Known unknowns: the challenges facing the global economy in 2025
As 2025 approaches, the Markets 360 team thinks that the global economy faces a host of ‘known unknowns’, ranging from the evolution of conflicts in the Middle East and Ukraine to the outcome of forthcoming elections (Germany and potentially France). In their view, many of these are likely to be shaped by the foreign, economic and trade policy of the incoming US administration.
The team considers that the impact on the global economy and markets from Donald Trump’s likely policies will depend ultimately on the extent of any changes, their timing and sequencing, and the policy response from other governments. In their view there is a high degree of uncertainty around all these factors going into next year. “Our core assumption is that President-elect Donald Trump will implement most if not all his campaign promises on foreign, economic and trade policy, including those that could harm the US economy, such as import tariffs. In this respect, our analysis diverges from what we perceive as the implicit market assumptions underlying current pricing”, says Luigi Speranza, Head of Markets 360 and Chief Economist.
Our core assumption is that President-elect Donald Trump will implement most if not all his campaign promises on foreign, economic and trade policy, including those that could harm the US economy, such as import tariffs. In this respect, our analysis diverges from what we perceive as the implicit market assumptions underlying current pricing.
Luigi Speranza, Head of Markets 360 and Chief Economist
Markets 360’s base case assumes that US import tariffs on China and the rest of the world will increase, rather than merely being used as a negotiating tool. At the same time, while the team accounts for a US growth boost from deregulation and a focus on government efficiency, they also consider how lost jobs in public administration and/or the dampening effects on productivity from protectionism and tighter immigration policy might shape the economic reality of Trump 2.0.
For the team the result is likely to be a year of two halves for the US economy. Over the next six months or so, they expect the picture of resilience to continue, underpinned by post-election ‘animal spirits’. Further ahead, however, their analysis suggests that the overall combination of proposed policy measures is likely to boost prices and dampen economic growth in the US, as well as leading to tighter policy from the US Federal Reserve than would otherwise be the case. Uncertainty and the return of inflationary pressures in H2 2025 look set to keep the US Federal Reserve on hold throughout 2025.
Global ripple effects
The Markets 360 team expect the US policy shift to be felt across the world, from both an economic and geopolitical perspective. In the eurozone, where growth seems already fragile, an increase in protectionism is another headwind to the recovery. With inflationary pressures contained, the team expects the European Central Bank to continue to chart a swift path back to a more neutral policy setting. The team expect a fiscal stimulus in the latter part of 2025, driven by a rethinking of the debt brake in Germany and a likely increase in defence spending.
The economists consider Chinese authorities will also probably respond to US policies with additional fiscal and monetary stimulus. However, with at least part of the likely measures aimed at investment, and hence adding to capacity, they expect this to prove disinflationary for the rest of the world. The team anticipates mixed policy responses across emerging markets, with larger moves in those economies with weak growth starting points and the most acute hits to net trade and rerouting from tariffs.
Risks abound
Risks include, among others, a renewed concern over fiscal dynamics. Should growth disappoint expectations and/or inflation limit the scope for monetary policy to respond, Markets 360 analysts consider a more concerning feedback loop could ensue. Across emerging markets, Brazil and Colombia stand out, but advanced economies are not immune to the risk of deteriorating fiscal positions in their view – recent spread widening in France being a case in point.
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