The Impact of Tariffs on the Economy and Investments - UBS Analysis
As the 2024 presidential election approaches, the possible reintroduction and increase of tariffs in the United States could have significant effects on the economy and investment landscape. Tariffs, which are taxes on imported goods, were a key component of the trade policy during the Trump administration. Now, analysts at UBS are delving into the potential economic and investment impacts of such actions.
According to UBS, the inflationary impact of tariffs is straightforward but significant. A 10% universal tariff applied to imports to the US could raise overall price levels in the US economy by 1.3%. This increase could lead to "profit-led inflation" where companies might raise prices beyond the tariff's direct impact, capitalizing on consumer expectations of price hikes.
Higher tariffs are expected to slow economic growth, reducing domestic consumption and increasing production costs for domestic firms that rely on imported components. This could lead to a decrease in economic activity and potentially lower employment rates. UBS forecasts a negative cumulative impact on GDP over three years under scenarios where tariffs are imposed, with the US GDP potentially declining by 1.0% to 1.5% under a universal tariff scenario.
The broader the application of tariffs, the more severe the economic impact, as rerouting supply chains becomes less feasible and costs are more broadly felt across the economy. Retaliatory measures from trading partners could also depress global trade, slow economic growth, and increase costs for consumers and businesses.
In terms of investments, UBS analysts anticipate that higher tariffs, particularly if applied universally, would put downward pressure on U.S. equities. The imposition of a 10% universal tariff could lead to a decline in U.S. equity markets by about 10%. Sectors such as retailers, automotive manufacturers, and tech hardware are likely to be impacted, while domestically focused industries like U.S.-based steel producers might benefit from reduced foreign competition.
To counter the economic challenges posed by higher tariffs, UBS expects the Federal Reserve to take a more cautious approach by likely lowering interest rates to prevent a recession. While tariffs may initially drive up inflation, the overall impact on economic growth is expected to push long-term interest rates down.
In response to these economic shifts, investors may seek the relative safety of government bonds, causing the yield on these bonds to decline. Currency markets may see an initial appreciation of the U.S. dollar due to a flight to safety, but UBS analysts caution that this strength may be short-lived as the U.S. trade deficit widens.
In conclusion, the potential reintroduction and increase of tariffs in the United States could have far-reaching effects on the economy and investments. It is crucial for investors to stay informed about these developments and consider adjusting their portfolios accordingly to mitigate risks and capitalize on potential opportunities in the market.