and accelerate under certain conditions while requiring the driver to stay engaged. For that reason, marketing terms such as "smart" and "autonomous" are banned. The new rules will focus on hardware and software designs that monitor a driver's state of awareness and their capacity to take control in time. To do this, regulators enlisted Chinese automaker Dongfeng and tech giant Huawei to help draft new rules and have sought public input over a month-long period, ending Friday. At the same time, government officials are pressing Chinese automakers to rapidly deploy even more-advanced systems, known as Level 3 assisted-driving, which allow drivers to take their eyes off the road in certain situations. Level 3 is the midway point on the industry's autonomous-driving scale, from basic features like cruise control at Level 1, to self-driving capability under all conditions at Level 5. The Chinese government had tapped state-owned Changan to be the first automaker to begin Level 3 validation tests in April, but the plan was paused after the Xiaomi crash, said a source familiar with the regulatory planning process. Beijing still hopes to resume such tests this year and approve the country's first Level 3 car in 2026, the source said. China's Ministry of Industry of Information Technology and Changan did not respond to requests for comment. Xiaomi has said it is cooperating with a police investigation into the accident. Driver-assistance systems are seen by industry analysts as the next big battleground in China's hyper-competitive car market. Over the past decade, Level 2 systems have proliferated in China, including Tesla's Full Self Driving system, as well as the Xiaomi feature involved in the March crash. The capability ranges from basic vehicle following on highways to handling most tasks on busy urban roads, under driver supervision. Automakers have pushed down hardware costs to levels that allow them to offer Level 2 features at little or no extra cost. China's No. 1 automaker BYD has rolled out its "God's Eye" assisted-driving software for free across its entire product line-up. More than 60% of new cars sold in China this year will have Level 2 features, according to an estimate from research firm Canalys. GLOBAL RACE In its push for assisted-driving technology, and ultimately fully self-driving cars, Beijing is seeking to help homegrown carmakers just as it supported China's rapid rise to become the world's electric-car juggernaut. Last year, China's government lined up nine automakers for public tests to advance the adoption of self-driving cars. In their Level 3 push, Chinese regulators also are upping the regulatory ante by holding automakers and parts suppliers liable if their systems fail and cause an accident. Legislation passed in Britain last year adopted a similar approach to liability. At the Shanghai auto show in April, several companies touted progress toward rolling out vehicles with Level 3 capability. Tech giant Huawei said it is ready to introduce a Level 3 system for highways after simulated testing of more than 600 million kilometers. It showed a video of drivers and passengers singing karaoke as the car drove itself. Geely's Zeekr brand debuted the luxury SUV 9X, featuring Level 3 software the automaker said is ready for mass production in the third quarter if regulations allow. Zeekr is also applying to be part of a second batch of automakers to undergo government Level 3 validation tests. Meanwhile, traditional automakers at the Shanghai auto show such as Mercedes-Benz and Volkswagen said they were pushing their most advanced assisted-driving features but stopped short of crossing the Level 3 liability line. Getting there is a challenge as they are already at a cost disadvantage against their Chinese rivals, analysts say. Mercedes-Benz CTO Markus Schaefer told Reuters that while chip and computing power prices have fallen, the additional safety required for Level 3 will cost much more. "It's a moving target," Schaefer said.
