Global Economy Takes Trump Shocks in Stride, for Now…

• Threats to the global economic order have come at a furious pace during President Donald Trump's first eight months in office – from a massive tariff shock to a battle for control of the Federal Reserve.
• However, the global economy has kept growing, stock prices have surged, and inflation fears remain muted.
• While many players worry that things could still unravel given the right spark, it is a far cry from the most dour predictions early in Trump's term, when recession odds soared, markets plummeted, and headlines even fretted over the cancellation of Christmas in a collapse of global trade.
• "The global economy continues to exhibit considerable resilience amid heightened policy and political uncertainty," BNP Paribas economists wrote recently, attributing it to "supportive financial conditions, robust household and corporate balance sheets, the promise of an AI-driven productivity boost, and lower energy prices, among other factors." While the landscape remains in flux, the accommodation shown by U.S. trading partners threatened with sky-high tariffs resulted in more modest levies that are being shared by exporters, importers and consumers in what economists feel has become a manageable distribution.
• Meanwhile, Trump's attempts to oust the Fed chair and fire one of its governors have so far failed, and financial markets appear willing to ignore the risk of rising White House influence over monetary policy until it happens.
• Indeed, the yield on the U.S. 10-year Treasury note has fallen from around 4.6% when Trump took office to around 4.1%. While that might reflect growth doubts, it is not what would happen if global investors were losing faith in the U.S., the Fed's independence or the long-term path of U.S. inflation. The Fed is now comfortable enough about meeting its inflation target that it cut its benchmark rate by 25 basis points this week.
• China's central bank kept a key interest rate unchanged due to resilient exports and a stock market rally, refraining from new stimulus. Meanwhile, the euro zone exceeded expectations, prompting the ECB to raise its 2025 GDP growth forecast to 1.2% from 0.9%.
• But the sense that the current benign situation is not built on firm foundations lingers. Early signs of the hit to exporters are being seen from Japan to Germany. Notably, BoJ Deputy Governor Ryozo Himino warned that tariff effects are taking time to surface and new U.S. policies may emerge.
• Others see investor complacency, with U.S. growth concentrated in AI-driven investment and high-end consumers, while housing is weak, hiring is low, and Trump’s policies could have long-term effects. Some investors warn that markets may not reflect underlying realities despite record highs.

(Source: Reuters)