“Trump 2.0” looms over the global economy

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

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

But stock markets fell sharply after the world’s most powerful central banker, US Federal Reserve Chairman Jerome Powell, signaled that they should not expect as many further cuts in 2025 as they might have hoped for as the fight against inflation continues.

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

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

Despite this, November saw inflation push up in the USA, Eurozone and Great Britain up 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 it may be easier to reach if the economy is growing.

Still, the biggest drag on global growth “is uncertainty, and the uncertainty comes from what might come out of the US under Trump 2.0,” said Luis 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 on key US trading partners. China, Canada and Mexico.

“The U.S. is pursuing a more isolationist policy, raising tariffs in an attempt to provide more effective protection for American manufacturing,” Mr. Oganes says.

“And even if it does support U.S. growth, at least in the short term, it will certainly hurt many countries that depend on U.S. trade.”

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

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

This can push up prices, reduce demand for products and hurt company profits, which in turn can lead to lower levels of investment, he explains.

Mr. Obstfeld, who is now at the Peterson Institute for International Economics, adds: “Putting these types of tariffs into a highly trade-dependent world could hurt growth and could send the world into recession.”

Threats of tariffs also played a role in the push resignation Canadian Prime Minister Justin Trudeau.

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

President Xi Jinping acknowledged this in his New Year’s address “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. The fall in demand as tariffs push up prices will compound the many domestic problems, including weak consumer spending and business investment, that the government is trying to address.

Those efforts are helping, according to the World Bank, which raised its growth forecast for China in late December 4.1% to 4.5% in 2025.

Beijing has yet to set a growth target for 2025, but believes it should reach 5% last year.

“Tackling challenges in the real estate sector, strengthening social safety nets and improving local government finances will be essential to unlocking a sustainable recovery,” said World Bank China Director Mara Warwick.

According to Michael Hart, president of the American Chamber of Commerce in China, this infighting means that the Chinese government is “more welcoming” of foreign investment.

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

Still, Mr. Hart notes that “it took China 30 to 40 years to become such a strong manufacturer-supplier,” and while “companies have tried to mitigate some of those risks … nobody is fully prepared now replace China.”

One industry that is likely to remain at the center 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 introduce tariffs on them.

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

However, the prospect of tariffs by Donald Trump is causing concern in the EU.

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

Germany and France are the traditional engines of economic growth in Europe. But theirs low productivity amid political instability last year means that despite a recent pick-up in growth, the eurozone risks losing momentum next year.

That is, unless consumers spend more and businesses don’t increase their investments.

In the UK, higher prices may also come as a result of higher taxes and wages, according to one survey.

One obstacle to lower interest rates in the eurozone is that inflation remains at 4.2%. This is more than double the target of 2%, and strong pressure on wages has been a barrier to further reductions.

According to Sander van ‘t Noordende, CEO of Randstad, the world’s largest staffing firm, something similar happened in the US.

“In the US, for example, (wage inflation) will still be around 4% in 2024. In some countries of Western Europe it is even higher.

“I think there are two factors. There’s a lack of talent, but also, of course, inflation and people demanding to be 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 upward pressure on overall inflation.

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

“When the economy is doing well, businesses are growing, they start hiring people. People see exciting opportunities, and you just start seeing people moving.”

In 2025, one person who will step into a new role is Donald Trump, and a series of economic plans, including tax cuts and deregulation, could help the US economy continue to grow.

While 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 globally, but warns that “a lot of that will depend on what policies are rolled out, particularly in the US.”