By Howard Schneider and Mark John
WASHINGTON/LONDON (Reuters) -Threats to the global economic order have come at a furious pace during President Donald Trump‘s first eight months in office – from a massive tariff shock to a battle for control of the Federal Reserve and even an emerging form of U.S. state capitalism.
But the reaction in terms of world equity and bond markets and economic activity has been a somewhat remarkable shrug: The global economy has kept growing, stock prices have surged and inflation fears remain muted.
While many players worry that things could still unravel given the right spark, it is a far cry from the most dour predictions early in Trump’s term, when recession odds soared, markets plummeted, and headlines even fretted over the cancellation of Christmas in a collapse of global trade.
“The global economy continues to exhibit considerable resilience amid heightened policy and political uncertainty,” BNP Paribas economists wrote recently, attributing it to “supportive financial conditions, robust household and corporate balance sheets, the promise of an AI-driven productivity boost, and lower energy prices, among other factors.”
Perhaps the biggest factor is that one of the deepest early fears – of a trade war of steadily rising tariffs and a halt to global shipping – has not materialized.
Deals, albeit sketchy, are in place with exporting nations in Europe and Asia. And while the landscape remains in flux, the accommodation shown by U.S. trading partners threatened with sky-high tariffs resulted in more modest levies that are being shared by exporters, importers and consumers in what economists feel has become a manageable distribution.
Meanwhile, Trump’s attempts to oust the Fed chair and fire one of its governors, potentially among his most-disruptive efforts, have so far failed, and financial markets appear willing to ignore the risk of rising White House influence over monetary policy until it happens.
Indeed, the yield on the U.S. 10-year Treasury note – one of the vehicles investors could use to discipline U.S. policy – has fallen from around 4.6% when Trump took office to around 4.1%.
While that might reflect growth doubts, it is not what would happen if global investors were losing faith in the U.S., the Fed’s independence or the long-term path of U.S. inflation.
The Fed is now comfortable enough about meeting its inflation target that it cut its benchmark rate by 25 basis points this week. Fed Chair Jerome Powell played down the market impact of Trump’s calls for him to resign and the president’s so-far unsuccessful attempt to fire Governor Lisa Cook.
“I don’t see market participants… factoring (that) in right now in terms of setting interest rates (on Treasury bonds and other market-based securities),” he told a post-meeting press conference.
GROWTH FORECASTS RAISED
At least for now, the uneasy calm has granted the rest of the global economy some breathing space.
Despite its broader slowdown, China’s central bank left a key interest rate unchanged on Thursday and market watchers said resilient exports and a stock market rally allowed policymakers to withhold fresh stimulus.
The euro zone is doing better than expected, with the European Central Bank last week raising its 2025 GDP growth forecast to 1.2% from 0.9% last year amid what ECB President Christine Lagarde called “resilience in domestic demand.”
Debt-laden Italy is tidying up its public finances to the point that it may get a ratings boost from Fitch on Friday. A Spanish growth spurt shows no signs of abating: The Bank of Spain this week lifted its 2025 growth forecast to 2.6% as tourism and other sectors support domestic demand.
Europe’s biggest economy, Germany, is on the cusp of a huge leap from this year’s stagnation to GDP growth pushing into 1.5-2.0% in 2026 and 2027 as it unleashes big public spending on infrastructure and defence projects, combined with tax cuts.
“The German fiscal plan is going to be a huge, huge support for the economy from 2026,” Edmond de Rothschild Asset Management co-head of equities Caroline Gauthier said.
Elsewhere, Japanese policymakers are still trying to explain buoyant manufacturer sentiment which the Reuters Tankan shows at its best in more than three years.
Emerging-market economies are holding up, supported by U.S. dollar weakness. Analysts cite as bright spots Brazil, Mexico and India, with the latter hoping tax cuts can boost domestic demand to partly offset the hit expected from U.S. tariffs.
“LONG, LONG TAIL ADJUSTMENT”
But the sense the current benign situation is not built on the firmest of foundations lingers – and early signs of the hit to exporters are being seen from Japan to Germany, if not as dramatically as once feared.
“The most plausible explanation for this is that tariff effects are taking time to surface,” Bank of Japan Deputy Governor Ryozo Himino said this month, warning “the U.S. administration may roll out policies we have yet to foresee”.
Others detect a lack of realism among investors about the U.S. economy’s real health, primed to see signs of weakness as a chance to bet on Fed rate cuts.
Powell acknowledged the concentration of U.S. growth in AI-driven investment and spending by high-end consumers; meanwhile housing is weak, hiring is low, and there could be long-term effects from things like Trump’s pressure on universities, the defunding of research and the government taking stakes in some U.S. companies.
“U.S. labour market weakness should have everyone on a hair trigger for recession,” said Janus Henderson Investors multi-asset portfolio manager Oliver Blackbourn. “But there is just a degree of complacency out there and it comes down to the fact there is this potential for a Fed put” – the belief the Fed would rush to the rescue if growth slowed.
Alan Siow, a portfolio manager at investment manager Ninety One, said understanding what is going on in global supply chains could take time because a lot of stock was built up during the pandemic and a lot of front-loading of activity occurred ahead of Trump’s tariffs.
“The economic scholars would say that this was always going to be a long, long tail adjustment,” he said, warning that market levels might not reflect underlying realities.
“We’re making all time highs in everything,” he said. “As an investor, I’m uncomfortable with that. I think I’m not alone.”
(Additional reporting by Naomi Rovnick and Karin Strohecker in London; Balazs Koranyi in Frankfurt; Leika Kihara in Tokyo; Corina Rodriguez in Madrid; Writing by Howard Schneider and Mark John; Editing by Dan Burns and Andrea Ricci)
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