Comparatively high US interest rates, erratic trade policies and market jitters are clouding corporate decision-making around the world. While there have been rate cuts in China and Europe, the US remains the wild card. President Donald Trump’s tariffs, spending cuts, federal layoffs and mixed signals on the dollar are fuelling uncertainty for corporations.
So, how do businesses plan when the rules keep changing?
Elsewhere, the picture is clearer. China’s latest data shows a return to consumer price deflation – meaning Beijing is unlikely to raise rates and may cut them further. The country’s consumer price index fell by 0.7 per cent in February, a sharper drop than the 0.4 per cent decline economists had predicted in a Bloomberg poll.
China’s central bank governor Pan Gongsheng recently reiterated that a rate cut is on the table for 2025.
The European Central Bank has already done so, hoping to jolt its sluggish economy back to life with a 0.25 per cent cut in its benchmark rate on March 6.
But there’s a problem. German government bond yields have jumped on expectations of a historic surge in borrowing – a sign that investors are nervous. Higher yields mean borrowing costs are rising, which could work against the ECB’s push for lower rates.
The real wild card is the US, where Mr Trump’s aggressive trade agenda is rattling investors. The post-election equity rally has lost steam, wiping out the gains sparked by Mr Trump’s victory over Kamala Harris in November.
His latest tariffs on trading partners – especially steep rises on metals like aluminium from this week – could fuel inflation in the short term, stoking up fears of a US recession. The American economy is expected to shrink by 2.4 per cent in the first quarter of 2025, according to the latest estimate from the Atlanta Fed.
Then, there’s the spillover effect from Mr Trump’s plan to reduce the federal workforce, with Tesla and SpaceX chief executive Elon Musk leading the cost-cutting drive through his Department of Government Efficiency (Doge) initiative. The cuts are meant to rein in spending, but they could send shock waves through the broader economy.
When federal agencies tighten budgets, private sector suppliers reliant on government contracts – defence contractors, construction firms, tech companies, healthcare providers – take a hit. That means lower revenue, the threat of layoffs and lower consumption. Over time, that dampens inflation as companies lose pricing power.
Mr Trump’s erratic policymaking – swinging between dramatic escalations and abrupt reversals – deepens the uncertainty, making it hard for businesses to plan ahead. The President put a 25 per cent tariff on imports from Canada and Mexico last week, only to reverse course days later.
Businesses are frustrated by the lack of clarity on tariffs, which have already disrupted markets, forcing companies to stockpile materials, rethink operations and brace for price rises.
And that is the real threat: uncertainty. When consumers do not know what is coming, they spend less, and when businesses cannot predict the future, they freeze investment. The result can be a slowdown that pushes the US economy closer to recession.
Recent data has missed forecasts, signalling a slowdown in consumer spending, the US economy’s core driver. Nominal personal spending dropped 0.2 per cent from December to January, marking the sharpest decline since early 2021.
The ISM manufacturing index stayed positive in February, but a steep drop in new orders signals the possibility of disruptions ahead as Mr Trump’s trade war takes shape.
As signs of slowing economic growth increase, US inflation cooled more than expected to 2.8 per cent in February, strengthening the case for Federal Reserve rate cuts.
But unemployment rose slightly to 4.1 per cent, from 4.0 per cent in February. A weaker-than-expected jobs report revealed the US economy added 151,000 jobs last month, falling short of forecasts.
And the latest data does not fully capture the extent of federal layoffs. Since the start of Mr Trump’s second term, tens of thousands of government jobs have been cut as part of a push to reduce federal spending, with more on the horizon.
If these job losses persist or increase, consumer demand could take a further hit – strengthening the case for Fed rate cuts to prop up economic activity.
Unlike the ECB, the Fed has a dual mandate: keep inflation in check while ensuring a strong job market. Fed Chairman Jerome Powell must decide what is the bigger threat – rising prices or rising job losses.
For now, markets expect the Fed to hold off on cuts until June. But if unemployment keeps climbing, the pressure to ease could come sooner.
Even if rate cuts are on the horizon, the real problem for companies is not just the relatively high cost of capital but the uncertainty surrounding future cash flows.
Businesses are holding back on investment, partly because Mr Trump’s chaotic tariff roll-outs have made earnings harder to predict. S&P Global Ratings expects global capital expenditure growth to slow to 4.2 per cent in 2025, down from 5.5 per cent in 2024, a clear sign that companies are thinking twice before committing to long-term spending.
When companies weigh investments, they discount future cash flows to determine what those earnings are worth today. But when uncertainty rises, those future earnings can shrink in value, making investment far riskier.
Even if the Fed cuts rates this summer, refinancing will not be as simple as locking in cheaper debt – companies need confidence that their future revenue can support new borrowing. Right now, the real risk is not the cost of capital, it is the unpredictability of cash flows.
Another major risk for global corporations is the volatility of the US dollar. As the world’s reserve currency, the greenback’s value impacts global trade, debt and corporate earnings. Sharp fluctuations can disrupt supply chains and push companies to reassess their currency hedging strategies.
But the US is sending conflicting messages about the dollar, making it harder for businesses to gauge currency risk. Mr Trump touts a strong dollar as a sign of US economic power but wants it weaker to boost exports and shrink the trade deficit. His “buy American” policy relies on a cheaper dollar making US goods more competitive in global markets, driving up foreign demand.
At the same time, his tariffs push up import prices, making foreign goods less attractive and steering demand towards domestic producers. This mix of currency policy and trade barriers is meant to protect US industries, but it also fuels uncertainty for global businesses.
If currency markets become more volatile, companies that skipped hedging to save costs could be at risk, forcing them to rethink their strategy before sudden swings hit their bottom line.
For corporate leaders, cutting costs is only part of the challenge – they must do it while the ground keeps shifting. With interest rates, trade policies and currency markets in flux, standing still is not an option. The companies that succeed will not be the ones just waiting for rate cuts.
Karl Schmedders is professor of finance at IMD
