Navigating a New Age of Macroeconomic Uncertainty

Navigating a New Age of Macroeconomic Uncertainty
Aon Insights Series UK

02 of 13

This insight is part 02 of 13 in this Collection.

July 9, 2025 11 mins

Navigating a New Age of Macroeconomic Uncertainty

Professor Trevor Williams analyses the latest seismic shifts in the global economy — and what they mean for businesses

The U.S. decision to impose tariffs on all its trading partners - friend and foe alike - has had a profound impact on the world economy and financial markets. Stock markets have experienced a sharp decline, reflecting increased uncertainty, reduced business and consumer confidence, and lower economic growth expectations. At the same time, bond yields have risen, indicating a higher default risk and the prospect of fewer interest rate cuts or even increases from the U.S. Federal Reserve amid heightened U.S. inflation pressure.

These developments underscore the potential consequences of the U.S. tariffs on global trade and economic growth, including reduced international trade, increased inflation risk in the U.S., and a consequent slowdown in global economic growth.

The lesson from the 1930s U.S. Smoot-Hawley tariffs is that the U.S. should expect reciprocal action from its trading partners. The Act, officially known as the Tariff Act of 1930, raised U.S. tariffs on over 20,000 imported goods to record levels, leading to retaliatory tariffs from other countries and a significant reduction in global trade.

The resulting trade war exacerbated the economic downturn and helped precipitate the Great Depression. This historical context is crucial in understanding the far-reaching potential implications of the announced increases in U.S. tariffs. Moreover, at 22 per cent, the average level of U.S. tariffs today is higher than it was under Smoot-Hawley's 20 per cent average in the 1930s - and significantly higher than the sub 3 per cent before "Liberation Day" on April 2. China has already reacted with tariff increases of 125 percent on U.S. goods exports.

One bit of good news is that the announcement of increased U.S. tariffs is not resulting in a trade war between other trading partners. Retaliatory action has been solely against the U.S. So far, the European Union, China, and Canada have tariff increases against the U.S. that are ready to be implemented should it go ahead with its tariffs. However, since the U.S. has announced a pause in imposing its tariff increases, others, including the EU, have paused their tariffs to see whether the U.S. administration reimposes them. Put simply, the other countries won't impose tariffs if the U.S. does not.

Its clear that the rhetoric has been dialled back in the dispute. That is why the 90-day period is crucial, as it provides a window for potential negotiations and temporary relief from the full impact of the tariff increase. Talks between the U.S. and China have led to a reduction in U.S. tariffs of 115 percent to 30 percent on that country and it has mirrored the US 115 percent cut, so Chinese tariffs on U.S. goods are now 10 percent. However, this reprieve will only last for 90 days while the discussions are ongoing. Talks with the EU have not progressed as smoothly, and the EU will retaliate with $23 billion of its tariffs if no agreement is made with them and the U.S. imposes tariffs.

The Best Reaction to Tariffs is to… Do Nothing

In theory, the best reaction to tariffs is not to retaliate because you're simply taxing your consumers, which could raise unemployment and inflation, making the economy less productive. It's a lose-lose situation. To illustrate how fearful some countries are of this outcome, a few, such as Vietnam and Cambodia, have reduced their tariffs on U.S. goods to zero.

To quote 18th-century writer Adam Smith in his book The Wealth of Nations, published in 1776:

"If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage."

At the time of writing, it is still unclear at what level tariffs on automobiles, steel, aluminium, and pharmaceuticals will be imposed by the government on goods entering the U.S. However, what is clear is that the uncertainty about these tariffs has negative economic impacts. 

The key, as it was in the 1930s, is whether trade partners turn on each other and erect tariff barriers as trade is redirected from the U.S. to other countries. Currently, U.S. trading partners are speaking to each other about reducing trade barriers between them rather than raising them so that they can continue to enjoy the benefits of free trade, which is a win-win for all concerned. An example of this is the World Trade Organisation (WTO) figures showing that the level of trade in 2024 was 45 times higher than in 1948, the start of the General Agreement on Tariffs and Trade (GATT).

Quote icon

The uncertainties we are seeing are unlikely to abate soon - and could even intensify.

Trevor Williams
Visiting Professor, University of Derby; Co-founder, FX Guard; and Former Chief Economist, Lloyds Bank

But the rise in U.S. tariffs has undoubtedly thrown the biggest spanner in the works of the global economy since Russia invaded Ukraine, the pandemic, and the global financial crisis of 2008-9. In short, this is the fourth one-in-one-hundred-year event since 2008/9. 

According to the World Trade Organization (WTO), world merchandise trade is now expected to decline by 0.2 percent in 2025 instead of rising by 3.2 percent. While the world economy will still grow this year and next, according to the World Bank's forecast in April, it's expected to have the worst performance since the pandemic.

Global Growth to Slow But Remain Positive

Global economic growth is currently forecast to be around 2.5 per cent this year and next rather than the 3.25 per cent expected before the tariffs were announced. The IMF forecasts that U.S. growth will be just 1.8% in 2025, down from 2.7% before the President announced the tariffs.

The reduction in growth forecasts is not great news, but there will still be expansion. Partly, this is because the geographical distribution of global growth is dominated by Asia, with its contribution three times that of the U.S., mitigating the impact of U.S. tariffs at the world level. But that does not preclude recession in individual countries. Some U.S. forecasters predict the U.S. will experience a recession in 2025.

World average price inflation may not necessarily be higher because oil and other commodity prices are trending lower, and weaker economic activity implies lower inflation pressure. However, it is likely to accelerate in the U.S. - as they are imposing the tariffs –  but inflation should slow in the rest of the world. 

However, the added uncertainty will rattle financial markets, feeding into higher fixed-income costs and reluctance to invest and trade across national boundaries. Even the U.S. is not immune from this risk, as it is a net borrower from the rest of the world to fund its $7 trillion debt. Having the world's reserve currency in the dollar makes it easier for the U.S. to borrow without worrying about a depreciating currency, inflation, and default concerns, which add to the cost of the debt. However, there is an internal gap between savings and investment in the form of a large federal fiscal deficit funded by issuing Treasury bills and borrowing from abroad.

The US is Not Immune to Tariff Risks

The global financial markets' unease at the U.S. erecting trade barriers - despite its role as the world reserve currency (a currency held in significant quantities by governments and institutions as part of their foreign exchange reserves) and lender of last resort (a country or institution that provides loans to other countries or institutions during financial crises) - is reflected in recent falls in the value of the U.S. dollar and rises in U.S. long-dated Treasury bill yields.

The U.S. risks being saddled with significant debt service costs, which are funded mainly by Japan and China recycling their trade surplus (the amount by which the value of a country's exports exceeds the value of its imports) into the U.S. by buying a treasury bill issued by the U.S. Fed to fund government borrowing.

Therefore, the potential consequences of the U.S. losing its status as the world reserve currency and lender of last resort would be costly. It would face higher borrowing costs and potentially a weaker currency, which could further exacerbate the impact of the tariffs on its economy and raise inflation.

Moreover, the government has talked about cutting taxation by up to $4 trillion without saying how it will fund this with spending cuts or tax increases; therefore, that would equal further borrowing from overseas. That borrowing from overseas investors can only come from those running trade surpluses, which is precisely what has displeased the U.S. President.

Therefore, the potential feedback loop from increasing tariffs on those with trade surpluses with the U.S. to reduce them will also make it harder for the U.S. to fund its fiscal deficit. To square the circle,  the U.S. must pay overseas investors a higher interest rate or make it cheaper to buy the bonds it issues via a weaker dollar or a combination of both. However, such an outcome would carry a significant risk of stagflation: weak growth and higher price inflation simultaneously.

Megatrends Persist

Aside from the macroeconomic events that are taking place, the long-term megatrends which we have discussed, namely climate change, the technological revolution, and population ageing, have not gone away. Indeed, the evidence is that these long-term megatrends influence in the short term are getting stronger. However, they each pose challenges and opportunities for businesses. Take climate change.

Carbon-reducing technologies, cleaner, better energy sources, and adopting agricultural practices which emit less carbon to reduce the impact of weather-related catastrophes, which are getting more unpredictable more costly and frequent, mean businesses have to respond as revenues are affected. But t gives opportunities for a range of companies to develop innovative solutions and risk assessors and insurers to manage these long-term but unpredictable risks.

At the same time, the pace of technological change is faster than ever across more industries. These changes have positive and negative effects. Technology can bring down costs and can make business activity more efficient. However, it also have disruptive effects across society and geographically within a country where technological changes wiped out industries with attendant job losses in some areas but created new ones in other areas. Or even new jobs with lower incomes in the same regions with the higher-paid jobs requiring training and upskilling.

However, technology offers the opportunity to solve many of these problems of population ageing and climate change, and it is an essential activity to be embraced. For instance, quantum computer developments will speed up the effectiveness of AI and associated systems, accelerating change while bringing new solutions to current problems.

Finally, population changes are occurring at varying rates worldwide, leading to shortages of workers in some areas and surpluses in others relative to business absorption. Some countries are aging faster than others, leading to labour shortages and some are not leading to excess labour supply. This divergence presents opportunities, such as locating enterprises in lower labour-cost areas and diversifying supply chains. It will also create new markets for goods and services as well as challenges around integration, migration flows, pay levels, skills, staff retention, and training.

How Businesses Can Turn Risk into Opportunity

The world is becoming a much more volatile and challenging place for businesses to operate in while at the same time offering greater opportunities for firms that get it right, innovate quickly, take advantage of technology's lower costs new markets, and embrace it to find new solutions to old problems and new solutions to emerging problems and opportunities.

The thing to remember about technological change, for example, is that over time, it boosts productivity. Higher productivity equals higher living standards, more wealth, and an enhanced ability to meet the challenges of ageing and climate change. However, change also destroys old (unproductive) jobs as it creates new (higher productivity) ones. So businesses have to respond quickly, be adaptive and have flexible workforces and policies that can transition to new ways of doing things and take advantage of new opportunities. 

However, societally, these processes in a period of rapid change may lead to winners and losers, as has been the case throughout history. That gap has to be bridged and managed with social policies that offer opportunities to retrain and reskill so that people are not left behind. That includes towns blighted by lost jobs as technological change means swathes of industries leave or are shuttered.

 

This article is current as of May 2025.

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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