A TV broadcasts market news on the floor of the New York Stock Exchange (NYSE) in New York, US, on Thursday, April 17, 2025. Photographer: Michael Nagle/Bloomberg
INVESTORS enjoying a brief respite from global volatility may want to keep their guard up. The next 90 days could mark the quiet before the storm.
Tariff tensions are expected to resurface in a big way as the United States edges closer to a significant escalation in trade policy – one that could unsettle markets well into the second half of the year.
Our central view remains unchanged: we expect the United States to raise universal tariffs by another 10% in the second half of 2025, bringing the total to 20%.
This would mark a return to a more combative trade stance, one that aligns closely with President Trump’s past rhetoric and recent actions.
While the administration has adopted a carrot and stick approach – dropping reciprocal tariffs and replacing them with a blanket 10% import tax – it has not shied away from hitting Chinese goods with punitive 145% duties.
The message is clear: cooperate and you will be spared. Retaliate, and the cost could be steep.
For now, markets appear to be in a holding pattern.
Recession fears have eased, and equity valuations are beginning to stabilise.
We estimate the probability of a global recession at 20% to 30% – a sharp decline from earlier in the year.
Policymakers appear keen to avoid further shocks in the short term, likely a response to Wall Street’s sharp correction earlier this quarter.
That political sensitivity, combined with easing inflation and looser monetary conditions, may offer a window of relative calm in the second quarter of this financial year.
But this is unlikely to last. If the universal tariff is indeed raised to 20% in July – as we expect – investors should be prepared for renewed market volatility and a reassessment of global growth expectations.
Our asset allocation remains defensive: we are overweight fixed income, market-weight equities, and underweight cash.
Any rally in global equities during this brief reprieve should be seen as an opportunity to reduce exposure and rotate into higher-quality bonds and safe-haven assets.
We expect US gross domestic product (GDP) growth to slow to 1% to 1.5% in 2025, while inflation may push higher, reaching 3.5% with upside risks to 5%.
China’s economy, already contending with elevated tariffs and softening demand, is likely to decelerate to 4% to 4.5%.
Meanwhile, trade-dependent economies such as Indonesia and Vietnam may feel the ripple effects of China’s slowdown.
Against this backdrop, traditional safe havens are likely to reassert their appeal.
Gold prices could climb toward US$3,500 per ounce, while US 10-year Treasury (UST) yields may settle around 3.8% to 3.9% by year-end, on assumption that China does not engage in an aggressive UST sell-off.
The US dollar index could rally to 103 in the second quarter as rate cut expectations are gradually priced in.
We continue to expect three rate cuts from the Federal Reserve in 2025, with the economy showing signs of a widening output gap in the second half.
For Malaysia, the impact of rising protectionism is already becoming visible. A 10% baseline US tariff is now in effect, and the possibility of a 24% rate after the 90-day pause puts Malaysia directly in Washington’s line of fire.
The immediate hit to GDP could be 0.1%, but broader spillovers – particularly from reduced Chinese demand – could shave off a further 0.8 to 1.1%.
In the worst-case scenario, should US import tariffs rates against Malaysia’s goods return to 24%, Malaysia could see an additional 0.2 to 0.3% contraction, bringing total downside risk closer to 1.5% of GDP.
Still, it’s worth noting that extremely high tariffs – those above 100% – tend to have diminishing economic impact.
Beyond a certain point, US demand for Chinese goods simply plateaus, regardless of price hikes.
Malaysia’s diversified trade portfolio and lower Asean tariff exposure may help cushion the blow.
Given these headwinds, we’ve revised our 2025 GDP forecast for Malaysia to 4.5%, down from 5%.
Should trade tensions intensify, growth could dip into the 3.5% to 4% range.
Still, we maintain our base-case forecast for Bank Negara’s overnight policy rate at 3%.
However, a rate cut of 25 basis points is not off the table in the second half of this year, if growth falls below 4% and domestic demand weakens.
Inflation, meanwhile, is expected to remain manageable. We have lowered Malaysia’s 2025 forecast to 2.2% (from 2.4%), reflecting softer economic activity and subdued global commodity prices.
Gradual policy changes – such as the re-targeting of fuel subsidies and expansion of the sales and service tax – may add some short-term inflation pressure, but the broader outlook remains contained.
Overall, we believe Malaysia’s fiscal deficit target of 3.8% of GDP still looks achievable, provided the government sticks to its reform agenda.
Broader tax measures, subsidy rationalisation, and revenue enhancements will be key to maintaining fiscal stability in an increasingly uncertain external environment.
While markets may be enjoying a temporary lull, the underlying risks have not gone away – they’ve simply been deferred.
With US tariff policy poised to tighten again by July, investors should brace for renewed volatility and recalibrate their portfolios accordingly.
Now is the time for prudence, not complacency.
Barnabas Gan is RHB’s group chief economist. The views expressed here are the writer’s own.
