It was a told-you-so moment. Official US government data released recently showed the US economy had shrunk 0.3 percent in the first 3 months of the year, down from a growth of 2.4 percent in the last quarter of 2024. With tariffs pushing up prices for US consumers in the second quarter, a possible further slowdown looms large. The US is now on the brink of a technical recession, defined as two consecutive quarters of negative growth.
The chaos and slowdown was not the best way for President Donald Trump to celebrate his first 100 days in office. But he kept up his strident posture. Blaming his predecessor, Trump said: “This is Biden’s Stock market, not Trump’s”; and the contraction “has nothing to do with tariffs.”
Economists though concur the contraction has been triggered by an unprecedented surge of imports, the highest in 5 years; and it was driven by a stampede of consumers and companies stockpiling goods before the tariffs kicked in.
Some argue since imported goods are not produced domestically, their value is subtracted from GDP, and therefore this factor has contributed significantly to a negative reading of the first quarter. Therefore, once these inventories are sold, and the trade gap narrows, the US’ GDP may rebound.
Global slowdown
What these economists have not factored is the sharp and continuing fall in consumer sentiment; and the threat of inflation and rising prices that kill demand. Consumer sentiment in the US has plummeted 32 percent in April, the lowest since the recession of 1990. Trump acknowledged this in jest when he suggested American children should learn to play with 2 dolls instead of 20.
Economists polled by Reuters in mid-April concurred US’ tariff policy will trigger a significant slowdown in the U.S. economy this year and next, with the median probability of recession in the next 12 months approaching 50 percent.
Tariffs may be earning revenue for the US government; but for American middle class families everything from automobiles to toys are now more expensive as companies pass on the higher import duties to consumers. Meanwhile, sourcing is under threat as Chinese companies withdraw from the US markets, and supply chains are caving in around the world. S&P Global Ratings has already cut US’ growth forecast for Q2 to 1.6 from 2.0 percent.
And it’s not just the US. The aftershocks are reverberating around the globe. After making strides, China’s factory activity has fallen back as export channels are blocked. China’s purchasing managers’ index (PMI) hit a 16-month low of 49 for April – down from 50.5 in March and 0.6 percentage points lower than the 49.6 forecast from economists polled by Bloomberg. A reading above 50 indicates expansion in the manufacturing sector, while one below 50 reflects contraction.
An ING report showed Japan’s industrial production fell 1.1% month on month in March (versus a growth of 2.3 percent in February). In a quarterly comparison, industrial production (IP) dropped 0.7% quarter on quarter, compared to a 0.4 percent gain in the fourth quarter of 2024. The monthly decline was the most pronounced in vehicle production, down 8.4 percent. This is accounted for by the hefty 25 percent US tariffs on foreign-manufactured cars. Japan is one of the largest car exporters to the US, and thus among the hardest hit.
China gambit fails
But from all accounts, Trump’s hard ball gamble is not going his way, especially with China. Slapping China with 145 percent import duty, was expected to bring it to the negotiating table on its knees. Instead, the Chinese retaliated with 125 percent with their spokesperson declaring: China is “ready to fight till the end” in “a trade war or any other type of war”.
What the Trump hawks had not factored in was China had faced severe tariffs in Trump’s 2017-20 first inning, and has been preparing itself against more surprises. President Xi Jinping has not only been cultivating national pride but pushing his local state enterprises to strengthen supply chain resilience and cultivate alternative overseas markets. In the face of slipping growth of 4.6 percent, the National People’s Congress, held in March, saw a call to boosting domestic consumer spends to downsize reliance on exports.
China has also been promoting the international use of renminbi-based payment systems to reduce China’s vulnerability to coercive U.S. financial sanctions. On Trump’s part, under all the bravado, there are signs of rethink and wavering following the turmoil and sell-offs in markets across the world. The slew of high reciprocal tariffs imposed on 57 trading partners have been paused for 90 days. For most of these countries it is a baseline 10% duty now.
Even in the case of China, President Trump has been making conciliatory noises. “We’re going to have a fair deal with China,” Trump told reporters on April 23, stirring hopes of a de-escalation. However, his claims that there is active negotiation with the Chinese has been stoutly denied by the latter.
America’s billionaires and the elite, both friends and foe of the President, have been pushing back saying tariffs are bad for US businesses. Warren Buffet of Berkshire Hathaway called tariffs “An act of war to some degree.” Billionaire investor and hedge fund manager Bill Ackman has called for a strategic pause in tariffs against China. We, like others, are hoping Trump blinks.