There’ll be no relief from the summer heat and storms this summer, both actual and those originating from the White House
Sitting in a stifling office or a packed train in the middle of a heatwave can make anyone wish for cooler, balmier days. I feel the same about the current global economic temperature. And if you’re dreaming of less heat from the Oval Office this summer, dream on.
US President Donald Trump sending actual letters to world leaders about prospective new tariffs had a charmingly old-fashioned theme in our digital age. But nothing was charming about the content. It simply reinforced the demands the president made on ‘Liberation Day’. At the same time, the extended deadline from 9 July to 1 August has given the impression that the president is in for some European ‘extend and pretend’.
Europeans will remember that phrase well. It’s also known as ’kicking the can down the road’. This term was often heard during the euro crisis when European leaders regularly tried to delay far-reaching and potentially painful decisions. The then European Commissioner, Jean-Claude Juncker, said at the time that all European leaders knew what they needed to do. But they just didn’t know how they’d ever be re-elected if they did it.
So, the latest episode in the never-ending US tax and tariff saga has given the impression that ‘extend and pretend’ is now also a favourite theme in Washington. But I wouldn’t be so sure. The heat is definitely on this summer, in many ways.
In fact, the ’One Beautiful Bill’ has actually increased pressure on the US government to ensure that tariffs become a source of revenue. This means that there will be little room for the US administration to give anything away in the ongoing negotiations.
The new tariff threats on and pharmaceuticals also show that trade tensions aren’t going away. I still think that, eventually, we will see trade deals settling at different base rates plus sectoral tariffs, which will bring the effective tariff rate in the US to levels last seen in the 1930s. The longer-term damage of this tariff saga, however, will be a different one: the loss of confidence in international negotiations and partnerships at eye level.
So, while temperatures continue to rise as far as global trade tensions are concerned, never forget the actual heatwave affecting people around the world, notably in Europe. It’s a real economic threat and could challenge the resilience of the European economy. As a rule of thumb, in most European countries, one day of heat with more than 30 degrees has the same economic impact as half a day of strikes. Hours worked drop, but also labour productivity and consequently income. According to an ECB paper, manufacturing and services partially rebound after a heatwave, while agricultural and certain infrastructure losses tend to persist.
When travelling in Germany last week, I heard the first warnings about melting asphalt on the roads. Add to that the wildfires at the beginning of the year in California or the floods in Texas last week, and it should become clear that the consequences of climate change are here. They have different patterns, but they occur more frequently and seem to be more intense. Therefore, adaptation to climate change and prevention should be high on all government policy agendas.
Admittedly, these policy priorities are well-known, but addressing them all is still a huge challenge. However, even though I struggle to see the role monetary policy can play in fighting climate change, I have a better understanding of the European Central Bank these days. In its latest assessment of its own monetary policy, the Bank paid more attention to climate change. Indeed, more extreme weather conditions will have a significant impact on growth and inflation.
With the tariff saga far from over and heatwaves affecting Europe, the heat is definitely still on. This shouldn’t take away the joy and rest that your holiday break can offer. Enjoy your rest; I fear you’re going to need it.
Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more