“Trump 2.0” looms over the global economy

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

Just a week before Christmas, there was a welcome gift for millions of American borrowers – third consecutive interest rate cut.

However, stock markets fell sharply after the world’s most powerful central banker, US Federal Reserve Chairman Jerome Powell, made it clear that they should not expect as many additional cuts in 2025 as they may have been hoped as the battle against inflation continues.

“It is a new phase from now on and we will be cautious about further cuts,” he said.

In recent years, the Covid pandemic and the war in Ukraine have caused prices to rise sharply around the world, and although prices are still increasing, the pace has slowed significantly.

However, November saw inflationary boost in the US, Eurozone and UK to 2.7%, 2.2% and 2.6% respectively. It highlights the difficulties many central banks face in the so-called “last mile” of their fight against inflation. Their target is 2% and may be more easily achievable if economies grow.

The biggest headwind for global growth, however, “is uncertainty, and the uncertainty comes from what might come out of the US under Trump 2.0,” said Louis Oganes, head of global macro research at investment bank JP Morgan.

Since Donald Trump won the election in November, he has continued to threaten new tariffs against key US trading partners, China, Canada and Mexico.

“The US is taking a more isolationist policy stance, raising tariffs, trying to provide more effective protection for American manufacturing,” Mr Oganes said.

“And while this will support U.S. growth, at least in the short term, it will certainly hurt many countries that rely on U.S. trade.”

The new tariffs “could be particularly damaging” to Mexico and Canada, but could also be “harmful” to the US, according to Maurice Obstfeld, former chief economist at the International Monetary Fund and former economic adviser to President Obama.

He cited auto manufacturing as an example of an industry that “depends on a supply chain that is spread across the three countries. If you disrupt that supply chain, you have massive disruption in the auto market.”

This has the potential to raise prices, reduce demand for products and hurt company profits, which in turn could reduce investment levels, he explains.

Mr. Obstfeld, who is now at the Peterson Institute for International Economics, added: “Putting these kinds of tariffs into a world that is heavily dependent on trade could be harmful to growth, could throw the world into recession.”

Threats of tariffs also played a role in enforcement the resignation of Prime Minister of Canada Justin Trudeau.

Although most of what the US and China sell to each other is are already subject to tariffs since Donald Trump’s first term, the threat of new tariffs has been a key challenge for the world’s second-largest economy next year.

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

Exporting cheap goods from its factories is crucial to China’s economy. Falling demand as tariffs push prices up would 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 in late December raised its growth forecast for China from 4.1% to 4.5% in 2025

Beijing has not yet set a growth target for 2025, but thought it was 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 sustainable recovery,” according to World Bank China Director Mara Warwick.

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

Tensions between the US and China and tariffs have risen during the Biden presidency, meaning some companies have looked to move production elsewhere.

But Mr. Hart points out that “it took China 30 to 40 years to emerge as such a strong supplier producer,” and while “companies have tried to mitigate some of those risks … now nobody is ready to completely replace China. “

One industry 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 this dominance led the US, Canada and the European Union (EU) to impose duties on them.

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

But the prospect of Donald Trump imposing tariffs is what worries the EU.

“Trade restrictions, protectionist measures are not conducive to growth and ultimately affect inflation, which is largely uncertain,” European Central Bank President Christine Lagarde said last month. “(But) in the short term, it’s probably net inflation.”

Germany and France are the traditional engines of economic growth in Europe. But theirs poor performance amid political instability over the past year means that despite a recent surge in growth, the eurozone risks losing momentum next year.

That is, unless consumers spend more and businesses increase investment.

In the UK, higher prices may also come as a result of tax and wage increases, according to one study.

One of the obstacles to a rate cut in the eurozone is that domestic inflation, which focuses on the prices of items less susceptible to external factors, remains at 4.2%. This is more than twice the headline inflation target of 2%, and strong wage pressures are an obstacle to further reductions.

It was the same in the US, according to Sander van ‘t Noordende, CEO of Randstad, the world’s largest recruitment firm.

“In the US, 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’s a shortage of talent, but there’s also, of course, inflation and people wanting to get paid more for the work they do.”

Mr van ‘t Noordende adds that many companies are passing these additional costs on to their customers, adding to overall inflationary pressure.

The slowdown in the global labor market reflects a lack of “dynamism” on the part of companies, and economic growth is the key to turning that around, he says.

“If the economy is doing well, businesses grow, they start hiring. People see interesting opportunities and you just start to see people moving around.”

One person starting a new role in 2025 is Donald Trump, and a set of economic plans, including tax cuts and deregulation, could help the US economy continue to thrive.

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

He hopes that inflation and interest rates can continue to fall around the world, but warns that “a lot of that will depend on what the policies are that are put in place, particularly from the US.”