At International Pulp Week 2025, the global macroeconomic backdrop took centre stage in a session led by Joaquin Kritz Lara, Chief Economist and Head of Macro at Numera Analytics. With trade tensions escalating and US tariffs rising sharply, Kritz Lara presented a data-rich assessment of the economic policy shifts reshaping global markets—and what they could mean for business decisions in the months ahead.

“This year, the word of the year is ‘uncertainty,’” he said, echoing a sentiment already raised earlier in the conference. Kritz Lara opened by referencing an Economic Policy Uncertainty Index developed at Stanford University, which uses media-based references to quantify volatility in government decision-making. “What you essentially find is that this tends to spike during geopolitical events or major economic crises,” he said, citing 9/11, the Lehman collapse, and now the current policy environment. “But really, never since these indices have been constructed… have we seen the current situation.” Uncertainty, he stressed, has a clear and measurable impact: “If you’re a corporation, a high level of uncertainty essentially stifles decision-making… You postpone your projects just until you get a little more clarity around the rules of the game.”

Kritz Lara noted that while tariff regimes have existed before—particularly in the early 20th century—the global economy is now far more integrated. “The US makes up a much larger share not only of the global economy but it’s a lot more integrated to the rest of the world,” he said. That makes protectionist moves far more disruptive. “If you’re raising tariffs, that creates uncertainty not just around the US outlook, but around the global outlook.” The degree of exposure is significant. He pointed to data showing that 8.5% of the Eurozone’s GDP is directly tied to exports to the US—surpassing even China’s 2.9%. For Canada and Mexico, the shares are even higher. “So if there’s a threat of a 50% tariff on Europe, that’s a real challenge for the region,” he said. “China’s economy is much less exposed than other major regions to the imposition of protectionist barriers.”

For the US, tariffs present a dual threat. “They create uncertainty around growth, but they also create uncertainty around inflation,” he said. The risk, he argued, is stagflation—a combination of slowing economic activity and rising prices. Using the US “misery index,” which adds unemployment to inflation, Kritz Lara showed that while actual levels are currently low, household expectations for future stagflation have spiked to levels not seen since the late 1970s. “That doesn’t guarantee stagflation,” he said, “but the point is that stagflation risk is absolutely on the rise as a function of tariffs.”

He then turned to the mechanics of how tariffs impact GDP. “What you basically have is a compression of margins, a weakening of purchasing power, and rising uncertainty,” he said. In combination with second-round global effects and retaliation, the result is a projected 2% reduction in the level of US GDP. “That’s about $600 billion,” he said. “It’s maybe not a permanent loss, but it’s a very long-lasting impact.”

Kritz Lara walked attendees through a timeline of tariff actions, including recent events. In early 2024, the US effective tariff rate stood at 2.3%. It jumped to 7.5% with the announcement of tariffs tied to fentanyl, then climbed to 11% with auto and metals tariffs. “Liberation Day”—a tit-for-tat escalation with China—peaked the rate at 24%, the highest since 1901. “That’s higher than after the Smoot-Hawley Tariff Act of the early 1930s,” he said. A recent US–China truce trimmed that to 14%, but Kritz Lara was clear: “You’re still in a net negative situation—just less negative than what it would have been a month and a half ago.”

Turning to inflation, he explained that the impact of tariffs varies significantly by product category, depending on retail markups. “The higher the markup, the lower the impact that tariffs have on inflation,” he said. For example, 90% of apparel sold in the US is imported, but retail markups are so high that even a 100% tariff may only raise final prices by 10%. “What that suggests is that retailers could be absorbing it when it comes to margins.” Still, input costs and reduced competition can amplify pricing pressures. “Initially, yes, there’s some inflationary pressure that arises,” he said. “But as the economy slows, what started off as an initial inflationary impulse becomes a disinflationary effect.”

Kritz Lara then addressed the latest US fiscal policy move—the so-called “Big Beautiful Bill,” which recently passed the House and could add $2.8 trillion to the federal deficit over 10 years. “The bill would widen the deficit by about 1.5% of GDP,” he said. “That’s very high outside of recession years.” Markets are increasingly concerned about debt sustainability as interest rates rise. But he pointed to a key omission in Congressional Budget Office projections: tariff revenues. “Customs duties now make up 1.2% of GDP,” he said. “That essentially cancels out the deficit expansion from the bill.”

Despite all this, Kritz Lara said the US economy has shown surprising resilience. “Domestic demand, which is basically household spending and investment spending, has been consistently running above trend since the Fed started raising interest rates at the end of 2022,” he said. He attributed this to the structure of household and corporate debt: “Even if rates are high, the rate that households have their mortgages locked in at is much lower… So the effective rate of interest in the economy is actually a lot lower.” Household balance sheets also remain strong. “Excess savings are still in decent shape,” he said. But there are warning signs. “Job security fears have collapsed to recessionary levels,” he added. “That’s a real concern and significantly increases downside risk.”

Wrapping up, Kritz Lara cautioned that while inflationary pressures may ease absent new tariffs, markets are likely too optimistic about US growth. “We find a 75% chance that the economy will grow less than what the market expects it to grow next year,” he said. “That will likely reverse the US exceptionalism narrative.” In terms of interest rates, Kritz Lara believes the Fed may end up cutting more than markets expect. “If all those [macro expectations] are weaker than what the market expects, the chances of long-term rates falling are far higher than what the market is anticipating right now,” he said. “So again, this is not to say the debt situation doesn’t matter—but macro matters more.”

Drafted with the assistance of digital tools to streamline the process.