Recent purchasing managers’ indices (PMIs) are showing a global slowdown may be gathering pace. While first-quarter 2025 US GDP figures indicated strong business investment, consumer demand has weakened.
Listen to the article
With the imposition of tariffs on imported goods by the Trump administration, and some retaliatory tariffs by US trading partners, economic activity globally was inevitably going to slow. As has been noted, a tariff is simply a consumption tax, so household and business demand would naturally drop in response.
The first broad data that reflects the impact of the tariffs are the ‘flash’ PMIs for April. They show slower manufacturing activity in Europe, as expected, though the decline was not too sharp. The absolute level of the PMIs for Germany and France of around 48 is in contractionary territory, but still above levels seen for most of the last 12 months. Manufacturing activity actually rose in the US (see Exhibit 1).
Exhibit 1: Purchasing managers’ indices (PMIs) declining
Data as at 1 May 2025. Source: FactSet, BNP Paribas Asset Management.
The more worrying figures were those showing a large decline in services sector activity. Tariffs would have been expected to impact manufacturing, with some spillover to services. The drop in services activity shows that neither the US nor Europe are in a particularly good position to withstand the hit from tariffs.
US GDP – A mixed bag
Given that ‘Liberation Day’ was 2 April, first-quarter US GDP data might be thought not to offer much insight on tariffs. Businesses nonetheless knew tariffs were coming (if not to what degree), and imports surged in anticipation.
This surge led to a negative contribution to GDP growth from net exports, partly offset by an increase in inventories (see Exhibit 2). The inventory contribution could yet be revised higher.
More important than net exports and the swing in inventory levels are the two indicators of underlying demand: personal consumption expenditures and business investment.
Here the data was mixed.
After contributing 2.1% on average each quarter to GDP growth in 2024, it was about half that level in the first quarter of 2025.
On the one hand, this is surprising insofar as consumers might also have anticipated the coming tariffs by bringing forward spending in the same way that businesses increased imports.
On the other hand, investors have been anticipating a slowdown in consumer demand for many quarters as excess savings from pandemic stimulus packages run out (the mythic ‘soft landing’).
Exhibit 2: Contribution to first quarter 2025 US real GDP
Data as at 1 May 2025. Source: FactSet, BNP Paribas Asset Management.
Comparatively weak consumer spending was offset by a dramatically large increase in business investment, which contributed 1.3% to the final GDP figure. This was the largest amount in three years and well above the long-run average contribution of just 0.5%.
The main driver was information processing equipment (see Exhibit 3). Though some of this increase may also be due to businesses accelerating purchases ahead of the tariffs, it primarily reflects a significant increase in capital expenditure by companies to support the rollout of artificial intelligence (AI) technologies.
Exhibit 3: Contribution to first-quarter 2025 US business investment
Data as at 1 May 2025. Source: FactSet, BNP Paribas Asset Management.
Equity market recovery continues
Albeit fitfully, equity markets have continued to recover from the post-‘Liberation Day’ declines. Trade negotiations and partial tariff exemptions have provided enough marginal good news to sustain the recovery. Just over a third of country indices are now back above their 2 April 2025 level (see Exhibit 4), in emerging markets primarily thanks to depreciating currencies.
The modest rebound in optimism could be dashed easily, however, if tariff deals do not materialise or if relations between the US and China deteriorate further.
Tariffs will inevitably reduce US sales by non-US companies.
Revenues for some US-based companies will likely rise as consumers avoid now-more-expensive imported goods, though exporters will suffer as consumers in foreign markets do the same. US producers look set to face the additional burden of potentially higher costs for imported inputs until they can find alternative sources.
The impact on earnings expectations has been notable, but not dramatic. Averaged across all markets, analysts’ earnings estimates for 2025 have fallen by 2.1%, leaving year-on-year earnings growth expectations still in positive territory (8.3% forecast).
Looking ahead
The market’s attention will turn next to additional PMI releases for the US and Europe, as well as US non-farm payrolls data. Expectations for the latter are modest: a gain of just 125,000 in April compared to 209,000 in the prior month.
Such a figure would align with the ‘soft landing’ narrative as it is unlikely payrolls would have yet been much affected by tariffs. It is only in the months ahead that we will see whether businesses increase hiring to meet rising domestic-oriented demand.
