Must Read Research
Also featuring commentary from Global Economic Weekly
March 30, 2025
Candace Browning, Head of BofA Global Research
From the Ides of March to rising tides of innovation. As markets recalibrate, we explore how tariff rhetoric will impact U.S. vehicle pricing and how advancements in AI are accelerating drug discovery.
The new 25% tariffs on imported cars and light trucks could boost U.S. vehicle prices by as much as $10k, according to John Murphy.
Annual auto sales could drop by 2.5-3 million units depending on pass through. The impact on many automakers will be negative but John believes the Trump Administration has incentive to implement the tariffs so their negotiating position is stronger. They would also like to show progress in getting a portion of the ~7.6 million imported vehicles produced in the U.S. More tariff announcements are expected on April 2 but the Economics team expects a one month delay in implementation, leaving additional space for negotiation. And while risks to our base case are large, they believe a third to a half of the announced measures will not get implemented.
Drug discovery is a long, costly process averaging 13 years and $2.6 billion, with $1.1 billion spent before human trials.
Drugmakers must sift through a vast chemical space estimated to contain >1060 potential molecules (more than grains of sand on Earth). Only 1 in ~12.5k drugs that enter preclinical testing is approved. U.S. SMID Cap Biotech Analyst Alec Stranahan, in the first part of his series on AI in healthcare, outlines how AI can accelerate drug development while reducing costs. AI can enable screening of more compounds, narrowing the candidates for testing from hundreds or thousands to 10-15 drugs. How soon? Alec expects lower costs and faster processes in the next two years with higher probability of success evident over the next five. Already, dozens of AI-influenced drugs have entered clinical trials.
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Claudio Irigoyen, Head of Global Economics, BofA Global Research
Ready, set, go: What to expect ahead of April 2
April 2 has been touted as Liberation Day. There is a vast array of potential tariffs on the table, with widely varying implications. Some isolated tariff measures, including reciprocal tariffs (taken at face value) would have only a small bite on the U.S. effective tariff rate. However, other options, ranging from VAT (value-added tax) reciprocity to sectoral tariffs, would have a much larger impact. Our growth and inflation forecasts are highly sensitive to less benign scenarios as consumer and business confidence continue collapsing.
We pencil in a more hawkish but still benign baseline
We continue to think Trump will negotiate comprehensive country-specific packages. But we now pencil in a somewhat more hawkish tariff scenario: around 2.5 percentage points additional increase in the effective tariff to reach 5.3 percentage points. Of this increase, 0.5 percentage points are explained by imposing asymmetric reciprocal tariffs on average tariff gaps (such as India, Japan, Thailand, and Brazil), while around 2 percentage points are explained by sector-specific tariffs on auto (already announced), food and pharma imports. We do not expect permanent tariffs on Canada and Mexico and believe proactive countries like India may also be spared.
But risks to the view and macro impact are material
Our baseline scenario would probably avoid significant retaliation from trading partners. Its inflation impact could be relatively contained to around 0.3-0.4 percentage points, with a similar drag for U.S. GDP (gross domestic product). Even so, we expect core PCE (personal consumption expenditure) to reach 3% this year. With tariff and inflation risks tilted to the upside, everything points to a more stagflationary environment. And even with a moderate slowdown, the space for the Fed to cut may just not be there. More extreme scenarios represent a significant risk to global growth.
