President Donald Trump’s reciprocal tariffs have started a global trade war and it will reduce not only the growth of the United States (US) and the world but also push up inflation and delay Federal Reserve rate cuts in US according to a report by Fitch Ratings.

The rating agency has cut the growth forecast of US to 1.7 per cent from 2.1 per cent in its December 2024, Global Economic Outlook (GEO) and the growth forecast for 2026 was cut to 1.5 per cent from 1.7 per cent. These rates are well below the trend if we compare it with almost 3 per cent annual growth in 2023 and 2024.

Fitch says fiscal easing in China and Germany will cushion the impact of higher US import tariffs, but this year growth in the Eurozone will still be a lot weaker than its forecast of December GEO. Mexico and Canada will experience technical recessions given the scale of their US trade exposures. Fitch Ratings has cut Mexico and Canada annual 2025 forecasts by 1.1pp and 0.7pp respectively.

It says the average world growth will slow to 2.3 per cent this year, well below the trend and down from 2.9 per cent in 2024. This is a downward revision of 0.3pp and reflects broad-based reductions in developed and emerging economies. World growth will remain weak at 2.2 per cent in 2026.

Fitch Ratings says “The size, speed, and breadth of US tariff hike announcements since January is staggering.”

The effective tariff rate (ETR) of US has risen to 8.5 per cent from 2.3 per cent in 2024 and is likely to rise further.

Fitch estimates an effective US tariff rate of 15 per cent on Europe, Canada, Mexico, and others in 2025, and 35 per cent on China. This will push the US ETR to 18 per cent this year before moderating to 16 per cent next year as the ETR on Canada and Mexico falls to 10 per cent. This would be highest rate for 90 years.

Fitch Ratings adds “There is huge uncertainty about how far the US will go and our assumptions could be too harsh. But there are also risks of a larger tariff shock including from an escalating global trade war. Moreover, the US administration has set out an import substitution agenda - aimed at boosting US manufacturing and reducing the trade deficit - which it believes can be achieved with higher tariffs.”

Tariff hikes will also impact US negatively, it will result in higher US consumer prices, reduce real wages, and increase companies’ costs, and the surge in policy uncertainty will take a toll on business investment.

Retaliatory tariffs will hit US exporters. Export-oriented global manufacturers in East Asia and Europe also will be affected.

Fitch calculation suggests tariff increases will reduce GDP by about 1pp in the US, China, and Europe by 2026.

Germany’s recent pivot to fiscal stimulus will do a lot to cushion the blow and will allow its economy to recover modestly in 2026. More aggressive policy easing will also help to offset the impact in China.

The tariff shock is estimated to add 1pp to US near-term inflation, the Fed will delay further easing until 4Q25. Fitch believes that now Fed will cut rate just once this year, but it may go for three more cuts in 2026 as the economy slows and tariff levels stabilise.

Source: ANI
--Agencies