25 Sep 2025 11:12:18 ET │ 48 pages Global Economic Outlook & Strategy Tariffs & Global Resilience —Waiting for Another Shoe to Drop CITI'S TAKE Global growth remains on a solid trajectory. The economy has cooled a notch, as tariff-related uncertainty has restrained spending, but activity has held up surprisingly well. All told, growth looks to have run at 2.6% during H1, down only slightly from last year. This performance is broadly a reprise of the past two years—and the global economy continues to defy ou ...

Summary of Key Points from the Conference Call Industry Overview - The conference call primarily discusses the **global economy** and the impact of **US tariffs** on international trade and inflation dynamics. Core Insights and Arguments 1. **Global Economic Growth**: The global economy has shown resilience, with growth slowing to 2.5% in the first half of the year, down from nearly 3% last year. A further slowdown to below 2% is expected in the second half, with a rebound to nearly 3% anticipated in the first half of next year [1][18]. 2. **Impact of US Tariffs**: US tariffs have created uncertainties, but their restraining effects have been slow to emerge. Recent months have seen a decline in US imports and a retreat in foreign exports, indicating that the effects of tariffs are beginning to be felt [2][17]. 3. **Central Bank Policies**: A majority of global central banks are expected to continue cutting rates, with 21 out of 30 major central banks projected to cut by year-end. The Federal Reserve is likely to cut rates in September due to a softer labor market [3][32]. 4. **Surge in Tariff Revenues**: US tariff revenues have increased significantly, surpassing $330 billion annually in July, compared to $75 billion last year, reflecting an effective tariff rate of 11% [4][46]. 5. **Tariff Absorption by Firms**: US firms are currently absorbing 60-70% of the tariffs, but this is not expected to be sustainable long-term. Firms may increasingly pass these costs onto foreign suppliers and US consumers [5][63]. 6. **Inflation Dynamics**: Headline inflation remains near 2%, but core inflation is running higher than pre-pandemic levels. The tariffs are contributing to stagflationary pressures in the US, while they may exert downward pressure on wages and prices globally [22][24]. 7. **Sectoral Impact of Tariffs**: The tariffs are expected to affect various sectors differently, with foreign exporters potentially absorbing some costs, while US consumers may face higher prices. Evidence suggests that consumers have borne approximately 30-40% of the tariff costs to date [48][53]. Additional Important Insights 1. **Global PMIs**: Global Purchasing Managers' Index (PMI) data indicates that services are outperforming manufacturing, with the services PMI recovering to favorable levels while manufacturing PMI hovers around the expansion-contraction threshold [8][11]. 2. **Trade Dynamics**: The expected reduction in US demand for foreign products due to tariffs has not yet fully materialized, as US imports surged late last year. However, recent trends show a decline in imports, suggesting a shift in trade dynamics [12][16]. 3. **Future Projections**: The likelihood of severe downside risks to the global economy is diminishing, but the potential for more powerful downdrafts from tariffs remains a concern [18][39]. 4. **Sectoral Tariffs**: The overall US tariff rate is currently around 18%, with expectations that it could exceed 20% with additional sectoral tariffs on pharmaceuticals and electronics [42]. This summary encapsulates the key points discussed in the conference call, highlighting the current state of the global economy, the implications of US tariffs, and the responses from central banks and various sectors.

Economic Outlook - The global economy is projected to grow at a slower pace, with growth rates of +2.8% for 2025, +3.3% for 2024, and +3.5% for 2023 [1] Investment Focus - The slowdown in economic growth warrants precaution and encourages a closer examination of investment opportunities [1]

Global Economic Outlook - Global economic growth expectations are diminished compared to previous expectations, but a modest upward revision exists compared to April due to easing trade tensions [2][3][4] - Medium-term growth has been relatively weak and is expected to continue, with tariffs potentially exacerbating this trend [6][7] Impact of Tariffs - Tariffs are expected to be around 17% on average for the US on the rest of the world, a significant increase from less than 3% last year [5] - The depreciation of the US dollar is amplifying the tariff shock, making foreign goods more expensive and US goods more competitive [10] - Tariffs are starting to transmit into domestic prices, with importers, distributors, retailers, and eventually customers likely to bear the cost [12][13] US Economic Performance - US GDP outlook for 2025 is revised to 19%, with a slight acceleration to 2% growth in 2026, partly due to tariffs not being as severe as expected and the recent budget bill [7][9][11] - The US economy has been helped by easing financial conditions, with equity markets performing well and a depreciation of the US dollar [10] Trade Deficits and Policy - The US is concerned about its trade deficit, a legitimate concern monitored by the IMF [15][16] - Tariffs and trade policy are unlikely to significantly reduce the US's external deficits, which are primarily driven by domestic fiscal policy [17][18] - The US fiscal policy, with 6-7% public deficits, is a primary driver of the external deficit, and addressing this through fiscal policy is preferable to raising tariffs [18][19]

Economic Growth and Consumer Confidence - Global economic growth remains uncertain, with high interest rates impacting households and businesses[11] - Overall consumer confidence has declined due to high consumer prices, with spending slowing down across most regions except Brazil[13][22] - The OECD global consumer confidence index shows a downward trend, indicating reduced consumer sentiment[20] Manufacturing and Services Sector - Manufacturing experienced its first contraction in 2024, while the services sector continues to show stable growth[14] - Manufacturing growth in China and the US has stagnated, with the Eurozone still in contraction[34] - The services sector remains a bright spot in the global economy, driven by industrial production growth and capital market improvements[45] Trade and Supply Chain - Global trade volume increased by 0.7% in June, primarily driven by growth in developed economies[50] - The global supply chain market is normalizing, with the pressure index reaching historical averages in July[51] - Total port trade in June 2024 decreased compared to June 2023, mainly due to reduced activity in Asian economies[69] Employment and Inflation - Unemployment rates in the US and China continued to rise in July, while Brazil's unemployment rate showed a declining trend[73] - Inflation in developed economies is easing, with the Eurozone facing deflationary pressures[77] - Consumer inflation in developing economies remained stable in July, with only Russia experiencing an acceleration[84] Commodity Prices and Market Trends - Most commodity prices continued to decline in August but remain significantly higher than pre-pandemic levels[89] - Gold prices reached a historical high of $2,439 per ounce in August[93] - Stock markets faced challenges in August, with most exchanges reporting losses[123]

Investment Rating - The report does not explicitly provide an investment rating for the industry but discusses the impact of trade policy uncertainty on economic activity, suggesting a smaller-than-feared drag on growth [5][34]. Core Insights - Trade policy uncertainty (TPU) rose significantly after President Trump's election but has recently decreased, with little evidence of a substantial negative impact on global economic activity [3][6]. - Investment, manufacturing employment, and consumer spending have remained stable, indicating that the anticipated slowdown due to TPU has not materialized as expected [12][34]. - The report highlights that trade-exposed investment constitutes a small portion of GDP, which may explain the limited observable effects of TPU on overall economic performance [21][22]. Summary by Sections Trade Policy Uncertainty - Trade policy uncertainty increased after the election but has since pulled back, with indices remaining elevated yet showing no significant drag on growth [2][4]. - Historical data suggests that the impact of TPU peaks shortly after its increase, implying that any slowdown in growth should have already occurred [3][5]. Economic Activity - Despite initial fears, indicators of investment and overall activity have followed prior trends, with forecasts for growth in Q2 and the full year improving [12][34]. - The report notes that the frontloading of US imports may have masked some of the uncertainty's effects, but even after accounting for this, the drag from TPU appears limited [16][17]. Statistical Analysis - Statistical analyses indicate that uncertainty primarily affects growth through its interaction with financial conditions, with easing financial conditions since early 2025 potentially dampening the impact of uncertainty [26][27]. - The report presents regression results showing that while uncertainty has a small negative effect on activity, the combination of tighter financial conditions and increased uncertainty creates a significant drag on growth [27][29]. Future Expectations - The report anticipates that while tariffs may slow activity later in the year, this will be driven more by direct impacts rather than uncertainty surrounding trade policy [34].

Global Economic Outlook - Global economic growth is expected to slow to 2.3% in 2025, the lowest rate since 2008, excluding global recession years [1][55] - Growth in advanced economies is projected to decline to 1.2%, with significant impacts from trade policies in the US and Eurozone [2][55] - Emerging market and developing economies (EMDEs) are forecasted to grow at 3.8%, with China at 4.5% and India at 6.3%, although many countries are underperforming relative to expectations [2][55] Trade and Inflation - Global trade growth is anticipated to drop to 1.8% in 2025, with commodity prices expected to decline by 10% [2][67] - Global inflation is projected at 2.9% in 2025, with core inflation remaining high due to persistent service price pressures [2][68] Regional Economic Prospects - East Asia and Pacific growth is expected to slow to 4.5%, with risks from trade tensions and geopolitical conflicts [4][56] - Europe and Central Asia are projected to grow at 2.4%, affected by tightening monetary policies and ongoing geopolitical risks [4][56] - Latin America and the Caribbean are forecasted to have the lowest growth among EMDE regions at 2.3%, hindered by high trade barriers [5][56] - The Middle East and North Africa are expected to grow at 2.7%, with oil-exporting countries mitigating price drops through increased production [6][56] - South Asia is projected to grow at 5.8%, driven by India, while facing challenges from political and economic issues in neighboring countries [6][56] - Sub-Saharan Africa is expected to grow at 3.7%, with Nigeria and South Africa showing weak growth due to reliance on commodity exports [7][56] Risks and Policy Recommendations - Major risks include escalating trade barriers, tightening global financial conditions, geopolitical conflicts, and extreme weather events [8][54] - Policy recommendations emphasize global cooperation to rebuild trade relations, restore fiscal order, and accelerate job creation [9][10][11]

Investment Rating - The report maintains a bullish outlook on gold while being cautious on oil and copper prices, reflecting a mixed investment rating across commodities [2][3][11]. Core Insights - The report highlights the direct impact of announced and expected tariffs on US industrial metals and the indirect effect on commodities due to weaker global growth, leading to bearish oil and bullish gold sentiments [2][3]. - It emphasizes that the US reciprocal tariffs will primarily affect commodities through their negative economic growth impact rather than direct tariff imposition [3][6]. - The report suggests that the recent sell-off in gold presents an attractive entry point for long positions, supported by ongoing central bank buying and increased ETF demand amid recession fears [17]. Summary by Sections Tariff Impact on Commodities - Tariffs on US imports of steel and aluminum are expected to remain, with copper likely to be included later this year, while energy and gold are exempt from these tariffs [2][3][4]. - The report anticipates that the tariffs will have a significant indirect negative impact on global economic growth, which is expected to weigh on oil demand and prices [2][11]. Oil Market Outlook - The report has lowered its December 2025 Brent/WTI crude oil price forecasts to $66/$62 per barrel from $71/$67 previously, citing a larger-than-expected increase in oil supply from OPEC and reduced oil demand growth expectations [11][12]. - The report indicates that the risks to the oil price forecast are skewed to the downside, particularly for 2026, due to recession risks and increased OPEC+ supply [12]. Industrial Metals Analysis - The report maintains a cautious near-term view on copper prices, with potential for prices to dip below $9,000 per ton in 2Q2025 if retaliatory tariffs escalate [15]. - It notes that existing tariffs on steel and aluminum are likely to keep US industrial metals prices higher compared to the rest of the world, but the overall demand outlook remains weak [15]. Gold Market Insights - Following the recent tariffs announcement, gold prices have seen a modest decline, but the report views this as an opportunity for investors to establish long positions [16][17]. - The year-end forecast for gold is maintained at $3,300 per ounce, with a range of $3,250 to $3,520, indicating upside risks to the forecast [17].