“Trump 2.0” looms large over the global economy

Inflation, interest rates, and tariffs mean 2025 is shaping up to be an interesting year for the global economy. Growth is expected to remain at a “stable but significantly low” 3.2%, according to the International Monetary Fund. So what does that mean for all of us?

Just one week before Christmas, millions of American borrowers received a welcome gift: their third straight interest rate cut.

But don’t expect Federal Reserve Chairman Jerome Powell, the world’s most powerful central banker, to cut rates as much as he had hoped for in 2025 as the fight against inflation continues. As a result, the stock market plummeted.

“This is a new stage and we will be cautious about further rate cuts,” he said.

Prices have risen sharply around the world in recent years due to the coronavirus pandemic and the war in Ukraine, and while prices are still rising, the pace has slowed significantly.

Nevertheless, inflation rose to 2.7%, 2.2% and 2.6% in the US, eurozone and UK in November, respectively. This highlights the difficulties many central banks face in the so-called “last mile” of the fight against inflation. Their target is 2%, which may be easier to achieve if the economy is growing.

But the biggest challenge to global growth is “uncertainty, and that uncertainty is posed by what happens from the United States under Trump 2.0,” said head of global macro research at investment bank JP Morgan. says Mr. Luis Organes.

Since winning the November election, Donald Trump has threatened to impose new tariffs on the United States’ major trading partners, China, Canada and Mexico.

“The United States is taking a more isolationist policy stance, raising tariffs and trying to provide more effective protection for American manufacturing,” Organes said.

“And even though it would support U.S. growth, at least in the short term, it would certainly hurt many countries that rely on trade with the United States.”

Maurice Obstfeld, a former chief economist at the International Monetary Fund and economic adviser to President Obama, said new tariffs “could be especially devastating” for Mexico and Canada, but for the U.S. It can also be “harmful”.

He cited automobile manufacturing as an example of an “industry that relies on a supply chain that spans three countries,” and said, “If you disrupt that supply chain, there will be major disruption to the automobile market.”

That could drive up prices, reduce demand for products and hurt company profits, which in turn could reduce investment levels, he explains.

Obstfeld, who currently works at the Peterson Institute for International Economics, said, “Introducing these types of tariffs in a world that relies heavily on trade could have a negative impact on growth and push the world into recession.” Yes,” he added.

The threat of tariffs also played a role in forcing the resignation of Canadian Prime Minister Justin Trudeau.

Much of what the U.S. and China sell to each other has already been subject to tariffs since Donald Trump’s first term, but the threat of new tariffs is a major threat to the world’s second-largest economy over the coming year. This will be an important issue.

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

Exports of cheap goods from Chinese factories are vital to China’s economy. If demand declines due to higher prices due to tariffs, it would exacerbate many of the domestic challenges the government is trying to address, including weak consumer spending and business investment.

Buoyed by these efforts, the World Bank said in late December that it raised its forecast for China’s growth rate in 2025 from 4.1% to 4.5%.

The Chinese government has not yet set a growth target for 2025, but last year it believed it was on track to reach its 5% growth target.

“Addressing challenges in the real estate sector, strengthening social safety nets, and improving local government finances are essential to achieving a sustained recovery,” said Mara Warwick, World Bank Country Director for China. said.

These domestic woes mean Beijing is “more welcoming” to foreign investment, said Michael Hart, president of the American Chamber of Commerce in China.

Tensions and tariffs between the United States and China have increased under President Biden’s administration, meaning some companies are looking to move production to other countries.

But Hart noted that “it took 30 to 40 years for China to emerge as such a strong supplier-manufacturer,” adding, “Companies have been trying to mitigate some of those risks…but now China… “No one is ready to completely replace them.” ”

One industry that is likely to continue to be at the center of global trade wars is electric vehicles. More than 10 million cars were produced in China last year, and its dominance led the United States, Canada and the European Union to impose tariffs on China.

The Chinese government claims they are unfair and is challenging them at the World Trade Organization.

But what worries the EU is the possibility that Donald Trump will impose tariffs.

“Trade restrictions and protectionist measures do not help growth and their ultimate impact on inflation is largely uncertain,” European Central Bank President Christine Lagarde said last month. “(But) in the short term, it’s probably going to be net inflation.”

Germany and France are the traditional engines of economic growth in Europe. However, its poor performance amid political instability over the past year means that despite recent growth gains, the eurozone risks losing momentum over the coming year.

That is, unless consumers increase spending and businesses increase investment.

According to research, prices could also rise in the UK due to higher taxes and wages.

One barrier to lowering euro zone interest rates is that inflation remains at 4.2%. This is more than double the 2% target, and strong wage pressures are a barrier to further reductions.

Sander van’t Noordende, CEO of Randstad, the world’s largest recruitment agency, says the same is true in the United States.

“In the United States, for example,[wage inflation]will still be around 4% in 2024. In some Western European countries, it’s even higher.

“I think there are two factors at play. There’s the talent shortage, but also of course inflation and people wanting to be paid more for their work.”

Van’t Noordende added that many companies are passing on these additional costs to customers, which is putting upward pressure on overall inflation.

The slowdown in the global job market reflects a lack of corporate “dynamism” and economic growth is key to reversing it, he says.

“If the economy is strong and businesses are growing, you’ll start hiring. People will see interesting opportunities and you’ll start to see people moving around.”

One of those starting a new role in 2025 is Donald Trump, whose numerous economic plans, including tax cuts and deregulation, could help the U.S. economy continue to grow.

Although much won’t be revealed until he returns to the White House on January 20, “everything points to continued American exceptionalism at the expense of the rest of the world.” JP Morgan’s Organes said.

He expects that inflation and interest rates may continue to fall around the world, but cautioned that “a lot of that will depend on what policy the United States in particular develops.” are.