By Mark McSherry
US exceptionalism is “fading” as policy uncertainty mounts and the economy slows, while Europe is on the verge of a “big loosening” in fiscal policy, according to Edinburgh-based investment giant Aberdeen.
However, Aberdeen believes US recession concerns are “overblown” and that “modest” tax cuts are coming.
The investment group said China’s policy easing is gaining some traction, although it is still insufficient to offset all headwinds.
Aberdeen had assets under management and administration (AUMA) of about £511 billion at the end of 2024.
Luke Bartholomew, Deputy Chief Economist at Aberdeen, said: “US sentiment data have cooled sharply amid elevated policy uncertainty, while nowcasts point to a contraction in Q1 GDP.
“However, technical factors are distorting the nowcasts, and underlying growth is stronger. The labour market, while cooling, is not consistent with recession. We aren’t forecasting the end of the business cycle.
“However, with US tariff uncertainty very elevated, the average tariff rate likely to increase further on 2 April, and federal agencies facing significant disruptions, the downside growth and upside inflation risks around President Trump’s policy agenda have increased.
“Progress on more ‘market friendly’ aspects of the policy mix, such as tax cuts and deregulation, has been limited. That said, we continue to expect fiscal stimulus worth around 0.5% of GDP, while the energy and financial sectors are likely to benefit from deregulation.
“There is an active debate about the growth vs inflation impact of tariff increases on the US economy. We are minded to think the Federal Reserve (Fed) will remain focussed on the inflationary impact of higher tariffs, so we expect just one rate cut this year, likely in September.
“However, the market has moved to price in more aggressive easing, and the Fed will probably need to clarify its reaction function soon to avoid disappointment.”
Bartholomew said that in China, financial conditions are now “the most accommodative they have been since the global financial crisis.”
He said fiscal easing worth between 1.5% and 2.0% of GDP was announced at the “two sessions”. But given domestic and external headwinds, the underlying pace of growth will slow further without larger consumption support.
Bartholomew said the Eurozone is on the verge of a radical transformation in fiscal policy, with the new German government looking set to deliver constitutional reform to unlock higher defence spending and public investment.
“Bond yields have risen sharply on this news, but the combination of higher yields, elevated equity prices, and a stronger euro suggests the market is pricing a growth shock rather than concerns about fiscal sustainability,” said Bartholomew.
“We think these measures will boost GDP growth by 0.5-1.0% over the next few years. But with the near-term European growth outlook still weak, and France on the verge of recession, there is still scope for further European Central Bank (ECB) easing, with rates set to fall to 2% this year. Fiscal stimulus has somewhat reduced the risk of more dramatic easing, although trade uncertainty could still see the ECB cut even further.”
Bartholomew said the UK remains highly exposed to movements in bond yields driven by US and European policy, and fiscal policy is set to tighten further, with the chancellor likely to announce spending cuts at the end of March to restore space against the fiscal rules.
He said interest rates are likely to be cut further, although the UK central bank will need to see how the economy responds to the large national insurance and living wage-driven cost shock this spring before considering speeding up the pace of easing.
“The Bank of Japan (BoJ) is likely to tighten policy further, as wage pressures mount and interest rates are returned to a more neutral stance,” said Bartholomew.
“The next Shunto wage round is shaping up to be strong, although tariff uncertainty may keep the BoJ relatively cautious. We are expecting one further hike this year, but risks are towards more.
“Across emerging markets, the rate cutting cycle will continue cautiously. Emerging markets face considerable tariff cross-currents. Mexico, India, and many South-East Asian economies could be relative beneficiaries from redirected global trade flows, if US tariff increases primarily focus on China. However, if much broader US tariff increases stick, then many of the same economies would face considerable headwinds.”