“Trump 2.0” looms over the global economy

Inflation, interest rates and tariffs mean 2025 will be an interesting year for the global economy. Growth is expected to remain at a “stable but disappointing” level of 3.2%, according to the International Monetary Fund. So what might this mean for all of us?

Exactly a week before Christmas there was a welcome gift for millions of American borrowers – Lowering interest rates for the third time in a row.

However, stock markets fell sharply because the world's most powerful central banker, US Federal Reserve Chairman Jerome Powell, made clear that they should not expect further cuts in 2025 as they had hoped, as the battle against inflation continues.

“From here, it is a new phase, and we will be cautious about further cuts,” he said.

In recent years, the Covid pandemic and the war in Ukraine have led to sharp price rises around the world, and although prices are still rising, their pace has slowed significantly.

However, the month of November Raise inflation In the United States, the Eurozone and the United Kingdom 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. Their target is 2%, which may be easier to achieve if economies are growing.

However, the biggest difficulty facing global growth “is uncertainty, and the uncertainty comes from what might come out of the US under Trump 2.0,” says Louis Oganes, head of global macro research at investment bank JPMorgan.

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

“The United States is moving toward a more isolationist policy stance, by increasing tariffs and trying to more effectively protect American manufacturing,” Oganes says.

“While this will support American 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 are also “harmful” for the United States, according to Maurice Obstfeld, a former chief economist at the International Monetary Fund and a former economic adviser to President Obama.

He cites the automobile industry as an example of an industry that “relies on a supply chain spread across all three countries. If you disrupt that supply chain, you will have massive disruptions to the automobile market.”

He explains that this would lead to higher prices, reduce demand for products, and hurt the company's profits, which in turn could lead to lower investment levels.

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

Threats of tariffs also played a role Resignation To Canadian Prime Minister Justin Trudeau.

Although the majority of what the US and China sell to each other is Already subject to tariffs Since Donald Trump's first term in office, the threat of new tariffs represents a major challenge for the world's second-largest economy next year.

In his New Year's speech, President Xi Jinping acknowledged “Challenges of uncertainty in the external environment”But he said the economy was on an “upward trajectory.”

Exports of cheap goods from its factories are extremely important to China's economy. Lower demand because tariffs push prices higher would exacerbate numerous 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 at the end of December raised its growth forecasts for China From 4.1% to 4.5% In 2025.

Beijing has not yet set a growth target for 2025, but believes it is on track to achieve 5% growth last year.

“Addressing challenges in the real estate sector, strengthening social safety nets, and improving local governments’ financial resources will be essential for a sustainable recovery,” said World Bank Country Director for China Mara Warwick.

These internal conflicts mean that the Chinese government has become “more welcoming” to foreign investment, according to Michael Hart, president of the American Chamber of Commerce in China.

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

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

One industry that is likely to remain at the center of global trade battles is electric vehicles. More than 10 million items were manufactured in China last year, and this dominance has pushed the United States, Canada and the European Union to… Imposing tariffs On them.

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

However, it is the possibility of Donald Trump imposing tariffs that is worrying the EU.

European Central Bank President Christine Lagarde said last month: “Trade restrictions and protectionist measures are not conducive to growth and ultimately have a highly uncertain impact on inflation.” “(But) in the short term, this is likely to be net inflation.”

Germany and France are the traditional engines of economic growth in Europe. But with them Poor performance Political instability over the past year means that the eurozone, despite a recent pick-up in growth, risks losing momentum next year.

That is, unless consumers spend more and companies invest more.

In the United Kingdom, higher prices could also be the result of increased taxes and wages. According to one survey.

One obstacle to lowering interest rates in the eurozone is that inflation remains at 4.2%. This is more than double the 2% target, and strong wage pressure has been an impediment to it falling further.

It was similar in the United States, according to Sander van't Noordeinde, CEO of Randstad, the world's largest recruitment company.

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

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

Van't Noordeinde adds that many companies pass these additional costs on to their customers, which adds upward pressure on general inflation.

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

“If the economy is doing well, and businesses are growing, they start hiring. People see interesting opportunities, and you start to see people moving around.”

One person who will start a new role in 2025 is Donald Trump, and a range of economic plans including tax cuts and deregulation could help the US economy continue to thrive.

While not much will be revealed before his return to the White House on January 20, “everything points to continued American exceptionalism at the expense of the rest of the world,” says Oganes of JPMorgan.

He hopes that inflation and interest rates will continue to fall around the world, but warns that “a lot of that will depend on the policies that are deployed, especially from the United States.”