US trade war could trigger more expansionary monetary and fiscal policies globally

The ongoing US trade war might push global economies to tweak their monetary and fiscal policies to account for tariff shocks, Fitch Solutions said. Last week, US President Donald Trump imposed 25% tariffs on Canada and Mexico and doubled tariffs on Chinese imports to 20%. He also announced plans to apply 25% tariffs on EU imports, and plans to place additional 25% tariffs on all steel and aluminum imports starting this week.

(Tap or click the headline above to read this story with all of the links to our background as well as external sources.)

It’s all about inflation and interest rates: To counteract economic slowdowns caused by tariffs, central banks may consider lowering interest rates, but their ability to do so varies across countries. The flexibility of monetary policy depends on how closely inflation aligns with targets and whether interest rates have room for adjustment compared to pre-pandemic levels.

Where do developed economies stand? The European Central Bank and central banks in Australia and Canada may have more capacity to cut rates due to inflation remaining near target. The US and UK stand in a middle position, with some ability to adjust rates but with inflation concerns potentially limiting aggressive reductions. Japan, facing an inflation rate of 4% — double its target — and a minimal policy rate spread, has little room for monetary easing. Meanwhile, China’s policy rate is already far below its 2015–2019 average, significantly reducing its ability to introduce further cuts.

For emerging markets, monetary policy flexibility is closely tied to economic stability. Countries with strong current account balances can lower interest rates with fewer concerns about currency depreciation or capital outflows. However, nations such as Brazil, Romania, and Poland face challenges due to above-target inflation and weaker external conditions, making interest rate cuts more difficult.

Governments looking to respond through fiscal measures such as increased spending or tax cuts face significant limitations. Resources have been strained by recovery efforts following the covid-19 pandemic and the surge in energy prices caused by the Russia-Ukraine war. Countries such as Germany, South Korea, and Australia, with relatively lower debt and manageable deficits, have more room to implement fiscal stimulus. In contrast, nations like France, Italy, Japan, and the UK, which are burdened with high government debt and fiscal deficits, have little flexibility to maneuver.

MARKETS THIS MORNING-

The sell-off on Wall Street extended to Asian markets, with Japan’s Nikkei falling 1.7%, while Topix fell 2%, and South Korea’s Kospi is down 1.5%. China was not spared, with the CSI 3000 falling 0.2% and Hong Kong’s Hang Seng index down 0.9% in early trade.

Wall Street futures indicate a lower open later today, as concerns over a potential recession continue to drag down stocks.

THE CLOSING BELL-

The EGX30 was flat at yesterday’s close on turnover of EGP 3.5 bn (0.5% below the 90-day average). International investors were the sole net sellers. The index is up 4.7% YTD.

In the green: Emaar Misr (+3.5%), Mopco (+2.5%), and TMG Holding (+1.6%).

In the red: Beltone Holding (-3.6%), Telecom Egypt (-3.3%), and Rameda Pharma (-3.0%).