• The planned increase in defence spending and the loosening of the dept brake in Germany are positive impulses for the European economy.
• However, new tariffs on goods from Europe are likely to overshadow the positive fiscal impulses, at least in the short term.
• The US economy is also likely to grow more slowly in 2025 than in 2024 due to the government's tariff policy.

• The erratic policies of the Trump administration are likely to keep uncertainty high in the financial markets.
• We consider the current credit spreads to be too low, particularly in the upper non-investment grade segment, where they are at a historically low level.
• There are strong regional differences on the stock markets.

• The focus is on global trade conflicts. Tariffs dampen economic growth and increase inflation at the same time.
• The geopolitical situation remains fragile. After a ceasefire, the situation in the Gaza Strip has come to a head again. The USA is trying to negotiate a new nuclear agreement with Iran. So far, however, without success. Negotiations between Ukaine and Russia, which habe been conducted in recent months with the support of the USA, are fueling hope. However, an agreement is not yet in sight.

At the beginning of the year, economists and investors agreed that economic development in the US was likely to be ahead of that in Europe in 2025 as well. In the eurozone, particularly in Germany and France, political uncertainties dominated, significantly restricting governments' ability to act. Urgently needed reforms could neither be continued nor initiated.   

However, fears of recession spread in the US in March. This is because the erratic policies of the Trump administration fuelled uncertainty among consumers, companies and investors. Indicators that quantify the uncertainty surrounding trade policy show that uncertainty has risen to historic highs.  

Uncertainty is fundamentally poisoning the economy. It initially dampens sentiment and subsequently the willingness of households and companies to buy and invest. A clear deterioration in sentiment can already be seen among US households. However, retail sales are currently still robust, supported by a solid labour market. Companies can be seen to be anticipating the tariffs and have therefore increased their imports.  

A decline in US economic growth is therefore to be expected. However, an even more aggressive US customs policy could have a further negative impact on growth. The new government agency "DOGE", which is set to eliminate tens of thousands of government jobs under Elon Musk's leadership, could also have a negative impact on US economic growth in the short term.  

In contrast to the USA, the economic outlook for the EU has brightened slightly. Friedrich Merz, who emerged as the winner in the early elections in February, announced that the debt brake enshrined in the German constitution would be relaxed. In addition to considerable investment in defence, an infrastructure programme amounting to EUR 500 billion is intended to strengthen the competitiveness of Europe's largest economy in the long term. New defence spending has also been agreed at EU level. Up to EUR 800 billion is to be mobilised for this purpose. However, a significant increase in economic growth is not expected until 2026.   

Another positive risk is the ceasefire in Ukraine. Negotiations have intensified in recent months. However, an agreement is not yet in sight.  

However, the 20 per cent tariffs on imports for goods from the EU announced by the US on 2 April 2025 pose a significant risk to the economy. The German economy is the most exposed to this. The fiscal policy measures are likely to counteract the negative effects of the tariffs, but not fully cushion them.  

Swiss foreign trade is, of course, also exposed to the risk of the tariff policy. The announcement of tariffs on Swiss goods of 31 per cent came as a surprise. In its negative scenario, the State Secretariat for Economic Affairs SECO had expected tariffs of 25 per cent (for Switzerland and the EU). This would not have led to a recession. But even with the higher tariffs now imposed, a recession could be avoided, especially if government support measures are taken for specific sectors or if certain exemptions/reductions can be negotiated with the US. 

The increased uncertainty in connection with Donald Trump's economic policy makes the task of central banks considerably more difficult. It is clear that US trade policy favours lower growth and higher inflation. However, it is highly uncertain how strong these effects will be. On the one hand, new tariffs or tariff adjustments are announced almost daily. Secondly, the effect of tariffs on the economy is influenced by a variety of factors. For example, exchange rate fluctuations and the shifting of trade flows can counteract tariffs. At the same time, each company decides to what extent it passes on tariff-related cost increases to its customers.  

In this environment, central banks are likely to pay close attention to the inflation expectations of households, companies and investors in addition to the inflation figures. In order to ensure price stability, it is important that long-term expectations are well anchored. A sharp rise in expectations could prevent central banks from lowering interest rates further.

In view of the increased uncertainty, particularly for the US economy, the US Federal Reserve (Fed) has decided not to change its interest rate policy for the time being but instead wants to wait and see how the economy develops. However, a new economic forecast published in March shows that it expects lower growth for the US than in December and also slightly higher inflation in 2025. The Fed currently assumes that inflation will only rise temporarily due to the tariffs, especially this year and is likely to fall again from 2026 onwards. Tariffs are therefore likely to delay the decline in US inflation. We expect the US Federal Reserve to leave interest rates unchanged in the second quarter.  

The European Central Bank (ECB) has already cut interest rates twice this year by 0.25 percentage points each time. The ECB is also faced with major uncertainties. On the one hand, US policy on tariffs poses a considerable risk for the eurozone. On the other hand, the economic consequences of the newly planned increase in defence spending at EU level and the German fiscal package must be assessed. We expect the next interest rate cut by the ECB on 17 April 2025.  

Inflation in Switzerland fell significantly again at the beginning of this year. The driving force was the fall in electricity prices. Inflation could fall further in the coming months. This is partly due to the reduction in the reference interest rate for rents. In March, the Swiss National Bank (SNB) lowered the key interest rate for the fifth time in a row. In view of the recent escalation of US tariff policy, it is likely that the SNB will cut interest rates again at the end of the second quarter. 

Review: Economic policy developments in the eurozone and the USA in the first quarter left their mark on the bond markets. The yield on 10-year German government bonds rose by 33 basis points in March. The risk premiums for EUR corporate bonds fell briefly. At the end of the month, however, they were on average at around the same level as at the beginning of the month. Compared to the end of the year, the average credit spreads were hardly changed.   

In the US, on the other hand, growth concerns in the first quarter led to a decline in long-term interest rates and a slight increase in credit spreads. However, the latter are still close to historic lows. 

Outlook: We consider the current credit spreads to be too low, particularly in the upper non-investment grade segment, where they are at a historically low level.  

The fiscal policy impetus in Europe is fundamentally positive. While rising defence spending is providing a short-term economic stimulus, we believe that the recently adopted German infrastructure programme is much more important for sustainable growth. Nevertheless, uncertainties remain. In our view, fiscal policy measures alone are not enough - they must be accompanied by comprehensive reforms in order to have a long-term impact.  

In the US, the announced tariffs could place an additional burden on private households, which is likely to dampen consumption in the medium term. If inflation rises more sharply than expected and the restrictive trade policy simultaneously triggers an economic downturn, this could not only weigh on the US economy but also noticeably weaken the global economy as a whole. In this scenario, the currently low credit risk premiums are likely to rise again in the medium term.

Review: Favourable valuations and optimism in connection with the planned defence spending in the EU led to a rally on the European stock markets, where new all-time highs were reached in some cases. The EuroStoxx 50 gained 7 per cent in the first quarter and the Swiss SPI was up 9 per cent.  

By contrast, US stock markets performed less favourably in the first quarter. Trump's trade policy weighed on US equities. The S&P 500 lost 5 per cent in the first quarter. The technology sector in particular came under additional pressure due to international competition, a hesitant US Federal Reserve and high valuations. The "Magnificent 7" (Apple, Microsoft, Google, Amazon, Meta, Tesla and Nvidia) lost 16 per cent in the first three months of the year.  

Developments in China, in particular the launch of the DeepSeek R1 model, led to investors increasingly investing in the Chinese market again 

Outlook: Donald Trump's policy on tariffs is also likely to be the centre of attention in the coming quarter. Higher price fluctuations are therefore to be expected on the stock markets. This applies in particular to companies that are dependent on international trade. For them, there is a risk that production costs will rise, if they have not already risen. Some of the higher production costs are likely to be passed on to end consumers. However, the companies themselves are also likely to absorb part of the increase. This puts pressure on profit margins. 

In recent months, analysts have reduced their estimates for the earnings growth of S&P 500 companies in the current year from 14 per cent to 10 per cent. Overall, this is still very solid earnings growth, but the latest tariff announcements are likely to lead to further cuts in estimates.  

Not all companies are affected in the same way. Domestic service providers, for example, are less affected by the customs risk. However, they are also indirectly threatened if tariffs impact the economy as a whole and therefore demand. 

Review: International economic policy also left its mark on the foreign exchange markets. The euro appreciated significantly in the first quarter. It gained 4.3 per cent against the US dollar and 1.4 per cent against the Swiss franc. At the same time, the strength of the US dollar weakened significantly. The US dollar lost 2.7 per cent against the Swiss franc. 

Outlook: The appreciation of the euro is fundamentally justified, as the planned government spending should boost growth in the currency area in the medium term. However, we do not expect the euro to appreciate much further in the coming months. The risk of the US tariff policy could even lead to a depreciation of the euro again. 

The Swiss franc tends to be a safe haven for investors and is in general very likely to appreciate in uncertain times. However, the surprisingly high tariffs for Switzerland could also counteract this somewhat. In the current environment, stronger fluctuations are to be expected. 

Review: As explained above, the SNB announced a further interest rate cut of 25 basis points to 0.25 per cent on 21 March. In the days following the SNB's monetary policy assessment between 20 and 24 March, the SXI Real Estate Funds Broad Total Return Index rose by 1.8 per cent. Overall, however, the performance of Swiss property funds has been subdued since the beginning of the year. The SXI Real Estate Funds Broad Total Return Index gained less than two per cent. Property shares saw much stronger growth in the first quarter.

The housing market continues to be characterised by excess demand. Immigration remains a driver of demand. This is because the Swiss economy remains robust by international standards. Following the sharp rise in net migration in 2023, there was a decrease of around 15 per cent in 2024. At 83,392 people, it is still significantly higher than the figures for the years prior to 2023. 

The high demand continues to be met by a shortage of supply. Lengthy authorisation procedures and inward densification are proving to be challenging. In addition, asking rents for flats in Switzerland have risen by around 1.3 per cent in the last three months. As a result, the gap between existing rents and asking rents is widening further, leading to fewer tenant changes and thus to more inefficient utilisation of already scarce living space. 

Outlook: The structural supply deficit in the rental flat market will not be resolved in the short term, which will result in further increases in asking rents. This in turn is likely to lead to further increases in rental income for new lettings. The reduction in the reference interest rate in March from 1.75 per cent to 1.5 per cent is likely to lead to a slight decline in existing rents. However, we do not currently expect any further reduction in the reference interest rate this year.  

No major shifts are expected in the office space market. On the demand side, there are regional differences as well as a difference between city centre and peripheral locations. 

Investors are likely to see further listings and capital increases in property products in the coming months. Last year already saw capital increases of over CHF 2.2 billion for real estate funds, the highest figure in the last five years. Further listings and capital increases of over CHF 1.79 billion for real estate funds and over CHF 0.84 billion for investment foundations are planned for the first half of 2025 or have already been completed in some cases. Investor demand has proven to be robust so far. 

This is because property products generally offer attractive returns compared to the Swiss interest rate environment. Although long-term interest rates in Switzerland have risen significantly in recent months, the distribution yield of Swiss property funds, for example, as measured by the SXI Real Estate Funds Broad Total Return Index, is still more than 1.6 percentage points higher than the yield on 10-year federal bonds.