Economic mood worldwide remains pessimistic
In a recent Bank of America European fund manager survey, concerns about the global economy weakening over the next 12 months have risen significantly. The survey reflects growing worries of "stagflation", a situation where high inflation and unemployment coupled with a stagnant economy stifles growth.
The tariffs introduced under Trump's administration have led to heightened uncertainties around global trade, contributing to expectations of elevated inflation, especially as tariff costs can raise input prices. However, some market participants remain hopeful that tariff measures will be temporary or partly offset by negotiations and productivity improvements, which tempers expectations for runaway inflation.
Regarding interest rates, the tariff-driven inflation risks have put pressure on central banks like the Federal Reserve to consider their policy stance carefully, balancing between combating inflation and supporting growth. Market watchers are focused on Fed guidance, with some anticipating potential rate cuts depending on economic data and inflation trajectory influenced by tariffs.
Specifically for Europe, tariffs are adding inflationary pressures on producers already facing structural challenges, leading to a dampening effect on growth forecasts. Uncertainties and complexities from these trade tensions are causing fund managers to view European growth prospects more cautiously, though a global recession is not widely expected. Some analyses suggest that if tariff tensions ease in 2026, global—and particularly European—growth could see revitalization as investment and hiring decisions normalize.
The survey shows that many believe Germany's fiscal stimulus will be the main driver for the European economy. Despite the cautious outlook, almost nine in ten respondents are optimistic about Europe equities in the long run. The financial sector is expected to be the best performing sector in Europe equities, with the insurance sector performing closely behind.
While the attitude towards global markets worsens, 35% of respondents are expecting to see stronger European growth over the coming year. However, a trade war triggering a global recession remains the biggest risk for causing significant losses in the market. Over 10% of respondents believe the European Central Bank easing the Eurozone economy will boost growth.
On the other hand, the auto and retail sectors are expected to underperform in the European equities market. Switzerland has become increasingly unpopular due to the 39% tariff imposed by Trump.
In summary, Trump's tariff policy has prompted fund managers to expect higher near-term global inflation, cautious or range-bound interest rate expectations, a tempered outlook on European growth caused by inflationary and tariff-related pressures, though improvement is possible if trade uncertainties recede. The US economic policy and weaker consumer demand are seen as the largest forces dragging down the global economy. Despite the challenges, fund managers remain optimistic about Europe equities in the long run.
