‘Trump 2.0’ looms over the global economy

Inflation, interest rates and tariffs mean 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 that mean for all of us?

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

However, stock markets fell sharply as 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 might have expected, as the battle continues. against inflation.

“From here on, it is a new phase and we are going to be cautious about new cuts,” he said.

In recent years, the Covid pandemic and the war in Ukraine have caused sharp price increases around the world and, although prices continue to rise, the pace has slowed noticeably.

Despite this, in November rising inflation in the US, the eurozone and the United Kingdom up to 2.7%, 2.2% and 2.6% respectively. It highlights the difficulties faced by many central banks in the so-called “last mile” of their battle against inflation. Its target is 2% and could be easier to achieve if economies are growing.

However, the biggest difficulty for global growth “is uncertainty, and the uncertainty comes from what could happen in the United States with Trump 2.0,” says Luis Oganes, head of global macro research at investment bank JP Morgan.

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

“The United States is taking a more isolationist political stance, raising tariffs and trying to provide more effective protection to American manufacturing,” Oganes says.

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

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

He cites automobile manufacturing as an example of an industry that “relies on a supply chain that spans all three countries. If that supply chain is disrupted, massive disruptions occur in the automobile market.”

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

Obstfeld, who now works at the Peterson Institute for International Economics, adds: “Introducing these types of tariffs in a world that relies heavily on trade could be detrimental to growth and could throw the world into a recession.”

Tariff threats have also contributed to forcing the resignation from the Prime Minister of Canada, Justin Trudeau.

Although most of what the United States and China sell to each other is already subject to tariffs Since 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 recognized the “challenges of uncertainties in the external environment”but said the economy was on “an upward trajectory.”

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

These efforts are helping, according to the World Bank, which in late December increased its growth forecasts for China. from 4.1% to 4.5% in 2025.

Beijing has yet to set a growth target for 2025, but believes it is on track to hit 5% last year.

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

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

Tensions between the United States and China and tariffs have increased under Biden’s presidency, meaning some companies have sought to move production elsewhere.

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

One industry that will likely continue to be at the center of global trade battles is electric vehicles. Last year, more than 10 million were made in China, and that dominance led the United States, Canada and the European Union (EU) to impose tariffs about them.

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

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

“Trade restrictions and 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 probably net inflationary.”

Germany and France are the traditional engines of Europe’s economic growth. But your bad performance Amid political instability over the past year means that, despite a recent pick-up in growth, the eurozone risks losing momentum in the year ahead.

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

In the UK, higher prices could also be due to tax and wage increases. according to a survey.

One 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 reducing it further.

It has been similar in the United States, according to Sander van ‘t Noordende, chief executive of Randstad, the world’s largest recruiting firm.

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

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

Van ‘t Noordende adds that many companies are passing these additional costs on to their customers, adding upward pressure to headline inflation.

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

“If the economy is going well, companies grow, they start hiring. People see interesting opportunities and you start to see people moving.”

One person taking on 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 prosper.

Although not much will be revealed before he returns to the White House on January 20, “everything points to the United States continuing to be exceptionalist at the expense of the rest of the world,” says JP Morgan’s Oganes.

He is hopeful that inflation and interest rates can continue to fall around the world, but warns that “a lot of that will depend on what policies are implemented, particularly from the United States.”