‘Trump 2.0’ shines on the global economy

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

A week before Christmas was a welcome gift to millions of American borrowers – third consecutive interest rate cut.

However, stock markets fell sharply after the world’s most powerful central banker, US Federal Reserve Chairman Jerome Powell, made it clear that they would not expect any further cuts in 2025 as the fight against inflation continues.

“From now on, it’s a new phase, and we will be careful with further restrictions,” he said.

In recent years, the Covid pandemic and the war in Ukraine have led to a sharp increase in prices worldwide, and although prices are still rising, the pace has slowed significantly.

However, November saw it to drive inflation In the US, the Eurozone and the UK to 2.7%, 2.2% and 2.6% respectively. It highlights the difficulties faced by central banks in the so-called “last mile” of the fight against inflation. Their target is 2%, which could be easier if economies are growing.

However, the biggest challenge to global growth is “uncertainty, and the uncertainty comes from what Trump 2.0 can pull out of the US,” 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 major US trading partners, China, Canada and Mexico.

“The US is taking a more isolationist policy, raising tariffs, trying to provide more effective protection for US manufacturing,” says Mr Oganes.

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

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

He cites car manufacturing as “an example of an industry that depends on a supply chain that’s spread across three countries. If you disrupt that supply chain, you have big disruptions in the auto market.”

This has the potential to raise prices, reduce demand for products and hurt company profits, which can lower investment levels, he explained.

Mr. Obstfeld, who is now at the Peterson Institute for International Economics, added: “Introducing these kinds of tariffs in a highly trade-dependent world could be detrimental to growth, could throw the world into recession.”

Threats of tariffs have also had the effect of coercion resignation Canadian Prime Minister Justin Trudeau.

Even though the US and China make up the majority of what they sell to each other already subject to tariffs From Donald Trump’s first term in office, the threat of new tariffs is a key challenge for the world’s second largest economy in the coming year.

He was recognized by President Xi Jinping in his New Year’s speech “Challenges of uncertainties in the external environment”but he said that the economy is on an “upward course”.

Exports of cheap products from its factories are crucial to China’s economy. Falling demand, as tariffs push up prices, would exacerbate a host of domestic challenges the government is trying to address, including weak consumer spending and business investment.

Those efforts are helping, according to the World Bank, which in late December raised its growth forecast for China. From 4.1% to 4.5% in 2025

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

“Addressing challenges in the property sector, strengthening social safety nets and improving local government finances will be essential to unlocking a sustainable recovery,” said World Bank Country Director for China Mara Warwick.

Those infighting means the Chinese government is becoming “more hospitable” to foreign investment, according to Michael Hart, president of the China American Chamber of Commerce.

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

However, Mr. Hart noted, “It has taken 30 to 40 years for China to emerge as a strong manufacturing supplier,” and “while companies have tried to mitigate some of these risks … no one is ready to completely replace China.” “

One industry that is likely to remain at the heart of global trade is electric vehicles. Last year more than 10 million were made in China, and this dominance led the USA, Canada and the European Union (EU) to do so. set rates on them

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

However, the possibility of Donald Trump imposing tariffs is what concerns the EU.

“Trade restrictions, protectionist measures, are not conducive to growth, and ultimately affect inflation which is largely uncertain,” European Central Bank President Christine Lagarde said last month. “(But) in the short term, it will probably be net inflation.”

Germany and France are the traditional engines of economic growth in Europe. But their poor performance Amidst the political instability of the past year, it means that despite a recent pick-up in growth, the Eurozone is at risk of losing momentum next year.

That is, if consumers do not spend more and companies do not increase their investments.

Higher prices may also come in the UK due to tax and wage rises, according to a survey.

An obstacle to reducing interest rates in the Eurozone is that domestic inflation, which focuses on the prices of items unaffected by external factors, remains at 4.2%. That’s more than double the headline inflation target of 2%, and strong wage pressures have been a barrier to further declines.

It has been similar in the US, according to Sander van ‘t Noordende, CEO of Randstad, the world’s largest contracting company.

“In the US, for example, (wage inflation) will still be around 4% in 2024. In some Western European countries, it’s higher than that.

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

Mr. Van ‘t Noordende added that many companies pass these additional costs on to their customers, which puts upward pressure on general inflation.

The slowdown in the global labor market reflects a lack of “dynamism” in business and economic growth is key to reversing this, he said.

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

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

While much remains to be seen before he returns to the White House on January 20, “it all points to continued US exceptionalism at the expense of the rest of the world,” says JP Morgan’s Mr Oganes.

He is optimistic that inflation and interest rates can continue to fall worldwide, but he warns that “a lot of this will depend on the policies that are implemented, especially from the US.”