U.S. tariff shock underscores the instability of a shifting world

The global economy is on a bumpy journey to an unknown destination

Author of the article:

Financial Times

Mohamed El-Erian

Published Apr 03, 2025  •  3 minute read

Western economies are facing a massive regime change that is multiyear in its evolution. The effects, while uncertain, are likely to be far-reaching. Photo by Seth Wenig/Associated Press/Postmedia files

“Just tell me how things will end up!” It’s a question on many minds as the global economy undergoes a genuine paradigm shift that goes well beyond the United States tariff announcement currently shocking global markets and businesses. Think of it as a “three-S” change in how things work: structural, secular and systemic.

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This shift sees politics overwhelmingly driving economics at a time when many domestic economies are unusually vulnerable to tricky external forces. America’s once-anchoring global role is not only changing beyond what most CEOs and investors have been bracing for. It is certain to trigger similarly unsettling behaviour on the part of other countries.

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In just weeks, the U.S., once seen as the reliable engine of the global economy due to its “exceptionalism”, has become subject to increasing concerns about “stagflation” — a troubling combination of slowing growth and rising inflation. Instead of discussing exciting innovations that boost productivity, governments and companies worldwide are concerned about tit-for-tat tariff escalation, the disruption of traditional governance and the challenge of funding more defence in a less secure era.

While different countries vary in the degree of space they have to adjust policy and strategy, there is limited room to manoeuvre as fiscal flexibility is constrained by the high level of debt and deficits. There is also a lot less confidence in the ability of the U.S. Federal Reserve to cut interest rates to support non-inflationary growth.

Such issues are increasingly reflected in surveys of how businesses and individuals feel, as well as in financial markets. U.S. business and household confidence has fallen, while expectations of longer-term inflation have surged to a level not seen in over three decades. Both the S&P and Nasdaq stock market indices ended the first quarter with heavy falls, and the price of gold, the traditional haven, has risen from one record level to another.

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The underperformance of U.S. stocks relative to their European counterparts has been stunning. While markets worry about the loss of U.S. economic exceptionalism, Europe is on the verge of an economic transformation as Germany responds to its “Sputnik moment”, taking advantage of its relatively larger fiscal space. Setting aside long-standing structural shortfalls, investors have suddenly embraced the prospects of Europe’s largest economy leading a continent-wide process of increased defence and infrastructure spending, as well as a more serious effort to close the innovation gap with China and the U.S.

While most would readily agree that the global economy’s immediate journey will be even bumpier, it is hard to predict where all of this is headed. Indeed, I recently attempted to do so, drawing on the collective wisdom of several economists and market analysts that I respect.

To achieve clarity, I outlined two opposing destinations. One was a Reagan-Thatcher-style rewiring through a process of creative destruction, resulting in more efficient economies, streamlined government sectors, more balanced global growth and a fairer trading system. In short, also a much more conducive set-up to exploit the productivity promise of exciting innovations in artificial intelligence, robotics, life sciences and more.

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The other scenario is that critical economic and financial relations break rather than get remade. Stagflationary dynamics akin to those seen in the U.S. under Jimmy Carter become increasingly complex to dislodge. Beggar-thy-neighbour weaponization of international trade and finance becomes the rule rather than the exception. And, without a deep crisis that threatens a multiyear global depression, there is little prospect of the type of international policy co-ordination needed to address common challenges, such as environmental issues and standards for innovations.

There was no cluster of answers when my colleagues opined on the probabilities of these two scenarios. Instead, they ranged from 80/20 in relative percentages to 20/80. Sadly, that is realistic. Western economies are facing a massive regime change that is multiyear in its evolution. The effects, while uncertain, are likely to be far-reaching.

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Rather than waiting for clarity and hoping for mean reversion, companies and governments worldwide must accept that they now operate in a global economy on a bumpy journey to an unknown destination. To thrive in a world of multi-year structural change, they need to embrace uncertainty and volatility rather than be paralyzed by them; and they need to adopt a degree of humility, resilience and agility that may be well beyond what they are used to. Beyond that, there are no common answers and no simple solution. It’s indeed a new world, and it’s an unsettling one.

© 2025 The Financial Times Ltd

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