Viewpoints: 2025

The current moment in global economic policymaking is marked less by direction than by dissonance. Nowhere is this more evident than in the US, where the return to tariff-based policy in early 2025 has underscored the contradictions at the heart of its economic agenda. Yet just as markets and policymakers began to absorb the implications of a more protectionist stance, Washington has partially reversed course—modifying or delaying some of the proposed measures. However, this retreat, rather than offering clarity, has only deepened global uncertainty, complicating the outlook for inflation, growth, and international cooperation.

Forecasts reflect this disorientation. Across major economies, expectations for GDP growth in 2025 have been revised downward in recent months, while inflation projections have edged higher (charts 1 and 2). This divergence—a hallmark of stagflation risk—signals a world in which economic constraints are no longer primarily demand-driven, but stem from structural disruptions to supply and trade flows. While not yet systemic, this shift poses mounting challenges for policymakers.

The Federal Reserve Bank of Philadelphia’s state coincident indexes in February were similar to January, generally on the soft side in January. In the one-month changes, West Virginia led with a .62 percent gain, with no other state up as much as .5 percent. Nine states were down, with Washington’s .2 percent drop being the largest. Over the three months ending in February, four states were down, all by small amounts West Virginia and South Carolina were the only states seeing gains above 1 percent. Over the last twelve months, three states were down, and twelve others saw increases of less than one percent. No state had an increase higher than four percent, and only two were higher than three percent. Utah’s index rose 3.32 percent, while Michigan was down 1.64 percent.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .81 and 2.51 percent. Both measures appear to be somewhat stronger than the state numbers. These indexes are very dependent on payroll employment numbers, and in both January and February the sum of state payroll employment changes was less than the national figure.

The Trump administration’s sweeping new tariffs, announced on April 2nd, may be pitched as a tool to restore US industrial greatness—but the global economy has moved on. Despite the political appeal of reshoring manufacturing and punishing trade partners, tariffs are a blunt instrument trying to shape a world that no longer exists.

Let’s start with the basics: the structure of global demand and production has changed. In the 1980s and 1990s, global trade was dominated by container ships full of cars, clothing, and household goods. Today, much of the economic value generated by advanced economies is invisible, weightless, and digital. A book bought on an iPhone doesn’t pass through customs. A call between colleagues in New York and Singapore doesn’t register on a trade ledger. The software used to design a prototype in Boston may be sent instantly to a 3D printer in Stuttgart—and no goods are “imported” in the traditional sense.

Tariffs don’t touch any of that. They are analog policy tools in a digital world.

Meanwhile, consumer preferences have shifted—especially in aging economies like the US, Europe, and Japan. Older populations demand more healthcare, more convenience, and more services. They are less interested in accumulating physical goods and more inclined to consume time-saving solutions: app-based services, digital content, personalised experiences. These are not products that are made in factories—they are composed of intellectual property, design, code, and networks.

In this landscape, intangibles rule. The most valuable US exports aren’t cars or machinery—they’re ideas, algorithms, entertainment, and software. The US remains the global leader in high-value services—finance, cloud computing, enterprise software, biotech R&D, education, and media. These exports are often delivered without crossing a border, and they generate high margins without requiring massive industrial footprints. The global demand for American creativity, standards, and know-how has only grown.

The US current account deficit has nearly tripled over the past eight years, covering the previous two administrations. With the current account deficit now running at roughly $1.1 trillion per year or 3.7 percent of GDP, the new administration has announced across-the-board increases in tariffs in order to level the playing field on trade. We wondered how we got here and if the causes might highlight ways to solve the problem.

In the April 3 Viewpoints article titled Liberating the Downside, Andy Cates and Kevin Gaynor discussed the prospects for narrowing the US current account deficit through tariffs in the context of the national accounts. One way to look at the national accounts is though the following identity

(M – X) = (I – S) + (G – T)

where (M – X) is the current account deficit, (I – S) is the private borrowing need, and (G – T) is the public borrowing need or the government budget deficit. This equation offers a valuable framework to identify the underlying causes of the undesirable rise in the US current account deficit.

Based on a combination of Bureau of Economic Analysis NIPA Tables 3.1, 4.1 and 5.1 (all these data can be found in the Haver USNA database), it is clear that the interplay between saving and investment drives the current account, with some small adjustments for the statistical discrepancy.

Trump announced sweeping new tariffs in a lengthy, rambling speech that if fully implemented would likely push the U.S. economy into recession and significantly slow global trade and economic activity, but based on Trump's history, the wisest interpretation is that he is open to bargaining with the leaders of trading nations and ultimately the effective tariffs will be lower and their economic impacts will be moderated. Even if the tariffs are moderated through negotiations, they are unambiguously negative, as markets are now signaling.

Invoking his authority under the International Emergency Powers Act of 1977 (IEEPA), President Trump assessed a 10% tariff on all imports effective April 5, and additional reciprocal tariffs on nations that Trump perceives disadvantage the U.S. through some combination of their own tariffs, fees and taxes. Trump bases these reciprocal tariffs on the simplistic calculation of each nation’s bilateral trade surplus with the U.S. divided by its exports to the U.S. According to the White House Fact Sheet of April 2, the IEEPA allows for Trump to modify the tariffs, either up or down, “if trading partners retaliate or decrease the tariffs [or] if trading partners take significant steps to remedy non-reciprocal trade agreements and align with the United States on economic and national security matters”.

These tariff pronouncements are both shaky and murky. The reciprocal tariffs are based on extraordinarily naïve calculations that defy economic common sense. And they are seemingly offered as bargaining tools. This makes an assessment of the magnitude of the tariffs and their impacts difficult.

A full version of this commentary is available here.

In a piece in Haver’s Viewpoints section earlier this week (Strategic Uncertainty and Market Pricing: A Game Theoretic Perspective on Recent US Policy Shifts) it was argued that markets are struggling to price a highly uncertain and rapidly evolving strategic environment, marked by the Trump administration’s shift from cooperative to non-cooperative global games—most notably via aggressive trade threats that represent a sudden break from past policy norms. While asset prices had been reflecting reduced US growth expectations, higher inflation risk, and a modestly higher cost of capital, the wide range of possible outcomes—amplified by geopolitical unpredictability—meant the path to a new global equilibrium was likely to be volatile and disruptive.

And this view has now been dramatically amplified following the decision by the US administration on April 2nd to announce a sweeping package of tariffs on a broad range of imports from key trading partners—including the EU, China, and several emerging markets. These measures were more expansive in both scope and scale than markets had anticipated, and they carry the potential for significant global economic disruption—particularly if targeted trading partners respond with retaliatory countermeasures, escalating the risk of a full-scale trade conflict.

How exactly this will reshape the world economy is still anyone’s guess. Will global supply chains fracture completely or merely bend? Will retaliatory tariffs hit US tech, agri-exports, or defence deals? Will capital flows seize up or simply redirect? Will monetary authorities act quickly enough to stabilize expectations?

But aside from game theory—which provides insight into the strategic logic of defection and retaliation—another useful framework for assessing the macroeconomic consequences of this shock is that of financial balances.

Financial Balances: An Accounting Identity with Predictive Power

Recall the national income identity in financial balances form: (Private Sector Balance) + (Government Balance) + (Foreign Sector Balance) = 0

That is: (S – I) + (T – G) + (X – M) = 0

Where: • (S – I) = private savings minus investment • (T – G) = government surplus (or deficit if negative) • (X – M) = net exports (i.e., current account balance)

If one of these balances shifts—say, a current account improvement via import compression—then either the private sector must reduce its surplus (invest more or save less) or the government must run a bigger deficit. The system must rebalance, always.

1. US Impact: From External Adjustment to Domestic Strain

The intention behind the tariffs is clear: compress imports, reduce the trade deficit, and ideally, bring back some production capacity to the US mainland. But as we've seen in past episodes, protectionism rarely leads to clean outcomes.

• If imports fall due to tariffs, and exports are simultaneously hit by retaliation, the net trade balance might not improve meaningfully. • That means the foreign sector balance (X – M) doesn't deliver the adjustment hoped for. So where does the pressure go?

It goes to the private and public sectors.

• Private sector balance (S – I) is likely to rise. Firms face greater uncertainty and may reduce capital spending, while households—facing higher prices on imported goods—could cut consumption. Net private saving rises. • This leaves the government to absorb the shock. With private retrenchment and a stagnant or worsening current account, the only way the identity can hold is via a widening fiscal deficit.

In effect, the tariffs may create an illusion of national self-reliance, but the reality is a fiscal offset to a trade-induced demand squeeze. Unless the US is willing to tolerate a deeper recession, fiscal stimulus becomes the balancing item.

2. Global Impact: Shock to Trade-Exposed Economies

Now consider the rest of the world—especially the major US trading partners. The tariffs strike at trade-dependent, export-surplus economies such as Germany, South Korea, and China. These countries have historically run external surpluses, allowing their private and government sectors to remain in surplus or near balance.

• If their exports to the US fall, their foreign sector balance deteriorates. • If they don't immediately offset that with stronger domestic demand (via fiscal or private sector action), then either their private sector must dis-save (less likely), or their governments must run larger fiscal deficits to compensate.

For surplus economies like Germany or China, this moment could trigger a major shift toward domestic demand rebalancing, but the scale and speed required are politically and economically challenging.

For emerging markets, the picture is more fragile. Weaker export revenues + capital outflows → tighter financial conditions → risk of pro-cyclical fiscal tightening, which worsens the downturn. Hence, EMs may become the shock absorbers of this global shift, through both growth and FX channels.

3. Inflation, Policy Recalibration, and Financial Markets

Tariffs act like a tax on imports. In the short term, that means higher prices, especially in sectors like electronics, consumer goods, and industrial inputs. If retaliation is met with further escalation, costs rise further.

At the same time, the private sector is pulling back—demand is softening, and investment is slowing. The result is a stagflationary impulse: higher inflation, but weaker growth.

• The Fed faces a credibility trap. Inflation is sticky, but growth is slowing. Cut too early and you risk fuelling inflation; cut too late and the downturn deepens. • The ECB and other central banks have a clearer path—softer inflation gives them cover to ease—but deteriorating global trade may limit the power of domestic stimulus.

Meanwhile, financial markets are struggling to find footing:

• Equities in global cyclicals, capex-heavy sectors, and exporters are weakening. • Bond markets are now arguably pricing a lower global neutral rate, with flattening curves and increased volatility. • FX markets are unsettled: EM currencies weaken, the USD fluctuates, and policy divergence risks new capital flow imbalances.

4. Strategic Rebalancing: A Slow-Motion Adjustment

The financial balances framework doesn’t tell us where policy should go—but it tells us where it must go if macroeconomic stability is to be preserved. If the external sector can’t deliver the adjustment, either the private sector must invest more (unlikely amid uncertainty), or the public sector must step in.

In the US, that likely means:

• A bigger deficit, at least in the near term; • A higher risk of longer-term fiscal sustainability debates; • And growing pressure for industrial policy, subsidies, and tax incentives to replace what trade used to deliver.

Globally, we are likely to see:

• Asynchronous policy cycles, with China and Europe stimulating more aggressively; • Ongoing FX pressure and fragmented capital flows; • And a world inching toward multi-polar demand models, where economies rely less on the US consumer and more on domestic engines of growth.

Conclusion: When Tariffs Shift the System

The new tariffs are not a policy tweak—they are a shock to the system. Through the lens of financial balances, we can already see how the global economy will be forced to rebalance: not by choice, but by accounting necessity.

In the short term, this means slower growth, higher uncertainty, and deeper fiscal footprints. In the long term, it may mean a less integrated world economy—with all the frictions and inefficiencies that implies.

The challenge now is not just to understand the game, but to read the scoreboard.

The Federal Reserve Bank of Philadelphia’s state coincident indexes continued to be on the soft side in January (February numbers will be released on April 9). In the one-month changes, Montana led with a .66 percent gain, while West Virginia and South Carolina had increases above .5 percent. 13 states registered declines, none greater than North Dakota’s .34 percent. Over the three months ending in January, only two states (Missouri and Wyoming) were down, both by small amounts. The gains were also somewhat muted, with only five (South Caroilina, Washington, Idaho, Utah, and Maryland) showing increases above 1 percent, topping off at South Carolina’s 1.35 percent. Over the last twelve months, three states were down, and eleven others saw increases of less than one percent. No state had an increase higher than four percent, and only three were higher than three percent. Washington’s index rose 3.66 percent, while Michigan was down 1.34 percent.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .61 and 2.41 percent. These both appear to be roughly in line with the state numbers.

Malaysia’s business cycle indicator assessment doesn’t make cheerful reading. Among eight Asian countries in our analysis, Malaysia’s overall indicator score ranks second lowest, just above Indonesia.

The profit cycle remains in a downswing. Since 2015, the return on equity for listed companies has stayed below the pre-pandemic (2013–2019) average of 10.8%. However, returns have improved for the second consecutive year, reaching just under 10% in 2023. Corporate balance sheets remain healthy, despite modest declines in cash flow and retained earnings per share. The credit cycle has yet to turn, with the two-year real cost of borrowing rising to 2.8%, exceeding the upper 2% threshold—an indication that monetary policy remains tight.

That said, Malaysia is in a stronger position than Indonesia, and we are overweight on Malaysian equities. The stabilisation of the profit cycle signals that the Malaysian business cycle is approaching a sustainable upswing. The key reason for our overweight stance this year lies in Figure 1.