Balancing Growth with Stability

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Good morning, as China wakes to economic headwinds and Powell tiptoes through a tariff storm, the world markets are holding their breath.

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THE HEADLINE
Powell's tariff tango

Federal Reserve Chair Jerome Powell steps up to the mic at the Economic Club, his voice steady but his words heavy. President Trump’s tariffs, he warns, are a storm brewing, threatening to whip up inflation while choking economic growth. It’s the ghost of stagflation, and Powell’s got a tightrope to walk.

These tariffs, far bolder than the Fed’s worst nightmares, could force a brutal choice: tame prices or save jobs. The markets catch the vibe instantly, S&P 500 tanks 2.5%, bonds surge, the dollar wobbles. Investors are spooked, and who can blame them? The tariff roulette, 25% here, 10% there, has everyone guessing.

Inside the Fed, it’s not all grim nods. Governor Christopher Waller, ever the contrarian, pipes up: Maybe this inflation spike is just a cameo, not a starring role. If tariffs grind growth to a halt, unemployment could hit 5%, cooling prices and begging for rate cuts. Powell, though, isn’t buying the quick-fix script. He’s playing the long game, eyes locked on keeping inflation expectations from spiralling. Rate cuts? Not until the labour market flashes red.

Powell’s cool as ever, promising liquidity if markets wobble and defending the Fed’s independence against political winds. But the auto industry’s supply chains? They’re in for a rough ride, and inflation could linger like an unwelcome guest.

In this economic thriller, Powell’s the stoic hero, balancing caution with readiness, while Waller’s the wildcard betting on a plot twist. As the tariff saga unfolds, all eyes are on the Fed’s next move—and the data that’ll script it.

TARIFF
The politics of protectionism

In the ever-shifting world of Trump-era economic policy, the past week felt like a lesson in volatility. One moment, financial markets teetered on the edge. Next, a single line from Donald Trump announcing a 90-day delay on aggressive tariffs sparked a sharp market rebound. It’s this unpredictable pendulum swing that keeps investors, diplomats, and economists on their toes, struggling to decode the strategy behind the President’s “Liberation Day” tariffs.

Two key voices attempted to put logic behind the chaos. Stephen Miran, chair of Trump’s Council of Economic Advisers, offered a vision where America, as the world’s financial anchor, has long borne the cost of being the reserve currency provider. His view: tariffs are a way to rebalance global trade by nudging countries to buy American, invest in its industries, or even, as he suggested half-seriously, send money directly to Washington.

But his argument faced a practical flaw. Being the reserve currency power isn't just a burden, it's a privilege. It gives the U.S. cheaper borrowing and geopolitical influence. The surge in Treasury yields after Trump's tariff threats signalled that even those privileges aren't immune to unpredictable governance.

Treasury Secretary Scott Bessent, meanwhile, tried to offer a steadier narrative. Speaking to right-wing commentator Tucker Carlson, Bessent emphasised America’s strong-dollar stance and painted tariffs as a national security tool. The pandemic, he said, exposed how vulnerable America's supply chains had become. His solution: bring manufacturing back, even from friendly neighbours like Mexico.

But here too, the logic stumbled. The administration’s tariff-first approach has strained alliances and created regulatory uncertainty. For all the talk of deregulation, tariffs have acted as a top-down command telling companies where to build.

Ultimately, Trump’s tariff policy isn’t anchored in a detailed economic framework. It’s driven by a simple belief: bring jobs home, at almost any cost. That clarity, however blunt, is the only consistent thread. And as the president continues to adjust his strategy, often by instinct rather than plan, one thing remains certain: explaining his economic moves remains a job few would envy.

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ECONOMY ANALYSIS
China’s economic outlook

China’s economy is at a pivotal moment. In the first quarter of 2025, it posted a robust 1.2% growth from the previous quarter, translating to an annualised rate of 4.9%, according to China’s National Bureau of Statistics. This performance, driven by a surge in exports and manufacturing investment, paints a picture of resilience. Yet, the horizon is clouded by President Donald Trump’s escalating tariffs, which reached 145% on over half of China’s exports to the U.S. starting April 2, 2025. China faces a critical test as factories falter and consumers tighten their belts. Can it sustain this growth, or will the tariff storm derail its economic engine?

The first three months of 2025 were a high note for China’s economy. The National Bureau of Statistics reported a 1.2% quarter-on-quarter GDP growth, annualising to 4.9%. Year-on-year, economic output was 5.4% higher than Q1 2024. This strength came from a pre-tariff export boom, with March exports soaring 12.4% in dollar terms compared to the previous year. Factories worked overtime to ship goods before the U.S. trade barriers tightened. Manufacturing investment was a key driver, rising 9.1% in Q1 compared to the same period in 2024. Infrastructure spending also contributed, up 5.8%. However, the real estate sector continued its decline, with investment dropping 9.9%, reflecting a prolonged housing market crisis.

The optimism of Q1 is now under threat. On April 2, 2025, Trump escalated tariffs to 145% on over half of China’s exports to the U.S., following earlier 10% tariffs in February and March. These earlier levies had little immediate impact, as exporters rushed shipments, but the new rates are proving disruptive. Some factories in southern China have suspended operations, unable to compete with the inflated costs in the U.S. market. This raises concerns about potential unemployment spikes, a worry echoed in reports.

Trump also imposed tariffs on goods from Vietnam, Cambodia, and other countries assembling Chinese components, with a baseline 10% tariff affecting nearly all U.S. trading partners. This complicates China’s export strategy, as these nations often serve as intermediaries for Chinese goods.

To offset the export slowdown, China’s leaders are pushing for increased domestic consumption. Subsidies for manufactured goods—ranging from rice cookers to electric cars—have bolstered sales of consumer electronics, appliances, and vehicles. However, this strategy faces significant hurdles. The housing market crash has eroded consumer confidence, with apartment prices falling as much as 40% since 2021. For many Chinese families, real estate represents up to 80% of their savings, making this wealth erosion, surpassing the U.S. housing crisis of the late 2000s, particularly painful.

This financial strain has led to widespread frugality. In Ganzhou, a butcher noted customers buying as little as a quarter-pound of pork, down from pounds, reflecting cautious spending even on essentials. Construction workers, like Yu Hongqiang in Guangzhou, express concerns about job security, fearing a return to rural hometowns if work dries up.

China’s central bank has allowed the renminbi to weaken by approximately 1% against the dollar since mid-March, aiming to make exports more competitive. However, a sharper devaluation risks financial instability, as households might rush to move savings abroad, a scenario Beijing is keen to avoid. Economists, including Zhu Ning from the Shanghai Advanced Institute of Finance, expect additional policy measures—potentially fiscal stimulus or monetary easing—to counter the tariff war’s impact.

The tariff war is not just a U.S.-China issue. Other nations, wary of China’s export surge from newly built factories, are raising their trade barriers, complicating Beijing’s strategy. Projections suggest a potential 0.16% drop in China’s real GDP by 2027 due to tariffs, though stimulus could mitigate this to a 4.5% growth rate in 2025. The real estate sector, once a quarter of China’s economic output, remains a drag, with stalled construction and declining demand for new apartments. This contrasts with the manufacturing and infrastructure sectors, which continue to drive growth but may not sustain it alone.

China’s Q1 2025 performance was a testament to its economic resilience, with a 5.4% year-on-year growth and a 12.4% export surge in March. However, the escalation of U.S. tariffs to 145% threatens to disrupt this momentum, with factory suspensions signalling early trouble. Beijing’s pivot to domestic consumption is ambitious but challenged by a cautious consumer base reeling from a housing market crash.

As China navigates this tariff storm, its policy responses subsidies, currency adjustments, and potential new measures, will determine whether it can maintain its growth trajectory or face a slowdown. The coming months will be critical, and further developments will shed light on China’s economic path.

Sources Cited
_{NYT: China’s Economic Stress
Reuters: China Q1 GDP
Bloomberg: China’s Growth
CNN Business: China’s Q1 GDP
Visual Capitalist: Tariff Impact
Goldman Sachs: China Stimulus}