The United States Reaches a Preliminary Agreement with the United Kingdom and China on Tariffs
May 13, 2025
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By Mario Catalá
The impact of tariffs has not yet been reflected in U.S. macroeconomic data, which still reflects the situation prior to Trump’s announcement of new tariffs. However, sentiment indicators already show that both investors and consumers are anticipating, at the very least, slower growth and higher inflation, even if only temporarily.
The April PMIs in the U.S., for both the manufacturing and services sectors, remained in expansion territory at 50.2 and 50.8 respectively, but came in below estimates. Meanwhile, the preliminary GDP figure for the first quarter of 2025 turned negative for the first time in several quarters, contracting by -0.3% (compared to the expected +0.2% growth), potentially pushing the U.S. economy into a technical recession. The trade balance (net exports down -4.8%) was one of the main contributors, along with the federal government’s cutbacks in public sector jobs. Retail sales in March, on the other hand, exceeded expectations by growing 1.4% versus the forecasted 1.3% and the previous 1%, although it’s likely that the figure was boosted by early purchases made to avoid tariff-related price hikes. Finally, consumer expectations remain very negative according to the “Conference Board” reading, which fell again to 86 (from 93.9), confirming the prevailing pessimism among citizens.
In Europe, the macroeconomic tone remains moderately optimistic. The PMIs continue their positive trend in manufacturing (49 vs. previous 48.6), improving on both the prior reading and the forecast. The services sector stayed in expansion territory (50.1), despite a predicted drop to 49.7. GDP grew more than expected in the fourth quarter of 2025, rising 1.2% compared to a market estimate of 1%. However, as we saw in the U.S., the effect of tariffs has been felt significantly in confidence surveys. For example, the German institutional investor confidence index from the ZEW Institute saw a sharp drop to -18.5 from 39.8 just two months ago (readings below 0 indicate pessimism in investor sentiment).
The data released in China has not yet fully shown the potential consequences of U.S. tariffs on its economy. Although PMIs came in below expectations, and the services reading even entered contraction territory at 49, other figures such as industrial production, which is still growing at 6.5% (up from 5.9%), and GDP, which remained steady at 5.4% (versus the expected 5.2%), still do not indicate a slowdown.
The Federal Reserve met last week and left interest rates unchanged at 4.50%. Jerome Powell emphasized that there is no urgency to continue adjusting monetary policy, given the economic uncertainty triggered by the U.S. administration’s decisions. It’s true that the CPI data still shows a downward trend that could ease Fed policy, but concerns remain about a potential inflation rebound due to tariff impacts, as well as a slowdown in consumption. For now, strong indicators such as employment are supporting the Fed, but the GDP has already sent an early warning sign, which could support future monetary easing. Although the market had priced in up to five 25-basis-point rate cuts in 2025, the calm of recent sessions has lowered expectations to just 2 or 3 cuts.
In contrast, the European Central Bank cut rates again by 25 basis points at its April 17 meeting, bringing the deposit facility rate down to 2.25%. The next ECB meeting is scheduled for June 5, and the market is already anticipating another 25-basis-point cut. The European economy is growing, albeit without exuberance, and combined with controlled prices (also helped by current energy costs) and geopolitical uncertainty, this is allowing the ECB to continue its expansionary policy.
The uncertainty caused by tariffs over the past month and a half has been clearly felt in the stock markets, with a significant increase in volatility that triggered sharp drops in equities at the start of April. However, markets have fully recovered since. That said, there are parts of the economy less visible in the short term where we’ll likely see effects in the coming weeks or months. This includes both consumer and business decisions which, given the current outlook, may have involved delaying investments or hiring. That’s why it will be crucial to observe the impact of all this on economic data published in the coming quarters, amid a backdrop of potential global economic slowdown.
The good news, at least in the short term, is that the United States seems to have reached significant agreements with the United Kingdom, and at the very least, has agreed to a 90-day extension with China, providing a framework for bilateral negotiations. Last week, an agreement was announced with the UK to cap tariffs at 10%, focusing on specific sectors. In the case of China, negotiations began in Switzerland over the weekend, resulting in a three-month pause during which significantly lower tariffs will be applied. China will reduce its tariffs on U.S. products from 125% to 10%, while the U.S. will lower its tariffs from an initial 145% to 30% (20 points higher than China’s, as it maintains a 20% tariff due to the fentanyl issue). Additionally, a preliminary agreement was announced to increase mutual purchases of goods, and markets reacted swiftly with sharp gains in both U.S. and Asian stocks.