“Trump 2.0” extends to the global economy

Inflation, interest rates and tariffs mean that 2025 is shaping up to be an intriguing year for the global economy. One in which growth is expected to remain at a “stable but disappointing” 3.2%, according to the International Monetary Fund. So what could it mean for all of us?

Exactly one week before Christmas there was a welcome gift for millions of American borrowers – a third interest rate cut in a row.

However, the stock markets fell sharply because the most powerful central banker in the world, the chairman of the Federal Reserve of the United States, Jerome Powell, made it clear that they should not expect as many more cuts in 2025 as they could hope, as the battle against inflation continues.

“From here, it’s a new phase, and we will be cautious about further cuts,” he said.

In recent years, the Covid pandemic and the war in Ukraine have led to a sharp increase in prices around the world, and although prices are still rising, the pace has slowed down markedly.

Despite this, November saw boosted inflation in the United States, the eurozone and the United Kingdom at 2.7%, 2.2% and 2.6% respectively. It highlights the difficulties that many central banks face in the so-called “last mile” of their battle against inflation. Their goal is 2%, and it could be easier to achieve if economies are growing.

However, the biggest difficulty for global growth “is uncertainty, and the uncertainty comes from what can come out of the United States under Trump 2.0”, says Luis Oganes, who is head of global macro research at the investment bank JP Morgan.

Since Donald Trump won the November election, he has continued to threaten new tariffs against the United States’ main trading partners, China, Canada and Mexico.

“The US is entering a more isolationist policy, raising tariffs, trying to provide more effective protection to US manufacturing,” says Mr Oganes.

“And even if it’s going to support U.S. growth, at least in the short term, it’s certainly going to hurt many countries that rely on trade with the United States.”

The new tariffs “could be particularly devastating” for Mexico and Canada, but also be “harmful” for the United States, according to Maurice Obstfeld, a former chief economist at the International Monetary Fund and a former economic adviser to the president. Obama.

He cites car manufacturing as an example of an industry that “depends on a supply chain that spreads across the three countries. If you disrupt that supply chain, you have massive disruptions in the auto market.”

That has the potential to push prices, reduce the demand for products, and damage the profits of companies, which could in turn drag down investment levels, he explains.

Mr. Obstfeld, who is now with the Peterson Institute for International Economics, adds: “Introducing these kinds of tariffs in a world that is very dependent on trade could be harmful to growth, it could throw the world into recession.” .

Tariff threats also played a role in forcing it the resignation of the Prime Minister of Canada Justin Trudeau.

Although most of what the United States and China sell each other already subject to fees from Donald Trump’s first term, the threat of new tariffs is a key challenge for the world’s second largest economy in the coming year.

In his New Year’s speech, President Xi Jinping acknowledged “challenges of uncertainties in the external environment”but he said the economy was on “an upward trajectory.”

Exports of cheap goods from its factories are crucial to the Chinese economy. A decline in demand as tariffs push up prices compound the many domestic challenges, including weak consumer spending and business investment, that the government is trying to address.

Those efforts are helping, according to the World Bank, which at the end of December raised its forecast for China’s growth. from 4.1% to 4.5% in 2025.

Beijing has not yet set a growth target for 2025, but it thinks it is on track for 5% last year.

“Addressing challenges in the property sector, strengthening social safety nets, and improving local government finances will be essential to unlocking a sustained recovery,” according to World Bank Country Director for China, Mara Warwick .

These domestic struggles mean the Chinese government is “more welcoming” of foreign investment, according to Michael Hart, who is president of the American Chamber of Commerce in China.

Tensions between the United States and China, and tariffs have risen under the Biden presidency, which means that some companies have sought to move production elsewhere.

However, Mr Hart points out that “it took 30 to 40 years for China to emerge as such a strong supplier manufacturer”, and while “companies have tried to mitigate some of those risks… no one is prepared now to completely replace China.”

One industry that is likely to continue to be at the heart of global trade battles is electric vehicles. More than 10 million were made in China last year, and that dominance led the United States, Canada and the European Union (EU) to impose fees on them.

Beijing says they are unfair, and is challenging them at the World Trade Organization.

However, it is the prospect of Donald Trump imposing tariffs that concerns the EU.

“Trade restrictions, protectionist measures, are not conducive to growth, and ultimately have an impact on inflation that is largely uncertain,” European Central Bank President Christine Lagarde said last month. . “(But) in the short term, it’s likely to be net inflationary.”

Germany and France are the traditional engines of economic growth in Europe. But I know poor performance In the middle of the political instability over the past year means that, despite a recent uptick in growth, the eurozone risks losing momentum in the year ahead.

That is, unless consumers spend more and businesses increase their investments.

In the UK, higher prices could also come from rising taxes and wages, according to a survey.

A barrier to cutting eurozone interest rates is that inflation remains at 4.2%. That’s more than double the 2% target, and strong wage pressure has been a barrier to lowering it further.

It was similar in the United States according to Sander van ‘t Noordende, the head of Randstad, the world’s largest recruitment company.

“In the United States, for example, (wage inflation) will still be around 4% in 2024. In some Western European countries, it is even higher than that.

“I think there are two factors. There is a shortage of talent, but there is also, of course, inflation and people who demand more for the work they do.”

Mr. van ‘t Noordende adds that many companies pass these extra costs on to their customers, which adds upward pressure to overall inflation.

A slowdown in the global labor market reflects a lack of “dynamism” from companies and economic growth is key to reverse this, he says.

“If the economy is doing well, businesses are growing, they’re starting to hire. People are seeing interesting opportunities, and you’re just starting to see people moving in.”

A person who begins a new role in 2025 is Donald Trump, and a series of economic plans including tax cuts and deregulation could help the US economy continue to thrive.

While much will not be revealed before he returns to the White House on January 20, “everything points to the continued exceptionalism of the United States at the expense of the rest of the world,” says Mr. Oganes of JP Morgan.

He hopes that inflation and interest rates can continue to fall worldwide, but warns that “a lot will depend on which policies are implemented, especially by the United States.”