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US: "Liberation Day" tariffs very broad-based & material
- 2 Apr “Liberation Day” tariff announcement by US President Trump, was more significant and broad-based than projected, bringing the US effective tariff rates to above 20%, something not seen since 1900s. 25% tariff on all auto imports will also come into effect while the De Minimis tariff exemptions will expire on 2 May.
- The imposition of significant tariffs on US trading partners has realised our pessimistic case of trade scenarios and materially impacted our growth and inflation outlook for the US. We now expect the US GDP growth to slow to 1% for 2025 (from previous forecast of 1.8%), while headline CPI inflation may spike higher to 4% (from previous forecast of 2.5%).
- FOMC outlook – We raise our Fed rate cut expectations to three 25-bps cuts to 3.75% by end-2025 (from previous 1 cut in 2025). We keep the two cuts for 2026, implying a lower terminal rate of 3.25% in 2026 (previous forecast was 3.75%). In this case, despite the inflation spike, the Fed could justify the rate cuts by pointing to the fact that inflation was induced by supply side shocks rather than demand-driven price increases. The probability of a US recession has risen to 40% (from 20-25% previously).
2 Apr “Liberation Day” tariffs more significant than projected
On “Liberation Day” (2 Apr), US President Trump announced a national emergency to “increase the nation’s competitive edge, protect our sovereignty, and strengthen our national and economic security”.
This declaration allowed him to invoke the International Emergency Economic Powers Act (IEEPA) and enabled him to issue an Executive Order, on the imposition of a 10% baseline tariff on all imports to the US from all countries, and among all these countries, reciprocal tariffs are imposed on several economies & one economic bloc (EU comprises 27 countries).
The “reciprocal” rates are based on the US government’s tally of the tariffs and nontariff barriers those countries imposed on US goods, and the customised levy imposed under Trump’s proposal, is approximately equal to half of that calculated amount (i.e. Tariffs charged to US by Thailand= 72%, proposed US reciprocal tariff on Thailand= 36%). That said, according to USTR, the reciprocal tariff rates are calculated simply based on the US’ trade deficit with the said country divided by the said country’s exports to the US and adjusted by price elasticity of import demand and tariff pass-through to import prices.
A darker US outlook post-liberation day, with more Fed cuts now priced in
Trump’s announcement of “Liberty Day” tariffs has unfortunately realized our pessimistic case of trade scenarios with 40% probability into reality (link).
The risk for US trade policy tilting towards a more negative outcome of higher tariffs (closer to 60% tariff rate for China as claimed by Trump during his election campaign), punitive reciprocal tariffs for major and lesser trading partners, coupled with the imposition of a blanket tariff for all US imports (10%), and an earlier than expected implementation timeline, has significantly impacted our outlook for the US.
The impact of this scenario will be significantly weaker growth outlook for the US and Asia, accompanied by higher US inflation outturns, which we assume to be a one-time spike in prices before coming off from the headline inflation sometime next year.
Changes to our US forecasts for 2025
GDP – lowered to 1.0% (from previous forecast of 1.8%)
CPI inflation – raised to 4.0% (from previous forecast of 2.5%)
FOMC rate cuts – raised to three 25-bps cuts to 3.75% by end-2025 (from previous 1 cut in 2025). We keep the two cuts for 2026, implying a lower terminal rate of 3.25% in 2026 (previous forecast was 3.75%). In this case, the Fed could justify the rate cuts by pointing to the fact that inflation was induced by supply side shocks rather than demand-driven price increases.
Notwithstanding that there could be 2 quarters of consecutive declines or “technical recession”, the probability of US entering into an economic recession or stagflation is now more material and we estimate it at 40% chance, from 20-25% prior to Liberation Day.
Suan Teck Kin
Head of Research
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Alvin Liew
Senior Economist
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