For a time, the overall outlook -- if not the details -- was somewhat clear: the United States would hit its trade partners with punitive tariffs, but because of offsetting factors in the U.S. such as deregulation and tax cuts, the growth shock for others would be larger, said ABN Amro.
All of this would trigger a massive monetary policy divergence, with tight monetary policy in the U.S. to fight tariff-induced inflation, and looser policy elsewhere to cushion the trade and growth shock, wrote the bank in a note.
In the past month, this picture has muddied considerably, stated ABN Amro. First, it has become increasingly clear that the U.S. will be hit hard by its tariff policy, while offsetting factors -- such as the deregulation drive -- seem to have lost momentum.
This has knocked confidence, raising fears of a U.S. recession, pointed out the bank. The current weakness suggested by nowcasts is driven by a frontloading of imports, and is, as such, a red herring.
However, there are other reasons to believe recession risk is real, and this is likely what has caused a renewed pricing in of Federal Reserve rate cuts, added ABN Amro.
The second factor muddying the outlook is Germany's new
fiscal bazooka, and more broadly, European defense spending. While the bank is skeptical about the capacity of some key eurozone countries to increase deficits, Germany's new fiscal firepower and the European Union's new SAFE fund could by itself be a sufficient game changer for next year's growth outlook.
That is, as long as U.S. tariffs -- and their economic impact -- don't get out of hand. To know this, the bank is waiting with bated breath for the U.S. administration's fabled April 2 announcement, which could well portend much bigger tariff rises than ABN Amro has currently incorporated into its base case.
It is this key uncertainty that makes the bank refrain from raising its eurozone growth forecasts on the back of higher fiscal spending. For now, ABN has provided estimates for the likely impact of defence and German infrastructure spending, but it plans to do a full review of its base case when the U.S.'s tariff plans have been revealed.
According to ABN Amro, one thing is clear: the outlook is getting a lot more complicated.
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