Signs point to U.S. economic slowdown in second half

U.S. trade policy shifts have had a muted effect on U.S. GDP to this point, but the cumulative effect of tariffs and geopolitics may hit in the second half of the year, says Paul Mielczarski, head of global macro strategy at Brandywine Global Investment Management.

“I think an appropriate metaphor for the current macroenvironment is this idea that right now we are in the eye of a storm,” he said on the latest episode of the Soundbites podcast.

Mielczarski said he expects to see “a more meaningful slowdown in economic growth” in the U.S. later this year.

Despite some shocks early in 2025, U.S. equities and 10-year bond yields are still close to their starting points for the year, insulated by higher inventories ahead of the tariffs, and the tremendous growth of AI-related investments.

“Spending on AI is boosting earnings of technology companies, which dominate the U.S. equity market,” he said.

The U.S. dollar, on the other hand, has fallen about 10% against a broad basket of currencies over the past six months, he said, thanks to:

• a historically high valuation to start the year;
• the overweighting of U.S. assets worldwide; and
• growing expectation of convergence in relative growth rates between U.S. and the rest of the world, after a long period of U.S. growth exceptionally.

“In the medium term, we do believe these factors can continue to drive further weakness in the dollar — although given how much we’ve moved in the past six months, we may go through some period of consolidation,” he said. “And the next leg of dollar weakness really may require some more definitive signs of deterioration in U.S. economic growth.”

Recession concerns are indeed growing, he allowed.

“We do have signs that the underlying economic growth is starting to slow,” he said. “And this is due to the tax-like impact of tariffs and, also, higher oil prices in response to the war between Israel and Iran.”

He said while the U.S. Congress is negotiating a fiscal package, likely to pass by the end of summer, that will provide some short-term stimulus to the U.S. economy, but the real benefits would only kick in around the middle of 2026.

“So overall, we do expect a significant slowdown in the second half of the year, although it’s still debatable whether we’ll just get close to a recession, or whether we do actually tip into one.”

Meanwhile global exporters will have to come to terms with new trade realities imposed by the U.S.

“In the first quarter [of 2025], and in early parts of the second quarter, you saw big increases in exports in Asia, Europe and Canada,” he said. “Now, in the second half of the year, we are going to see the reversal of this effect. There will be the payback from the tariff frontrunning.”

As exports to the United States weaken, there will be knock-on implications for both investment and employment, he said. It will hit especially hard in China, where exports have been the been the bright spot in an economy battered by a real estate crisis.

“The Chinese economy will likely continue to muddle through but with some downside pressures on both growth and inflation,” he said.

In the eurozone, exports are expected to weaken, but generally lower interest rates bode well for the housing market and capital expenditure. Planned spending on infrastructure and defence should also provide a multi-year boost to the economy.

Meanwhile, the Canadian economy, which has struggled in 2025 against tariffs and housing pressures, may continue to see higher than expected unemployment.

“The key question is whether the new Liberal government under Prime Minister Carney, can deliver an economic boost via some mix of shorter-term stimulus measures and also through longer-term investments in infrastructure and housing,” he said.

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.