Nordic: Normalisation with tariff risks

Tariffs continue to cloud the outlook

• We expect economies to continue to normalise, which implies slightly higher growth in Europe in general, slightly lower growth in the US and an increase in consumer demand in China, while interest rates can be lowered further.

• However, the US tariff increases will reduce growth somewhat and there is a risk that the effect is large, for example if the actual tariffs end up higher than expected, that they cause serious supply disruptions or that the sentiment effect is large.

• The tariff policy can also be seen as part of a wider shift away from an integrated global economy and a political world order based on common institutions and as such lead to lower economic growth in the long run.

In Nordic Outlook, we have often cautioned against putting too much emphasis on politics in assessing the near-term economic outlook. This time around, we cannot deny the very significant potential impact coming from US tariff policy, as the Trump administration has announced a wide array of import tariffs, some in effect and some postponed. Since Donald Trump’s inauguration and especially since the announcement of so-called reciprocal tariffs on 2 April, the policies have been constantly changing and subject to many bilateral negotiations with other countries, as well as to a legal decision that might require tariffs to be approved by Congress.

In our forecasts, we assume that the very high tariffs announced on China, the EU and many others are mostly a negotiation tactic, but also that the US is serious about raising tariffs significantly, landing at a universal import tariff of 10%, around 40% on Chinese imports and additional tariffs on selected products. This will be enough to meaningfully reduce US and Chinese growth without causing a recession and shave a few tenths of a percentage point off growth in the euro area and the Nordic countries.

In the data we have so far, there seems to be a slight negative impact across countries on business sentiment from the many tariff announcements. The impact on consumer sentiment seems much more negative in the consumer surveys, but so far, there are few signs that this has been translated into large declines in actual consumption. We assume this to be a template for the coming months as well, so that the impact of tariffs on economic growth will mostly come from the direct hit to consumers and corporate profits and only to a smaller extent from indirect sentiment effects. However, our experience with large tariff increases is almost 100 years old. We can reason as to what the economic effect will be, but we cannot know it.

Download The Full Nordic Outlook