UBS On-Air: Paul Donovan Daily Audio '….not well'
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Good morning. This is Paul Donovan, Chief Economist at EBS Global Wealth Management. It's seven o'clock in the morning London time on Friday, the 4th of April. Financial markets had expected US President Trump to introduce a significant tax increase on the 2nd of April. The fact that US equities fell so far yesterday suggests that investors feel the outcome was a great deal more destructive than had been previously anticipated.

The fact that the dollar fell so far is also very telling. It is a common adage that if the US sneezes, the global economy catches cold. But this is not a case of the US sneezing. This is a case of the US cutting off its arm with a blunt penknife to try and cure a headache. The rest of the world is affected, but the self-inflicted nature of this economic damage

means that market perceptions focus firmly on the idea that the United States will be more negatively affected than the rest of the world. In that context, the dollar's move is not surprising. US Federal Reserve Chair Powell speaks today on the economic outlook. It will be interesting to hear what Powell's speechwriters have to say on the subject. It will still take several weeks for US consumers to become aware of the price effects of the tax increases.

The increases come into effect next week for the most part, but it still takes time for them to filter down the supply chains. There are goods with very short inventory life, which would tend to show price increases faster, like fresh vegetables. However, these inevitably tend to come from Mexico and Canada as nearby countries. They do not have the same tax burden, and so the price impact is going to be less obvious.

Perceptions of the effects of the tariff are also likely to remain polarised. Media coverage of these events is not homogenised. One notable television channel simply stopped showing the equity market price ticker yesterday as markets collapsed. Consumer behaviour will depend on whether the media bubble is penetrated by real-world changes. There are consequences beyond the direct price increases. Policy competence remains in question.

There is at least circumstantial evidence that this was a policy produced by asking a large language model how to introduce tariffs, which suggests a less-than-considered approach. Taxing imports the US cannot possibly produce – bananas, the appropriate example – raises questions about the coherence of the policy's objectives. US President Trump has suggested that if other countries offer "phenomenal" terms, deals could be done.

No news yet on what the penguins of the Herd and McDonald Islands might intend to offer. This sort of casual comment adds uncertainty about trade taxes that deters businesses and potentially to consumers from making important business decisions. The universal 10% tariff raises questions about whether deals could take tariffs below that point.

There are also attempts by some members of the US Congress to override or rein in the president's tax hikes, again adding uncertainty, delaying economic decisions. And the retaliation of other countries has yet to be announced, which given the nature of current politics, risks incurring even higher taxes levied on US consumers.

Recession risks in the United States have obviously increased meaningfully, which is what the markets are pricing. However, over time, effective tariff rates should shift lower. Supply chains might adjust to some extent to help US consumers avoid tariffs, as happened with China's exports after 2018. Naturally, lower tariffed goods are likely to have more growth or less contraction in international trade than highly tariffed goods.

The economic and political pressures around these taxes is significant. And Trump has repeatedly retreated from trade taxes when these pressures have built. There are negative long-term trend growth consequences from the current situation, of course, but assessing those in the midst of the current volatility is not going to be terribly helpful. That's all for today. Have a good day.

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