Trump 2.0" looms large over the global economy

The International Monetary Fund predicts that global economic growth will remain "stable but lackluster" at 3.2% in 2025, with factors such as inflation, interest rates, and tariffs making the year full of variables. So, what does this mean for each of us?

A week before Christmas, millions of American borrowers received a "gift" - a third consecutive interest rate cut. However, the stock market fell in response, as Federal Reserve Chairman Jerome Powell made it clear that further rate cuts in 2025 might not be as numerous as people had expected in the fight against inflation.

Powell stated, "From now on, we will enter a new phase, and we will be cautious about further rate cuts." In recent years, the COVID-19 pandemic and the war in Ukraine have led to a significant increase in global prices, and although prices are still rising, the pace of increase has clearly slowed. Nevertheless, inflation rates in the US, the Eurozone, and the UK rose to 2.7%, 2.2%, and 2.6% respectively in November. This highlights the difficulties many central banks face in the "last mile" of fighting inflation. Their target is 2%, which may be easier to achieve if the economy grows.

Luis Oganes, head of global macro research at JPMorgan Chase, believes that the biggest challenge to global growth is "uncertainty, which comes from the policies that the US may adopt in the Trump 2.0 era." Since Donald Trump won the November election, he has repeatedly threatened to impose new tariffs on the US's major trading partners, China, Canada, and Mexico. Oganes said, "The US is moving towards a more isolationist policy stance, raising tariffs, and trying to provide more effective protection for US manufacturing. While this will support US economic growth in the short term, it will certainly harm many countries that rely on trade with the US."

Maurice Obstfeld, former chief economist at the International Monetary Fund and former economic advisor to President Obama, said that new tariffs "could be particularly devastating for Mexico and Canada" and could also be "harmful to the US." He used the automotive industry as an example, pointing out that the industry "relies on supply chains distributed across three countries. If this supply chain is disrupted, there will be massive chaos in the auto market." This has the potential to drive up prices, reduce product demand, damage company profits, and in turn, drag down investment levels. Obstfeld added, "Introducing these kinds of tariffs in a world that is highly dependent on trade could harm economic growth and potentially plunge the world into recession."

The threat of tariffs has also led to the resignation of Canadian Prime Minister Justin Trudeau. Although most of the goods that the US and China sell to each other are already affected by tariffs imposed during Donald Trump's first term, the threat of new tariffs remains a key challenge for the world's second-largest economy in the coming year. Chinese President Xi Jinping acknowledged the "challenges brought by the uncertainty of the external environment" in his New Year's address, but also stated that the economy is on an "upward trajectory."

Cheap goods exported from Chinese factories are crucial to the Chinese economy. If demand declines due to tariffs pushing up prices, it will exacerbate the many challenges the government is struggling to address, such as weak domestic consumption and insufficient corporate investment. The World Bank believes these efforts are working and raised China's 2025 growth forecast from 4.1% to 4.5% at the end of December. Beijing has not yet set a growth target for 2025 but believes it is on track to achieve 5% growth last year.

Mara Warwick, the World Bank's Country Director for China, stated that "addressing the challenges in the real estate sector, strengthening the social security network, and improving local government finances are crucial for achieving a sustainable recovery." Michael Hart, chairman of the American Chamber of Commerce in China, said that due to domestic difficulties, the Chinese government is "more welcoming" to foreign investment. Tensions and tariffs between the US and China have increased during President Biden's administration, meaning that some companies have begun to look at shifting production elsewhere. However, Hart pointed out that "it took China 30 to 40 years to become such a powerful supplier and manufacturer," and although "companies have tried to reduce some of these risks... no one is prepared to completely replace China now."

Electric vehicles are likely to continue to be at the heart of global trade wars. Last year, China produced more than 10 million electric vehicles, and this dominance has led the US, Canada, and the EU to impose tariffs on them. Beijing says these tariffs are unfair and is challenging them at the World Trade Organization. However, the EU is concerned about the tariffs that Donald Trump may impose. European Central Bank President Christine Lagarde said last month: "Trade restrictions and protectionist measures are not conducive to economic growth and ultimately have a great degree of uncertainty on inflation. But in the short term, it may net push up inflation."

Germany and France are the traditional engines of European economic growth. However, they have underperformed over the past year due to political instability, meaning that despite a recent rebound in growth, the Eurozone is still at risk of losing momentum in the coming year, unless consumers increase spending and businesses increase investment. In the UK, a survey shows that higher prices may also come from tax and wage increases. One obstacle to interest rate cuts in the Eurozone is that domestic inflation (mainly focusing on the prices of goods that are less affected by external factors) remains at 4.2%. This is more than double the overall inflation target of 2%, and strong wage pressures have been an obstacle to further reducing inflation.

Sander van 't Noordende, CEO of Randstad, the world's largest human resources company, said that the situation is similar in the US. "For example, in the US, [wage inflation] will remain around 4% in 2024. In some Western European countries, it is even higher." He believes, "There are two factors here. One is the shortage of talent, and of course, there is inflation, and people are demanding more pay for the work they do." Van 't Noordende added that many companies are passing these additional costs on to customers, which is increasing the upward pressure on overall inflation.

The slowdown in the global job market reflects a lack of "dynamism" in businesses, and economic growth is key to reversing this situation. He said, "If the economy is doing well, and businesses are growing, they will start hiring. People see interesting opportunities, and you will start to see people moving around." Donald Trump is one of the people who will start a new job in 2025, and a series of economic plans, including tax cuts and deregulation, may help the US economy continue to prosper. Although many details will not be revealed until he returns to the White House on January 20, JPMorgan Chase's Oganes said, "Everything points to continued American exceptionalism, at the expense of the rest of the world." He hopes that global inflation and interest rates can continue to fall, but also warns that "much depends on the policies that the US in particular will adopt."