Trump 2.0: Impact on the Global Economy and Future Outlook

Trump 2.0: Impact on the Global Economy and Future Outlook.

Inflation, interest rates, and tariffs indicate that 2025 is poised to be a fascinating year for the global economy. The International Monetary Fund projects that growth will remain at a "stable yet underwhelming" rate of 3.2%. What implications might this have for individuals and businesses alike?

Just one week prior to Christmas, American borrowers received a positive development with the announcement of a third consecutive interest rate reduction.

Nevertheless, stock markets experienced a significant decline following remarks from Jerome Powell, the chair of the US Federal Reserve. He emphasized that further interest rate cuts in 2025 may not be as plentiful as some had anticipated, as efforts to combat inflation persist.

"From here, it's a new phase, and we're going to be cautious about further cuts," he said.

In recent years, the Covid pandemic and the conflict in Ukraine have resulted in significant price increases globally. Although prices continue to rise, the rate of increase has notably diminished.

In November, inflation rates in the United States, eurozone, and the United Kingdom rose to 2.7%, 2.2%, and 2.6%, respectively. This situation underscores the challenges that many central banks encounter in the final stages of their efforts to combat inflation. Their objective is to maintain a target rate of 2%, which may be more attainable if economic growth is robust.

Nevertheless, the primary obstacle to global growth is uncertainty, particularly stemming from potential developments in the United States under a possible Trump administration, according to Luis Oganes, head of global macro research at JP Morgan.

Following Donald Trump's victory in the November election, he has continued to threaten the imposition of new tariffs on major US trading partners, including China, Canada, and Mexico.

"The US is going into a more isolationist policy stance, raising tariffs, trying to provide more effective protection to US manufacturing," says Mr Oganes.

"And even though that is going to support US growth, at least in the short term, certainly it's going to hurt many countries that rely on trade with the US."

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New tariffs may have particularly severe consequences for Mexico and Canada, while also posing risks to the United States, as stated by Maurice Obstfeld, a former chief economist at the International Monetary Fund and a past economic advisor to President Obama.

He points to the automobile manufacturing sector as an example of an industry reliant on a supply chain that spans all three nations. Disrupting this supply chain could lead to significant upheaval in the automotive market.

Such disruptions could result in increased prices, diminished product demand, and reduced corporate profits, which may subsequently lead to lower levels of investment, he elaborates.

Currently affiliated with the Peterson Institute for International Economics, Mr. Obstfeld further remarks that "the introduction of these tariffs in a trade-dependent global economy could hinder growth and potentially lead to a recession."

The threats of tariffs have also contributed to the resignation of Canada's Prime Minister, Justin Trudeau.

Burak The Weekender from pexels

Although a significant portion of the trade between the United States and China is already subject to tariffs established during Donald Trump's initial term, the potential for new tariffs presents a considerable challenge for the world's second-largest economy in the coming year.

In his New Year address, President Xi Jinping recognized the "challenges of uncertainties in the external environment", but said the economy was on "an upward trajectory".

The export of inexpensive goods from Chinese factories is vital to the nation's economic health. A decline in demand due to increased prices from tariffs would exacerbate existing domestic issues, such as sluggish consumer spending and low business investment, which the government is actively seeking to address.

According to the World Bank, these efforts are yielding positive results, as it raised its growth forecast for China from 4.1% to 4.5% for 2025 at the end of December.

While Beijing has not yet established a growth target for 2025, it anticipates achieving a 5% growth rate for the previous year.

"Addressing challenges in the property sector, strengthening social safety nets, and improving local government finances will be essential to unlocking a sustained recovery," according to the World Bank's country director for China, Mara Warwick.

The domestic challenges faced by China have led the government to adopt a more favorable stance towards foreign investment, as noted by Michael Hart, president of the American Chamber of Commerce in China.

Under the Biden administration, tensions between the United States and China have escalated, accompanied by increased tariffs, prompting some companies to consider relocating their production facilities.

Nevertheless, Mr. Hart emphasizes that it took China three to four decades to establish itself as a leading manufacturing hub, and while companies are attempting to reduce certain risks, none are currently in a position to entirely replace China as a supplier.

The electric vehicle sector is poised to remain a focal point in global trade disputes. Last year, over 10 million electric vehicles were produced in China, a level of dominance that has led the United States, Canada, and the European Union to impose tariffs on these vehicles.

Beijing has labeled these tariffs as unjust and is contesting them at the World Trade Organization.

However, the potential for Donald Trump to reintroduce tariffs is a significant concern for the European Union.

"Restrictions on trade, protectionist measures, are not conducive to growth, and ultimately have an impact on inflation that is largely uncertain," the president of the European Central Bank, Christine Lagarde, said last month. "[But] in the short term, it's probably net inflationary."

Germany and France have historically served as the primary drivers of economic growth within Europe. However, their lackluster performance amid political turmoil over the past year suggests that, despite a recent increase in growth, the eurozone may face challenges in maintaining its momentum in the coming year.

This situation could change if consumer spending rises and businesses enhance their investment activities.

In the United Kingdom, a survey indicates that rising prices may also stem from increases in taxes and wages.

One significant obstacle to reducing interest rates in the eurozone is the current inflation rate, which stands at 4.2%. This figure is more than double the target rate of 2%, and persistent wage pressures have hindered efforts to lower it further.

A similar trend has been observed in the United States, as noted by Sander van 't Noordende, the chief executive of Randstad, the largest recruitment firm globally.

"In the US, for instance, [wage inflation] is still going to be around 4% in 2024. In some Western European countries, it's even higher than that.

"I think there's two factors there. There's the talent scarcity, but there's also, of course, the inflation and people demanding to get more for the work they do."

(US Department of State - wikimedia)

Mr. van 't Noordende notes that numerous companies are transferring these additional expenses to their customers, thereby contributing to an increase in overall inflation. He further states that a deceleration in the global employment market indicates a deficiency in "dynamism" among businesses, emphasizing that economic growth is essential for reversing this trend.

"If the economy is doing well, businesses are growing, they start hiring. People see interesting opportunities, and you just start seeing people moving around".

A notable individual assuming a new position in 2025 is Donald Trump, whose array of economic strategies, encompassing tax reductions and deregulation, may contribute to the sustained prosperity of the US economy.

Although specific details will remain undisclosed until his return to the White House on January 20, JP Morgan's Mr. Oganes asserts that "all indicators suggest ongoing US exceptionalism at the cost of other nations."

He expresses optimism regarding the potential decline of inflation and interest rates globally; however, he cautions that "much will hinge on the policies implemented, especially those originating from the US."

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Despite global uncertainties, 2025 holds promise for economic growth. As nations like China show signs of recovery and efforts to manage inflation continue, the global economy could experience stability. Although trade tensions and tariff concerns persist, countries are adapting by fostering stronger domestic policies and encouraging foreign investment.

The electric vehicle sector's growth, along with ongoing innovations, suggests that global trade may find new opportunities. While challenges remain, the potential for positive change in markets, consumer spending, and business investments signals a brighter economic outlook in the year ahead.