International Markets

Macroeconomics

The following is a freely accessible summary of a published Citi Research report.
In the latest iteration of our global forecast, Chief Economist Nathan Sheets and team weigh three considerations. First, recent data have shown slowing economic activity in the U.S., the euro area, and China, with a key question whether this represents just a temporary downdraft or a more pronounced weakening.&nbsp;Second, we&rsquo;ve seen a further escalation in global geopolitical and election risks, which can have powerful implications for economic activity and markets. Third, central banks must continue to focus on returning inflation to target, but we think the upside risks for inflation look less prominent than six or 12 months ago.
Sorting through these considerations, we expect the global economy will slow a notch but broadly shake off the current challenges in yet another manifestation of resilience despite unremitting headwinds.&nbsp;An important stabilizing force may come from global central banks, which are nearing a point where they&rsquo;ll have scope to cut rates in earnest, marking a turning of the tide toward a broader and more significant easing cycle.
<table style="border-collapse: collapse; width: 99.9974%;" border="1"><colgroup><col style="width: 49.9438%;"><col style="width: 49.9438%;"></colgroup>
<tbody>
<tr>
<td>Citi Economic Surprise Indexes</td>
<td>Central Bank Policy Rates</td>
</tr>
<tr>
<td><img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/672b757d943ff8407958a2d8.jpg" alt="" width="371" height="283"></td>
<td><img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/672b75d4c5b88e608eef58c7.jpg" alt="" width="353" height="270"></td>
</tr>
<tr>
<td>
<div>
<div>
<div>
<div>
<div>
&copy; 2024 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission.
</div>
</div>
</div>
</div>
</div>
<div>
<div>
Source: Citi Research, Bloomberg
</div>
</div>
</td>
<td>
<div>
<div>
<div>
<div>
<div>
&copy; 2024 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission.
</div>
</div>
</div>
</div>
</div>
<div>
<div>
Source: Citi Research, National Statistical Sources, Haver Analytics
</div>
</div>
</td>
</tr>
</tbody>
</table>
Bottom line, we judge that global growth will only slow to 2.4% this year from 2.7% last year. We think emerging-markets growth will be little changed at around 4%, while developed-markets growth is expected to decline to 1.1% from 1.7%. Global growth in 2025 should edge back up to around 2.5%.
Slowing in the U.S., euro area and China
Recent U.S. data have signaled a cooling in the pace of economic activity, most notably with labor-market conditions loosening. In addition, a range of indicators point to a slowing in consumer spending on both goods and services, while tight bank credit looks to be putting a squeeze on lower-income households and bank-dependent small firms. A critical question for our outlook is whether this slowdown is leading to a soft landing or points to a sharper, recessionary downturn.
The case for a more pronounced downturn is rooted firmly in history. A key feature of past U.S. business cycles is that once the Fed has hiked and the economy has started to slow, the pace of deterioration tends to accelerate sharply, an idea captured in the &ldquo;Sahm Rule.&rdquo; A review of U.S. business cycles over the past half-century suggests restraining wage growth and bringing down inflation have inevitably required a period of rising unemployment and, ultimately, recession.
But there are also compelling points in favor of a soft landing:
<ul>
<li style="font-size: 16px;">the economy was previously running at too hot a pace;</li>
<li style="font-size: 16px;">the labor market remains generally supportive;</li>
<li style="font-size: 16px;">much of the adjustment in the labor market has reflected a massive immigration-driven inflow of workers, rather than a more familiar pullback in demand for them;</li>
<li style="font-size: 16px;">consumer spending hardly looks primed for collapse, with the household sector&rsquo;s aggregate balance sheet remaining robust; and</li>
<li style="font-size: 16px;">the corporate sector looks well positioned for further growth, with equity-market confidence high.</li>
</ul>
For now, our baseline U.S. forecast leans toward expectations of recession, but we&rsquo;re watching the data closely and note that Chair Powell has emphasized that the Fed is prepared to act more aggressively if further softening is seen.
In the&nbsp;euro area, growth has picked up a notch from 2023&rsquo;s near-stagnation. The economy is gradually shaking off the effects of recent years&rsquo; devastating supply shocks, and the ECB is moving to reduce monetary-policy restraint. But the recovery remains lackluster. Digging into the details, we note very different performances within the euro area: Germany&rsquo;s growth will likely continue to lag, with the economy eking out annual growth of just 0.1% this year, but Spain should be buoyed by still-strong services spending, with the economy expanding at a robust 2.7% pace. And the recent upsurge in political uncertainty surrounding the French snap elections is very much on our radar screens. While the outcome in France was more market-friendly than had been feared, it came as a reminder that the euro area&rsquo;s recovery may still be vulnerable.
In&nbsp;China, second-quarter real GDP growth came in at 4.7% from a year earlier, well below our 5.1% forecast. The economy is clearly showing cyclical softness, marked by lower-trending retail sales growth, subterranean readings for consumer confidence, and generally soft PMIs. Despite these headwinds, we believe the second half will see fiscal stimulus, support for the housing sector, and corresponding momentum in private spending. As such, we think China&rsquo;s 5% growth target is still achievable.
While we&rsquo;re relatively sanguine about China&rsquo;s near-term prospects, we remain concerned about its medium-term challenges. One key question is, &ldquo;What will be the engine of growth for the coming decade?&rdquo; President Xi has highlighted advanced manufacturing as a key driver. But this will require access to global markets, and recent Biden administration tariffs highlight that the U.S. market is closed to this strategy, with meaningful constraints in the EU as well.
Geopolitical and election risks
While we were well aware of 2024&rsquo;s extraordinary sequence of national elections and the challenges and uncertainties that could result, we still weren&rsquo;t prepared for the past two months&rsquo; string of surprises. Incumbents and established parties have taken it on the chin in election after election as voters express discontent with the status quo.
In India and South Africa, Modi and Ramaphosa were returned to office but are now managing coalitions. In the European Parliament elections, right-wing parties scored significant gains. That prompted France&rsquo;s Macron to call snap parliamentary elections, which resulted in a &ldquo;hung&rdquo; parliament and left-wing parties ultimately coming out on top after political maneuvering. And in the UK&rsquo;s early July election, the Conservative Party suffered a defeat of historic proportions. To date, Mexico has been the principal exception to these electoral trends, as Claudia Sheinbaum and President AMLO&rsquo;s Morena party won a sweeping mandate in early June.
Global uncertainty has been further exacerbated by the recent assassination attempt on Trump at a time when his candidacy looked to be gaining traction. In response to Trump&rsquo;s apparent momentum, investors are increasingly implementing curve steepeners, strong dollar, and long sectors such as energy and financials that are likely to benefit from Trump deregulation. Even so, we expect further twists and turns before Nov. 5. (Note: Our report was published before Biden&rsquo;s decision to drop out of the presidential race and endorse Vice-President Harris.)
Other types of geopolitical risks also remain in play: The conflicts in Ukraine and the Middle East are grinding on, and we&rsquo;ve seen new manifestations of tensions between the U.S. and China. These developments have helped fuel a surge in global container shipping costs; a meaningful further rise could put pressure on global goods inflation and create unwelcome challenges for central banks.
Implications for central banks
While inflation in many countries remains above target, central banks have made significant progress in harnessing inflationary pressures: Global headline inflation peaked near 7% in mid-2022 but is now hovering at 2.5%; core inflation had been as high as 4.5% but has fallen to around 2.5%.
While we recognize the importance of the &ldquo;last mile&rdquo; and bringing inflation fully back to target, the global inflation picture now strikes us as more favorable. This, in turn, is creating scope for central banks to gradually reduce the restrictiveness of their policies. We see rate cuts gaining steam through the second half in the U.S., euro area, UK and Canada. (In Australia, on the other hand, we expect an August rate hike with cuts not coming until early next year.)
<table style="border-collapse: collapse; width: 99.9974%; height: 347.5px;" border="1"><colgroup><col style="width: 49.9438%;"><col style="width: 49.9438%;"></colgroup>
<tbody>
<tr style="height: 18.0078px;">
<td style="height: 18.0078px;">Global Inflation&nbsp;</td>
<td style="height: 18.0078px;">DM Policy Rates</td>
</tr>
<tr style="height: 314.492px;">
<td style="height: 314.492px;"><img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/672b7420b4a4627f32cdfcb0.jpg" alt="" width="378" height="295"></td>
<td style="height: 314.492px;"><img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/672b74acc5b88e608eef58c0.jpg" alt="" width="345" height="273"></td>
</tr>
<tr style="height: 15px;">
<td style="height: 15px;">
&copy; 2024 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission.
*Headline and core cover 15 economies with readily available data.
Source: Citi Research, National Statistical Sources, Haver Analytics
</td>
<td style="height: 15px;">
<div>
<div>
<div>
<div>
<div>
&copy; 2024 Citigroup Inc. No redistribution without Citigroup&rsquo;s written permission.
</div>
</div>
</div>
</div>
</div>
<div>
<div>
Source: Citi Research, National Statistical Sources, Haver Analytics
</div>
</div>
</td>
</tr>
</tbody>
</table>
Central banks have clearly preferred to move together, and we expect their easing cycles to be similarly correlated. The Bank of Japan&rsquo;s policies remain highly stimulative and a marked outlier. For now, the Japanese authorities are seeking to buy time and hoping rate cuts from the Fed and other central banks will be sufficient to take pressure off the exchange rate.
Many emerging-markets central banks are already well into their cutting cycles. Even so, the trajectory of cuts has generally been gradual, and in some cases the scope to cut rates has been less than anticipated. We speculate that developed markets&rsquo; initial rate cuts may pave the way for a second phase of easing in emerging markets.
The bottom line is that with inflation moderating, we expect central banks will have scope to shift to a less restrictive policy trajectory in the second half. That will likely be an important stabilizing factor for the global economy in the event of a sustained weakening in demand, or geopolitical headwinds that prove more pronounced or prolonged.

Existing Citi Research clients can follow <a href="https://www.citivelocity.com/t/eppublic/3Coc0" target="_blank" rel="noopener" data-link-source="tiny">this link</a>&nbsp;to access the full report, which includes country-by-country discussions.

Recent data have signaled slowing growth in the U.S., euro area and China. To what extent does this deceleration represent a temporary downdraft vs. a more pronounced weakening? In a new report, we conclude that global growth will likely soften a notch this year but broadly shake off the challenges.

We See Global Resilience Amid Mounting Risks

Research

Our latest forecast for the global economy, offered by Chief Economist Nathan Sheets and team, seeks to balance three ongoing themes. First, we continue to see evidence of resilient service-sector performance, with global labor markets generally staying tight. Second, given these developments, inflation continues to run above official targets, with central banks finding it challenging to end their inflation-fighting policies. Third, significant geopolitical pressures persist.
Given these factors, we&rsquo;ve left our global forecast little changed from last month. We continue to see global growth slowing to 2.3% this year from 2.7% last year. Our assessment is that monetary policy, which is still restrictive in many economies, will restrain activity and help loosen the labor market. But we&rsquo;re also keenly aware that the global economy has shown surprising resilience. Any labor-market slowing to date has been incremental at most and our 2024 growth forecast has been on an upward trajectory in recent months; given this, we see the risks to our forecast as still skewed toward stronger performance.
Strength in Services Continues
The global purchasing managers' indices (PMIs) for services and manufacturing strike us as particularly useful measures of performance. The global services PMI retreated through much of last year, but hit bottom in October and has moved steadily upward since then, with its current reading of 54.1 a signal of considerable strength in the services sector. Even so, we continue to expect some tapping out of services demand in the months ahead.
Meanwhile, labor markets have remained tight, with unemployment rates across a broad set of countries still generally at or below pre-pandemic levels. The U.S. has seen its jobless rate edge up in recent months to 4%, but labor-market data haven&rsquo;t delivered a clear verdict about what&rsquo;s driving this rise.
Wage growth has also remained rapid in many economies, far surpassing the pre-pandemic pace and keeping central banks on high alert. A particular concern is that services inflation continues to run hot in many countries, frustrating central banks&rsquo; efforts to reach their targets. And the global manufacturing PMI has edged up to readings slightly above 50, which points to a tepid recovery. A broader rotation of spending toward goods is an important part of our forecast, and that should help take the heat out of labor markets and so temper services inflation.
Taken together, many of the global macro issues we&rsquo;ve wrestled with over the past two years remain unresolved. As such, we see the global outlook as very much a work in progress. The question is whether these developments &mdash; particularly, the strength of services spending, tight labor markets, and outsized services inflation &mdash; ultimately unwind as we expect. If not, it&rsquo;s increasingly possible that we&rsquo;re seeing the onset of a more sustained &ldquo;new normal&rdquo; for spending and activity.
Central Banks Face a Complicated Exit
In recent months, several major central banks have been bedeviled by the challenge of finding a path to the exit, with the Fed front and center. First-quarter U.S. inflation data proved much stronger than anticipated, which threw cold water on market expectations and caused the Fed to backpedal on its plans to ease. Markets have gone from pricing in as many as six rate cuts for the year to expecting just one to two, which has been a central factor shaping the performance of global markets. Our current projections call for the Fed to remain on hold until September, a meeting later than our previous forecast.
Chair Powell has highlighted that a weakening of the labor market &mdash; and of the economy more generally &mdash; could also lead to Fed rate cuts, and some indicators have pointed to softer U.S. performance. But with other data remaining somewhat stronger, the next several quarters will be critical in determining whether the U.S. economy achieves a soft landing.
The European Central Bank (ECB), in contrast, cut its deposit rate by 25 basis points at its June meeting, but the move was accompanied by relatively hawkish communications, with the Governing Council clearly concerned about the tone of recent wage data. We now see just two further ECB rate cuts this year, in&nbsp;September and December. Elsewhere in Europe, we now think the Bank of England will likely remain on hold until September. The upshot is that we see all three of these major central banks proceeding with rate cuts in September, and expect their cutting cycles will continue through 2024.
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/66cefbc41e91c537ed1499d1.jpg" alt="" width="800" height="359">
The Bank of Japan has remained on the sidelines. The good news is that its 2% inflation objective looks to be coming into view, but the pressures associated with the historically weak yen threaten to force the central bank&rsquo;s hand. That has Japanese officials eagerly anticipating the easing of Fed policy, which should help the yen rebound. Many emerging-markets central banks are already well into their cutting cycles, but the trajectory of cuts has generally been gradual, and in several cases the scope to cut rates has been less than anticipated.
Bottom line, central banks have been locked into restrictive policies for longer than they (and we) expected when 2024 began. As noted above, the looming question is when wage growth and services inflation will return to a pace more consistent with central-bank targets, as well as how confident we should be that cuts will indeed come in September. The answer will depend on the durability of economic activity in key countries.
Geopolitical Pressures Remain in Play
The global economy continues to endure a range of geopolitical challenges. The Russia&ndash;Ukraine war grinds on, the painful conflict in the Middle East continues, and several other developments have recently made headlines. These include the Biden administration slapping sizable tariffs on a targeted set of Chinese goods, including 100% tariffs on imports of Chinese electric vehicles, and a series of important election results in major G-20 countries.
While no geopolitical development has proved a game changer for the global economy or markets so far, such pressures are clearly in play and may yet reach a boiling point. We place particular emphasis on the potential risks from France&rsquo;s snap elections and, of course, uncertainties surrounding the U.S. presidential vote. Such uncertainties are likely to ebb and flow in markets through the end of this year and into the next.

Our new report, Global Economic Outlook &amp; Strategy: The Still-Challenging Path Back to &ldquo;Normal,&rdquo; also includes country-by-country discussions. It&rsquo;s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/38yjZ" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

Services sectors remain resilient and labor markets have stayed tight. Inflation continues to run above official targets, challenging central banks, and geopolitical pressures persist. We've wrestled with these developments over the past two years, but they remain stubbornly in place as we present our latest forecast for the global economy.

The Still-Challenging Path Back to “Normal”

In our latest global economic forecast, Chief Economist Nathan Sheets and team see this year&rsquo;s global growth settling in at a little under 2.5%, just a notch softer than last year&rsquo;s pace, with the underlying economic processes staying strikingly similar to what we&rsquo;ve seen in recent years. Strong consumer spending on services, along with tight labor-market conditions, continue to be growth&rsquo;s principal drivers. While our forecast has envisioned a rotation back toward goods spending, so far any rebound in the goods sectors looks to be &ldquo;green shoots&rdquo; at best, with the drivers of growth not yet having shifted appreciably.
The good news is that key parts of the global economy have continued to show resilience despite numerous challenges including elevated geopolitical risk. Emerging-market economies look like they&rsquo;re on track for another solid year, with their aggregate growth rate hovering near 4%, similar to 2023.
For the developed-market economies, we see an aggregate slowdown in growth this year, largely reflecting a projected U.S. deceleration around mid-year. More generally, how the U.S. performs strikes us as a hinge point for the global outlook. Given the U.S. economy&rsquo;s size and reach, this is always true to some extent, but the uncertainties and implications around that performance seem particularly marked at present.
A Rotation Back to Goods?
Coming out of the pandemic, consumers rotated strongly toward services as they sought to make up for experiences they&rsquo;d postponed. As the pandemic moves further into the rearview mirror, we&rsquo;ve expected a rotation back toward goods. But any moves in that direction are still tentative at best.
The global manufacturing purchasing managers&rsquo; index (PMI) has crept slightly above 50, the breakpoint between expansion and contraction. We see a&nbsp;strong global bid for sophisticated AI chips, and the manufacturing inventory cycle looks to have become less of a headwind. &nbsp;But the electronics sector as a whole has yet to pick up appreciably, and PMIs for manufacturing orders and global exports remain lackluster.
After declining through the middle of last year, the services PMI has recently rebounded and points to solid performance. In addition, global services inflation remains comparatively hot, another sign of sector strength. Although the data have been uncooperative, we maintain our call for a rotation from services spending back to goods as the year progresses.
Further Global Slowing?
For&nbsp;some time, we&rsquo;ve envisioned&nbsp;a&nbsp;more pronounced slowing in the global economy, which was expected to arrive due to the anticipated moderation in services spending taking some heat out of&nbsp;growth and the labor market, as well as headwinds from the substantial accumulated monetary tightening. And we have seen some effects: &nbsp;Global growth has remained below its 3% historical trend, both headline and core inflation have retreated, and some regions have felt significant drag from central bank tightening.&nbsp;
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/66cf13bcbcaecd3485ad742c.jpg" alt="" width="800" height="383">
Even so, we expect some policy restraint still in the pipeline will manifest itself as the year progresses. The upshot would be a step down in aggregate consumer spending, with an accompanying softening in global labor markets, wage growth and services inflation. While we&rsquo;ve seen some preliminary signs of this, labor markets clearly remain tight. In our view, further adjustments in the economy will be needed to bring global inflation down to central banks&rsquo; targets.
U.S. Scenarios and Their Implications
We think the prospects for the global economy through the rest of 2024 depend critically on U.S. performance, with the U.S. trajectory affecting the global picture directly due to its large share of global activity but also indirectly through, for example, the implications for other central banks.
We offer two scenarios for the U.S. economy, and some implications. Our first scenario is broadly consistent with our baseline forecast, while the second is more closely aligned with current consensus views and market pricing of central banks&rsquo; policy paths.
In our first scenario, the U.S. economy softens to a recessionary or near-recessionary pace. This prompts the Fed to start its easing cycle sooner and more aggressively, with four cuts during the second half of the year. The Fed&rsquo;s rationale for cutting rates would be two-fold: to ensure the softening doesn&rsquo;t proliferate or become entrenched; and because economic slowing would give it greater confidence that inflation was poised to fall back to the 2% target.
Such cuts would greatly simplify the lives of central bankers at the European Central Bank (ECB), the Bank of England, and the Bank of Japan. &nbsp;The ECB and the Bank of England would likely cut rates in tandem with the Fed, while the Fed&rsquo;s easing would take some heat off the yen and, thus, reduce pressures on Japan to tighten.
In our second scenario, U.S. growth moderates from the rapid pace we saw in last year&rsquo;s second half, but continues at a solid 1.5 to 2% rate. &nbsp;In sync, inflation gradually falls and the Fed cuts twice &mdash; once in the fall and again in December.
This scenario would pose more challenges for other central banks than our first one. To the extent that the Fed remains on hold awaiting evidence of disinflation, it highlights the question of whether &mdash; and to what extent &mdash; other central banks are willing to go their own way in cutting rates. &nbsp;
The ECB has clearly signaled that it&rsquo;s prepared to cut in June, which strikes us as essentially a done deal. A Fed that held rates would complicate President Lagarde&rsquo;s efforts to manage her committee and create complexities for ECB communication, with concerns about a weaker euro also possible. In such a situation, the pure economic case for cuts would need to be compelling. Meanwhile, Japan&rsquo;s policymakers would continue to fight yen appreciation with an eye toward eventual Fed cuts.&nbsp;
Other scenarios are possible, of course. For example, U.S. inflation could be sufficiently sticky that the Fed doesn&rsquo;t cut at all this year or, in an extreme case, is forced to hike. This would amplify the challenges facing other central banks and, in our view, further raise the bar for them to cut rates.
&nbsp;

Our new report, Global Economic Outlook &amp; Strategy: The Global Outlook Hinges on U.S. Performance, also includes country-by-country discussions. It&rsquo;s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/35ujR" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

We continue to project softening in the U.S. around mid-year as the Fed struggles with hotter-than-expected inflation prints. We see the uncertainties surrounding the U.S. outlook as unusually pronounced, and their eventual resolution as a critical hinge point for the global outlook.

The Global Outlook Hinges on U.S. Performance

A new Global Economic Outlook &amp; Strategy report from a team led by Citi Chief Economist Nathan Sheets notes that the global economy continues to motor forward, while acknowledging uncertainties about its near-term prospects. While we expect a &ldquo;divot&rdquo; in developed markets&rsquo; performance and heightened uncertainty over the next several months, we also expect these strains to be short-lived, with central banks ready to temper the pressures by shifting policy to a more supportive stance. The bottom line is that we&rsquo;re in the final chapter of post-pandemic adjustment, with the coming months set to reveal how these storylines are resolved.
We now see global growth coming in at 2.5% this year, just slightly softer than last year&rsquo;s pace and appreciably higher than our projections when 2024 began. Growth next year looks poised to continue at a similar rate. At the same time, we still have worries about global growth&rsquo;s near-term prospects. While emerging-markets economies should continue to expand at a 3.5% pace in the second half, for developed markets we anticipate markedly softer performances from the U.S., Canada and the UK.
The U.S. outlook strikes us as particularly uncertain. The unemployment rate has risen sufficiently to trigger the Sahm rule, which been a good indicator of past recessions, and housing-market activity remains soft. But consumer spending has shown resilience, and the Citi Surprise Index has climbed back from July lows. The ebb and flow of recent U.S. data has amplified volatility in global markets, which we see continuing.
Global Purchasing Managers Indices (PMIs) offer another important prism. Here, the story continues to be remarkable strength in services and weakness in manufacturing. We&rsquo;ve seen emerging green shoots for global manufacturing at times over the past year, including strong demand for advanced AI chips, a hardware replacement cycle, and a recent export bounce from some Asian emerging-markets economies.
But none of these developments has fully taken hold, leaving us looking for an explanation for the sustained weakness in global manufacturing and goods demand. We can no longer appeal to the post-pandemic rotation to services, as pent-up demand for services should have played through. One possibility is that high interest rates are weighing on manufacturing, as capital goods and durable goods often require financing. On the consumer side, it&rsquo;s possible that soft housing markets are inhibiting knock-on spending on appliances, furniture and other housing-related goods and materials. To date, we judge the weakness in manufacturing to be cyclical, rather than indicating a sustained structural shift toward services.
The good news is that inflation looks to be abating, with headline and core inflation both down appreciably from their 2022 peaks and core goods inflation now below pre-pandemic levels. Services inflation remains elevated, but we now see it as on a downtrend as well. Additionally, we project a sharp retreat in oil prices in the year ahead.
The U.S., euro area and China
The U.S. labor market is clearly softening: The unemployment rate has risen, payroll gains have softened, and the ratio of job openings to unemployed workers has declined. What&rsquo;s also striking, however, is that none of these readings has collapsed or points to any kind of marked weakness. The question in interpreting the labor market&rsquo;s recent performance, then, is how much weight to put on the slowing trend of the data vs. the overall level of activity. Answering that question, however, depends heavily on answering a different one: Is a soft landing possible?
Our work highlights that six decades of U.S. experience offer no examples of a soft landing emerging from episodes of wage and price disinflation; on the other hand, in previous triggerings of the Sahm rule, the economy has typically already been in recession for several months, making the Sahm rule a lagging indicator of recessions, and that&rsquo;s not the case this time. Recent readings of U.S. consumer spending have also shown continued growth, with the saving rate falling to 2.9%. This low level suggests consumers are still spending, but may also be getting stretched.
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/66ec4f0a3832f91fbdece067.jpg" alt="" width="850" height="418">
Our bottom line is that the risks for the U.S. economy strike us as finely balanced, with coherent cases possible for an upcoming sharp recessionary slowing as well as for a soft landing. And we note that the post-pandemic period has brought many surprises, with this economic cycle correspondingly unique. One way or another, we expect the next few months will resolve many of these questions.
Looking overseas, we see aggregate growth in the euro area continuing at an annualized pace of near 1%. We expect price pressures to continue to cool, with headline inflation ending the year just slightly above the 2% target set by the European Central Bank (ECB) and so driving significant further easing. The bigger story, as we see it, is the divergence of performance across countries: During the past year, Spain and Greece have grown at a 2% to 3% pace, while Germany&rsquo;s economy has stagnated and shown particular vulnerability to the gas shock and policy tightening. And unlike in the U.S., euro-area consumers have been hesitant to draw down &ldquo;excess saving&rdquo; accumulated during the pandemic.
We&rsquo;ve lowered our 2024 forecast for Chinese growth to 4.7% from 5.0%. Recent months have seen both manufacturing and services PMIs lose momentum, with consumer confidence stuck at low levels. One headwind is adverse wealth effects from the moribund property sector; a significant share of Chinese households&rsquo; wealth is held as real estate, and the sharp retreat seen in recent years has taken a toll. What&rsquo;s striking is that Chinese authorities have been slow in providing policy support. Why is a puzzle; we note worries about high levels of debt and leverage in the economy, as well as the possibility that authorities may be reserving a significant slug of fiscal stimulus in case the U.S. election brings a quantum hike in tariffs or other headwinds.
Implications for central banks
Improvements in global inflation have opened the door for a sustained easing of central-bank policy. This global cutting cycle has already begun, and we expect it to gather steam through year&rsquo;s end, as the scope for rate cuts is substantial in many countries.
The Fed is clearly committed to moving policy to a less restrictive stance, with its concerns shifting toward the labor market and growth. We think it&rsquo;s likely that the coming year will see the Fed take its policy rate down to near 3%, in the neighborhood of the neutral rate (where both inflationary and deflationary pressures are absent). While that&rsquo;s unlikely to forestall a recession, should one develop, it will certainly provide important support.
The ECB is ahead of the Fed; we expect another cut at its December meeting and another 100 basis points of cuts in 2025, with more rapid moves a possibility. We also expect further cuts from the Bank of England starting in November.
Recent market developments have given the Bank of Japan (BOJ) significantly more room to maneuver in order in crafting policy with an eye on inflation and the domestic economy, without unusual worries about exchange-rate implications. We see the BOJ gradually lifting rates to 1% by the end of 2025.
Emerging markets have followed diverse paths. Many of these central banks began easing policy during the second half of 2023 or early this year. Going forward, we expect rate cuts by the Fed and other developed-markets central banks will broaden the cutting cycles in major emerging markets.

Our new report, Global Economic Outlook &amp; Strategy: The Final Chapter of Post-Pandemic Adjustment &mdash;How Will the Plot Unwind?, also includes country-by-country discussions and forecasts. It&rsquo;s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3K1rZ" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

Global Economic Outlook & Strategy

We now see global growth coming in at 2.5% for 2024, markedly stronger than what we expected when the year began. But Nathan Sheets and team continue to worry about the global economy&rsquo;s near-term prospects. A new Citi Research report looks at what the team believes will be the post-pandemic adjustment&rsquo;s final chapter.

The Final Chapter of Post-Pandemic Adjustment

A new Emerging Markets Economic Outlook &amp; Strategy report from a team led by Head of Emerging Markets Economics Johanna Chua says the start of protracted easing by the Fed should support net inflows into emerging markets (EM), though important caveats apply &mdash; most notably that this will require a soft or at least &ldquo;softish&rdquo; landing for the U.S. economy as well as the U.S. elections proving more friendly for emerging markets.
In the report, we note that the drivers of capital flows are complex and go beyond rate differentials to broader measures of expected returns. A look at broad valuation metrics signaling a strong U.S. dollar (USD) shows this signal started well before the Fed even started hiking, which we think was influenced by a recalibration of growth prospects in the rest of the world given a sharp slowdown in leverage-fueled growth in China and the end of the commodities super-cycle.
Broad dollar valuation metrics conceal a more nuanced story within emerging markets: Excluding China, net capital flows bounced back in 2023 and this year&rsquo;s first quarter, but in a highly differentiated way.&nbsp;
India saw a strong rebound and central Europe and Latin America proved resilient, but net capital flows were relatively weak in lower-yielding ASEAN, particularly Thailand and Malaysia. EM resilience has been attributed to a significant reduction in reliance on external financing and an improved track record of credible macro policies, including pre-emptive monetary tightening. Meanwhile, China&rsquo;s weak net capital flows have come from a secularly weakening growth story alongside a geopolitical/regulatory risk premium.
That said, common factors such as Fed policy can reduce this differentiation. Higher-frequency portfolio flow data show this EM differentiation fading in recent months as U.S. inflation risks receded, giving the Fed room to lower rates. We now expect most EM central banks to opt for smaller cuts than the U.S., either because they didn&rsquo;t need to hike rates as much to re-anchor inflation to targets or because they&rsquo;re in the more advanced stages of their own easing cycles. The only EM central banks we see cutting more aggressively are ones where monetary policy was very tight to begin with, a list that includes Colombia, Turkey, Egypt and Mexico. We see Brazil as the lone central bank that will need to reverse policy easing to re-anchor expectations.
As Fed easing advances, we think the situation could be particularly supportive for EM portfolio debt flows coming from economies with higher rates to begin with. The most extreme cases are Turkey and Egypt, but we also include South Africa, Hungary, India, the Philippines, Indonesia and Brazil. A potential stumbling block? It&rsquo;s the U.S. elections: A Trump victory and potentially aggressive tariff actions would be viewed as USD-positive, at least over the short term, and a Republican sweep and repricing of the fiscal trajectory could further complicate our baseline path for the Fed to ease rates 225 basis points by mid-2025.
Assessing headwinds and tailwinds
A key assumption supporting our thesis that we&rsquo;re at an EM turning point is that we won&rsquo;t get a &ldquo;hard landing.&rdquo; Despite recession worries, so far actual data don&rsquo;t suggest an imminent recession. But global growth headwinds are still evident, with the global manufacturing indices on a weakening bias and growth risks clearly rising in China, where we see the credibility to anchor inflation as among the lowest globally. Weak Chinese demand worsened by deflation expectations will likely further amplify margin pressures impacting global manufacturers, something we&rsquo;re already seeing materially playing out in Europe, where the European Central Bank remains in a gradualist mode and so at risk of overtightening.
But our forecast growth and inflation trajectories for the coming quarters are also highly differentiated. Beyond the slowdown in the U.S. and China, only some of the more trade-linked economies are expected to slow. Most emerging markets are still forecast to remain steady or continue expanding during the period of Fed accommodation, with the most favorable stories in South Africa and Egypt.
<img style="display: block; margin-left: auto; margin-right: auto;" src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/66f529717c27b5481f4259ca.jpg" alt="" width="655" height="490">
We think it&rsquo;s important to put the tech demand slowdown risk in perspective: We don&rsquo;t see the kind of sharp business equipment downturn we saw in 2001&rsquo;s U.S. recession, or a cyclical collapse amplified by financial deleveraging, as was seen during the 2007&ndash;2008 Global Financial Crisis. U.S. corporate balance sheets still look healthy, chip inventory ratios still look historically low, and we think a genuine tech product replacement and innovation cycle will persist alongside AI-related capex. Nor do we see a drag on commodity prices as a big enough hurdle to derail appetite for emerging-markets assets at this juncture in the Fed easing cycle.
We note that several EM economies &mdash; notable cases are Taiwan, Malaysia, India, Poland and Romania &mdash; have lower ex ante real rates vs. their established neutral settings to begin with, meaning that growth expectations are unlikely to be penalized much by more limited or nonexistent rate-easing action. Beyond this, we think the transmission of easing to the real economy can be faster in some EM economies than in the U.S. even though the quantum of easing &mdash; the amount of rate cuts expected from a central bank in a given period &mdash; will likely be more limited.
Factors that likely helped drive U.S. economic resilience amid historically aggressive Fed tightening were relatively strong private-sector balance sheets accompanied by long-dated fixed-rate mortgages that locked in at low rates before the Fed hiked. In contrast, a number of EM economies saw a significant buildup of leverage, and notable EM markets have been through a significant down cycle for housing prices and are also more exposed to adjustable-rate mortgages. This could cause an easing cycle to transmit more quickly into the real economy. That likely wouldn&rsquo;t do much for China, but could provide relief for Hong Kong.

Our new report, Emerging Markets: Economic Outlook &amp; Strategy: A Turning Point for EM?, also includes country-by-country discussions. It&rsquo;s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3KJAB" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

Emerging Markets Economic Outlook & Strategy

Fed easing should help spur more net inflows into emerging markets, according to a new Citi Research report. Does that mark an EM turning point? Johanna Chua and team note that the answer will be influenced by factors such as risks of a U.S. hard landing and election outcomes.

Have We Reached a Turning Point for EM?

A new note from Chief China Economist Xiangrong Yu answers the top 10 questions posed by investors about China&rsquo;s stimulus package.
<ol>
<li>What happened?</li>
</ol>
A long-awaited policy shift may have arrived for China&rsquo;s economy and markets.
On the monetary-policy front, the People&rsquo;s Bank of China (PBoC) implemented a 50-basis-point (bp) cut to the reserve requirement ratio (RRR) and a 20-bp policy rate cut, two days after it cut the medium-term lending facility rate 30 bps. The PBoC then unveiled a plan for mortgage repricing, with outstanding mortgage rates potentially to be lowered to 30 bps below the loan prime rate before the end of this month. And forward guidance indicates another RRR cut of 25 bps to 50 bps within the year.
For fiscal policy, while concrete details haven&rsquo;t materialized, the Politburo vowed to strengthen &ldquo;countercyclical adjustments of fiscal and monetary policies&rdquo; and deploy &ldquo;necessary fiscal spending.&rdquo; We now see a higher probability of an interim budget revision to add stimulus.
Regarding the property sector, the PBoC fine-tuned its relending tool to support government buybacks by raising the coverage ratio while keeping the interest rate unchanged, and it cut the floor for the second-home down-payment ratio. In a bit of unprecedented guidance, the Politburo explicitly vowed to &ldquo;stop property-market decline and foster stabilization.&rdquo; Tier 1 cities then followed up by either lifting or substantially easing purchase restrictions in Guangzhou, Shanghai and Shenzen.
<ol start="2">
<li>Is this time different?</li>
</ol>
We&rsquo;re more inclined to think so. Previous rounds of monetary easing failed to deliver results because strong liquidity supply doesn&rsquo;t address the fundamental issue of weak credit demand. This time, though, we think demand-side measures are finally coming through. The sense of urgency is clearly rising among China&rsquo;s top leadership, with the economy the first priority now. Moreover, policy credibility would be seriously undermined if the cycle of hope and disappointment repeats itself this time. Fiscal stimulus is late but appears to be finally moving alongside the policy efforts, with the Politburo&rsquo;s meeting potentially marking a shift in thinking. The Politburo&rsquo;s vow to stop the property sector&rsquo;s decline marks a new, strong and decisive key performance indicator for economic and local officials.
<ol start="3">
<li>What should we expect on fiscal policy?</li>
</ol>
We expect meaningful fiscal follow-up measures before the end of October and note that investors will lose patience if they aren&rsquo;t delivered. If overall policy thinking has changed at the top, we see little reason for the Ministry of Finance to wait. The ministry could tap into some RMB5.1 trillion in funding without additional approval, though a budget revision is a touchstone, and a timely and sizeable budget revision or a new quota for ultra-long special Chinese government bonds (CGBs) of more than RMB1 trillion could offer more policy space. A tilt toward consumers in funding usage could be a further confirmation of a fiscal pivot, with direct and forceful support needed to stop consumer confidence from falling further. Large tax cuts may not be an ideal option with households and entrepreneurs unlikely to consume or invest; an expansion of expenditures is more essential for consumption, investment, bank recapitalization and local debt relief. Monetary easing and flush liquidity will also allow the ministry to make bolder moves.
<ol start="4">
<li>What consumer stimulus is plausible?</li>
</ol>
We foresee a higher weight of consumption in the potential fiscal stimulus. With household confidence close to an all-time low and retail sales growing at merely ~2% year over year, it&rsquo;s time for a direct consumption boost; we expect a package of around RMB3 trillion. Trade-in subsidies for autos and durable goods could continue or be stepped up, consumer vouchers for targeted sectors look increasingly likely, and consumer services could get more policy attention. The government is also set to strengthen the social safety net: We think the chances are good that unemployment benefits will be raised for middle-aged, disadvantaged and long-time unemployed people; subsistence allowances could also be enhanced. Another effort that looks increasingly likely is cash handouts to targeted groups. And policymakers could be more cautious about rolling out negative policies, such as consumption and property taxes and regulatory policies that disrupted income growth and wage expectations.
<ol start="5">
<li>Is there still room for investment stimulus?</li>
</ol>
We do see scope for more infrastructure investment, though not at the same scale seen after the Great Financial Crisis. The property sector is going through a structural downturn, with the land-property boom unlikely to return, but the green transition, high-end manufacturing and infrastructure upgrades could benefit from more investment. The tight grip on local debt also needs to be loosened to capture upside for investment. Stringent local debt control and project approval are largely responsible for lagging bond issuance in 2024 and softening fixed-asset investment momentum. But we think the Politburo&rsquo;s guidance will tilt the balance toward supporting growth and away from debt resolution, easing the bottleneck for infrastructure financing.
<ol start="6">
<li>What will it take to stabilize the property market?</li>
</ol>
We don&rsquo;t see a quick fix to property challenges, and stepping up existing measures may not be enough. The scope for demand-side easing could be much narrower now. Home sales responded only briefly to earlier easing efforts, though the impact of the latest easing in top-tier cities remains to be seen, with Golden Week sales the first test. Tighter control of new home supply and revitalization of idle land parcels, as promised by the Politburo, would only limit new supply. Digesting existing projects on the market will depend on the PBoC&rsquo;s RMB300 billion relending tool for housing buyback, and it&rsquo;s unlikely to have a sizable impact.
What would be a game changer would be large-scale public funds to make housing buybacks really work &mdash; and this approach may be the only way to quickly restore the supply-demand balance. The Politburo has ample reason to step in directly and provide interest subsidies and/or down payments, with the money coming from government bond issuance or from development banks. In any case, the buyback initiative can&rsquo;t work without the support of public funds.
<ol start="7">
<li>How much does equity-market support matter?</li>
</ol>
We agree with Beijing&rsquo;s assessment that the stock market is more of a solution than a problem of the Chinese economy. If successful, efforts to boost property and capital markets could reverse the negative wealth effect for middle-class families seen over the last few years. We doubt the PBoC&rsquo;s involvement will extend beyond liquidity support, however, and follow-up actions to aid the economy would matter much more than direct measures to support markets. The success of equity-market support greatly hinges on upcoming fiscal stimulus aimed at fixing China&rsquo;s fundamental economic problems.
<ol start="8">
<li>How to reconcile bank recapitalization and local debt relief in the whole picture?</li>
</ol>
Bank recapitalization is clearly in the pipeline as a semi-fiscal policy, with Bloomberg reporting that the government is considering injecting RMB1 trillion in capital into the Big Six banks by issuing special CGBs. Such a move would help keep systemic risk concerns at bay and make room for countercyclical policies; the capital replenishment could provide a boost to the banking system and make room for monetary easing, given net interest margin concerns. Local government debt relief is also a realistic option.
<ol start="9">
<li>Are you ready to raise GDP and inflation forecasts?</li>
</ol>
We&rsquo;re holding on until we see if policymakers walk the talk. The fiscal mix will do a lot to decide the growth impact, and weak confidence could lessen the impact of consumer stimulus. Chinese households&rsquo; saving rate is as high as 36%, and a rebound in confidence could lead those households to tap into their deposits for spending, fueling a broad-based rebound instead of the current broad-based slowdown. We&rsquo;re relatively comfortable with the growth impact from public investments, and think bank recapitalization and local debt relief&rsquo;s direct impact on growth could be limited.
We maintain our 2024 GDP forecast at 4.7% year over year, with the picture for 2025 still rather uncertain. And escaping deflation may not be quick or easy. The CPI reflation outlook hinges on domestic demand and particularly on consumer confidence; for industrial deflation, current overcapacity could prove a stubborn problem, one that&rsquo;s only been addressed through minor efforts so far. We think the key is to incentivize local officials &mdash; it takes good implementation for good policies to have good impact, and local officials may be shouldering all the responsibilities. For example, stimulating the local economy through borrowing helps address the growth target, but debt concerns could surface later, and local officials are held accountable for local debt.
<ol start="10">
<li>What should we watch going forward?</li>
</ol>
The next few weeks are a crucial window for both policy announcements and implementation. The window for delivering policy on property could be very short, as we see it. Potential measures include relaxing purchase restrictions in other top-tier cities, further credit support for developers and any further adjustments for government buybacks. On the fiscal front, implementation room is still available within the approved 2024 budget, and there&rsquo;s a potential budget revision at month&rsquo;s end, with earlier hints at this direction possible.
Any discussion in the last two months of the year could be more about 2025, which brings a long list of open questions, from who will win the U.S. elections to the 15th Five-Year Plan and the 2035 target. We would look for more policy clues from December&rsquo;s Central Economic Work Conference.

Our new report, China Economics: Ten Questions on Stimulus, is available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3LGUf" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

Investors had a lot of questions for us about China&rsquo;s stimulus package. Why should we think this is different from previous stimulus efforts? What will it take to stabilize the property sector? And how much does equity-market support matter? We offer answers to investors&rsquo; top 10 questions in this note.

China Economics: Ten Stimulus Questions

Our new report, Global Economic Outlook &amp; Strategy: The Global Economy &mdash; Still Resilient, also includes country-by-country discussions and forecasts. It&rsquo;s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3OFQC" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

Despite an eventful past month, our overarching narrative remains broadly intact: Global growth continues at a solid but slightly below-trend pace. Central banks have scope to slowly unwind tight monetary policies, which should support global growth in the year ahead, though risks remain.

The Global Economy Remains Resilient

Citi’s Research team leverages expertise across all asset classes and regions to provide our clients with independent analysis of financial markets, economies, industries and companies.

Europe in general, and Germany in particular, plan significant increases in defense spending at a time when U.S. growth has been softening. That combination is putting U.S. exceptionalism at risk, as we explore in a new Citi Research note from Adam Pickett and his Global Macro Strategy team.

Auf Wiedersehen, U.S. Exceptionalism

Analysis, commentary and forecasts from our global and regional economists.&nbsp;

Economics

English Survey

Spanish Survey

Ernesto Revilla

Julio Cesar Ruiz 

Felipe Juncal 

Download the full survey results here in <a href="https://ir.citi.com/J-hdYXqCk-xI2PQQiSmQOA8HV6q-aICIYvJhRmlMxz-qi-FhDrKvqS39RtfD7sLOj9Rd-4R24YZASiAR7gH3auJradvj378hiMlyqZ60RpBJPQPuP-G-5folxfCNWlgOsHu_I1puaUo%3D" target="_blank">English</a> and <a href="https://ir.citi.com/6tRAD9rWvI48jVA-ou70eVppJ8bJiyKiOc9xi80Ukefv6ztQ-VrkLuoUVqqD7e_Z2kPKwP3O8uRk7L0j2COV20dILjHny3muJU7cbVTz02s1lBvmVwlPCSkdMyAd5Z7SlE6KHvevRtg%3D" target="_blank">Spanish</a>.&nbsp;

All respondents project a rate cut in December’s monetary policy decision. The consensus estimates that Banxico's next move to the interest rate will be a 25-bp decrease in December. Of the 34 participants, 31 project a 25-bp reduction, while 3 respondents, a 50-bp rate cut. The median of the estimates for the interest rate by Y/E 2024 remained at 10.00%. For the end of 2025, the median of expectations was also unchanged at 8.00%, with a range from 7.50% to 9.00%.&nbsp;For the full month of November, the consensus forecasts for headline and core inflation are at 0.49% and 0.07% MoM, respectively. For the month of December, analysts’ consensus sees headline and core inflation at 0.50% MoM and 0.41%, respectively. As a result, 2024 annual headline and core inflation would stand at 4.38% (from 4.45% in the previous survey) and 3.59% (from 3.75%), respectively.&nbsp;For Y/E 2025, inflation expectations remained stable compared to the previous survey. The median projection of annual headline inflation for Y/E 2025 stood at 3.83%, compared to the previous survey of 3.80%, while core inflation stood at 3.70% (unchanged compared to the previous survey). The median estimate for the average annual inflation rate in 2026-2030 was unchanged at 3.70%.&nbsp;Exchange rate estimate for 2024 was adjusted upwards. The median projection for the exchange rate by Y/E 2024 was revised upwards to 20.23 USDMXN from 20.00 in the previous survey. For Y/E 2025, the consensus estimate remained unchanged at 20.50, relative to the previous survey.&nbsp;Slightly better GDP growth projections for 2024 and 2025. For 2024, the consensus anticipates GDP growth at 1.6% (previously at 1.5%), while for next year it is estimated at 1.2% (compared to the previous survey of 1.0%).&nbsp;This survey contains thematic content and is not investment research, nor does it constitute financial, economic, legal, tax or accounting advice. This survey is provided for information purposes only and does not constitute an offer or solicitation to purchase or sell any financial instruments. The contents of this survey are not based on your individual circumstances and should not be relied upon as an assessment of suitability for you of a particular product, security, or transaction. The information in this survey is based on generally available information and, although obtained from sources believed by Citi to be reliable, its accuracy and completeness are not guaranteed. Past performance is not a guarantee or indication of future results. © 2024 Citigroup Global Markets Inc. Member SIPC. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.

Existing Citi Research clients can also access the survey <a href="https://www.citivelocity.com/t/eppublic/3ScqL">here</a>.<o:p></o:p>

Mexico Economics

Citi Mexico Expectations Survey (Dec 5, 2024)

<ul><li>The global economy has shown dogged resilience over the last two years, but how the U.S. economy performs is our 2025 forecast’s big wild card. </li><li>Our “baseline Trump scenario” sees Trump 2.0 policies as a complex mix, with tariffs a major source of uncertainty. </li><li>Despite such uncertainties, we think investors who stay riveted on economic fundamentals will reap benefits.</li></ul>

<h2>Two storylines for 2025’s global narrative&nbsp;</h2>In our new Global Economic Outlook &amp; Strategy report, a team led by Chief Economist Nathan Sheets looks at two storylines that have to be married together to formulate our global narrative for 2025.&nbsp;The first storyline is the dogged resilience shown by the global economy over the past two years: Despite surging inflation and the most aggressive central-bank hiking cycle in a generation, growth has continued at a solid, near-trend pace.&nbsp;The second storyline involves the economic implications of Trump’s election to a second White House term. We examine a “Baseline Trump Scenario” that includes tariff hikes (especially on China), an extension of the 2017 Trump tax cuts, sharp curbs on immigration, broad deregulation of Biden-era requirements, and a potential boost to animal spirits — emotional factors that influence consumer and investor confidence. Our conclusion is that Trump’s policies are a complicated mix of favorable and adverse supply and demand shocks, with the question of how Trump will deploy tariffs a major source of uncertainty and downside risk.&nbsp;But while the uncertainties are significant, we’re not inclined to appreciably modify our pre-Trump baseline. In our view, investors who stay riveted on the economy’s fundamentals will reap benefits.&nbsp;<h2>What’s driven the global economy’s resilience?&nbsp;</h2>The global economy has kept moving forward at a slightly below-trend pace for two years running, defying our expectations for a marked slowdown. We’ve expected growth to retreat to below 2%, but instead we’ve continued to see a rate of expansion of roughly 2.75%. U.S. growth in 2023 and 2024 exceeded our expectations by more than two percentage points (ppt) and we’ve also been surprised on the upside by growth in the euro area, where performance has been soft but not as soft as expected.&nbsp;A key driver of this resilience has been the services sectors, where purchasing managers’ indexes (PMIs) have remained firmly in expansionary territory, while the manufacturing PMI has languished near the breakpoint between expansion and contraction. Because services production is relatively labor-intensive, this strength has supported a virtuous dynamic of tight labor markets and solid household incomes, which has driven additional spending.&nbsp;This strength was originally associated with post-COVID “revenge” spending, but it’s proved surprisingly entrenched, as has the corresponding weakness in goods spending. We continue to interpret the strength of services and the weakness of manufacturing as a transitional feature of the post-pandemic adjustment and not a deeper shift in the structure of consumer preferences. But the persistence of strong services demand gives us pause, and we’ll be watching this issue closely in 2025. Inflation, meanwhile, has continued to gradually come down as the lingering displacements from the pandemic have abated.&nbsp;<h2>Where are we headed in 2025?&nbsp;</h2>Turning to our outlook for the coming year, we look for the global economy to expand at a 2.7% pace, exactly matching this year’s performance. The big wild card in our forecast is the performance of the U.S. economy. Our U.S. economics team continues to pencil in a marked dip in U.S. growth during coming quarters; as a rationale for this call, they point to signs of loosening in the U.S. labor market. Other challenges for the U.S. economy include the still-soft housing market and the struggling manufacturing sector.

The big wild card in our forecast is the performance of the U.S. economy.

Our concern is that we’ve been projecting U.S. recessions for the past two years, only to have such expectations denied by the economy’s momentum. The U.S. consumer has continued to show resilience, bolstered by strong balance sheets and favorable wage developments. This has been particularly true for upper-income consumers, who account for the bulk of consumer spending. In addition, the corporate sector has remained strong, the Fed is now on an easing trajectory, and the economy has shown few signs of slowing.With this in mind, we look at our baseline forecast for a dip in U.S. growth, alongside an alternative scenario in which U.S. growth remains a bit above 2%, a notch weaker than in 2024. In the baseline scenario, global growth steps down to just 2.2%. In the alternative, U.S. growth is stronger and growth also picks up in Canada, Mexico, China and the euro area. This yields global growth of 2.6%, similar to the last two years’ performance.<figure class="image"><img style="aspect-ratio:900/426;" src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/67596948aed90861a829bacf.png" alt="US Consumption Shares by income pie chart and real GDP growth table by region. " width="900" height="426"></figure>&nbsp;Having underestimated the global economy’s strength in each of the past two years, we’re loath to make the same mistake again, and we see few signals that a meaningful slowdown is in train. As such, we think the most likely outcome is a performance broadly in line with the last two years.<h2>The outlook for central banks</h2>In the environment we’ve sketched out, we see scope for further easing of monetary policy across a broad set of countries, though we also note that the Fed and other central banks will need to stay light on their feet given the evolving policies of the Trump administration. In this respect, the Fed looks to be front and center. It’s now cut rates by a total of 75 basis points, but policy remains restrictive, and the December meeting is shaping up as a close call. Still, the broader narrative is the Fed is likely to remain on an easing trajectory in 2025, with the details dependent on the strength of the economy, progress returning inflation to target, and the Fed’s evolving judgments about the level of the neutral rate, where monetary policy is neither stimulating nor restricting economic growth.&nbsp;For the European Central Bank (ECB), the case for aggressive easing is compelling: The euro-area economy is likely to continue growing at a below-trend pace, while inflation pressures look to be receding. We see easing paths for not only the ECB but also the Bank of England, the Bank of Canada and Sweden’s Riksbank. We think the Bank of Japan (BoJ) must avoid hiking prematurely and undercutting still-fledgling positive economic developments, though we note the amplified volatility shown by the yen in recent months has at times impacted the BoJ’s maneuvering room. Meanwhile, monetary policy among emerging-markets central banks is likely to be a mixed bag.<h2>Our “baseline Trump scenario”</h2>Trump’s election has stoked uncertainties about the economic outlook. In our view, an important framing thought is that we’ve already seen Trump in the White House. During his earlier term, he was assertive in his rhetoric and policies but ultimately avoided actions that were seriously disruptive, and the economy and the markets generally performed well during his tenure.With this in mind, we consider a Baseline Trump Scenario composed of the following elements:<o:p></o:p><ul style="list-style-type:disc;"><li>Tariff hikes: Trump’s initial tariffs are largely directed at Mexico, but he pivots to bilateral negotiations with other countries, including Mexico, Canada, the EU and Japan. As a rule of thumb, we assume the U.S. effective tariff rate will rise by roughly 5 ppt in 2025, including 10-15 ppt tariffs on China, with foreign retaliation on U.S. products roughly half as large. (It’s hard for other countries to retaliate one-for-one because the U.S.’s imports are significantly larger than its exports.) The net macro effects are upward pressures on U.S. prices and downward pressures on real incomes in both the U.S. and the rest of the world.<o:p></o:p></li><li>Tax cuts: Trump jams through a reconciliation bill in his first six months that extends his 2017 tax cuts. Other tax cuts are possible, including lower corporate taxes and abolishing taxes on tips, but we assume these measures will be funded by increased revenue from tariffs and possible cost-cutting. The net macro effects are likely limited, though we remain concerned about high U.S. government debt.<o:p></o:p></li><li>Tighter immigration policies: Trump will further clamp down on security at the U.S. southern border, diminishing the inflow of undocumented workers, but legal immigration should continue. These actions will cause the labor market to gradually tighten, but it should remain well supplied for the next couple of years. Trump will accelerate the deportation of some who have committed felonies, but the scale of these deportations won’t be sufficient to affect overall labor-market conditions. The net macro effects will be likely modest, at least for the first few years.<o:p></o:p></li><li>Deregulation: Trump will sign an early executive order reversing broad swathes of the Biden administration’s regulations in areas including energy, finance, employment practices and consumer protection. The macroeconomic effects of deregulation are notoriously difficult to assess, but it’s reasonable to expect that cumulatively such policies could boost growth and restrain inflation in the near term. The more challenging question involves these policies’ longer-term effects.<o:p></o:p></li><li>Animal spirits: This is a wild card. Various measures of U.S. economic sentiment and market confidence have risen since the election, which likely reflects expectations for lighter regulation and reduced tax burdens. While there are deeper questions, the net macro effects are likely a positive demand shock for the U.S. economy, though such sentiment can be notoriously transitory.</li></ul><figure class="image"><img style="aspect-ratio:905/669;" src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/6759683faed90861a829bacb.png" alt="Baseline Scenario for 2025 chart" width="905" height="669"></figure>&nbsp;Taken together, the policies in our Trump Baseline Scenario represented a complicated mix of favorable and adverse supply and demand shocks. How they’ll net out will ultimately depend on their precise relative magnitudes and a broad range of real-time conditions.<o:p></o:p>That said, we do have a few thoughts.<o:p></o:p>For U.S. real GDP, the effects strike us as perhaps balancing out, leaving our pre-Trump views essentially intact. For U.S. prices, the effects look to skew toward some moderate upward pressures. The clear implication is that over the coming year, the Fed will need to remain alert for signs of emergent inflation pressures, and monetary policy may need to be a bit tighter.<o:p></o:p>For the rest of the world, we see several likely implications. U.S. tariffs are a stagflationary shock for the U.S. but an adverse demand shock for countries facing tariffs, meaning growth abroad is likely to be somewhat weaker than otherwise. While animal spirits have skewed positive in the U.S. post-election, they’ve clearly skewed negative abroad. Both of these effects should, in turn, provide scope for foreign central banks to be somewhat more stimulative than they would be otherwise. We also think many of these effects are likely to make the dollar somewhat stronger.<o:p></o:p>The most pronounced risks to our Trump Baseline Scenario involve tariff policies. We’re inclined to view Trump’s campaign remarks as a prelude to negotiation, but it’s clear that more aggressive actions on tariffs, likely in tandem with even larger tariffs on China, would amplify the stagflationary effects for the U.S. economy, likely causing an upward hit to prices and downward pressure on demand.<o:p></o:p>Another tariff-related risk is that Trump seeks to follow through with a 60% levy on U.S. imports from China. Such tariffs would immediately disrupt supply chains that use inputs from China, hitting China’s economy hard but being symmetrically disruptive for the U.S.<o:p></o:p>The uncertainties are significant, but walking through the specifics of what seems likely, we’re not inclined to appreciably shift our pre-Trump baseline for the U.S., with the exception of highlighting the need for extra vigilance from the Fed.<o:p></o:p><o:p></o:p>

Our new report, Global Economic Outlook &amp; Strategy: The Resilient Global Economy &amp; Trump 2.0, also includes region-by-region economic analyses. It’s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3Sc8f">here</a>.<o:p></o:p>

The global economy has shown dogged resilience over the last two years, but how the U.S. economy performs is our 2025 forecast’s big wild card.&nbsp;

The Resilient Global Economy & Trump 2.0

Download the full survey results here in <a href="https://ir.citi.com/mn60jqaGx7AoNgEytCXauZLg548On1vL5CqL_TFJDZI4o3YCTURP0f7p4BHsJdBUHdFs1BtbftMFRcANC-UozB4Gb3CGA5wDgsVgXm4K9SJSrEJT2V9Whvj8rCKHUcAS" target="_blank">English</a> and <a href="https://ir.citi.com/Mns6tEAYhbI4Qg5q4MHmgL3rnE2jbuZ_AA5vFkh3NgzJUqkqdyFkoQIG1847YiiVRkZra4zZ7H349Gs1mW3FaTagbqOwPRqksnhrQ-9GPh9zMuefKY4eJixU60x4mL5m" target="_blank">Spanish</a>.&nbsp;

All respondents project a rate cut in December’s monetary policy decision. The consensus estimates that Banxico’s next move to the interest rate will be a 25-bp decrease in December. Of the 31 participants, 25 project a 25-bp reduction, while 6 respondents, a 50-bp rate cut. The median of the estimates for the interest rate by Y/E 2024 remained at 10.00%. For the end of 2025, the median of expectations increased to 8.50% (previously at 8.00%), with a range from 7.50% to 9.00%.<o:p></o:p>For the first half of December, the consensus forecasts for headline and core inflation are at 0.39% and 0.47% bw/bw, respectively.&nbsp; For the full month of December, analysts’ consensus sees headline and core inflation at 0.50% MoM and 0.45%, respectively. As a result, 2024 annual headline and core inflation would stand at 4.33% (from 4.38% in the previous survey) and 3.60% (practically unchanged from the previous survey), respectively.<o:p></o:p>For Y/E 2025, the median headline inflation expectation increased slightly. The median projection of annual headline inflation for Y/E 2025 increased to 3.90% (previously at 3.83%), while core inflation stood at 3.70% (unchanged compared to the previous survey). The median estimate for the average annual inflation rate in 2026-2030 was unchanged at 3.70%.<o:p></o:p>Exchange rate median estimate for 2025 was adjusted upwards. The median projection for the exchange rate by Y/E 2024 stood at 20.25 USDMXN (practically unchanged from the previous survey). For Y/E 2025, the consensus estimate increased to 21.00 (from 20.50 in the previous survey).<o:p></o:p>Stable GDP growth projections for 2024 and 2025. For 2024 and 2025, the consensus anticipates GDP growth at 1.6% and 1.2%, respectively, both unchanged compared to the previous survey.<o:p></o:p>This survey contains thematic content and is not investment research, nor does it constitute financial, economic, legal, tax or accounting advice. This survey is provided for information purposes only and does not constitute an offer or solicitation to purchase or sell any financial instruments. The contents of this survey are not based on your individual circumstances and should not be relied upon as an assessment of suitability for you of a particular product, security, or transaction. The information in this survey is based on generally available information and, although obtained from sources believed by Citi to be reliable, its accuracy and completeness are not guaranteed. Past performance is not a guarantee or indication of future results. © 2024 Citigroup Global Markets Inc. Member SIPC. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.<o:p></o:p>

Existing Citi Research clients can also access the survey <a href="https://www.citivelocity.com/t/eppublic/3Towo">here</a>.<o:p></o:p>

Citi Mexico Expectations Survey (Dec 18, 2024)

<ul><li>Our baseline forecast calls for the global economy’s resilience to continue, with global growth running at 2.6% in 2025.</li><li>Trump 2.0 policies are a factor to consider, with wide uncertainties around the administration’s agenda. </li><li>We see several factors fueling the recent rise in global long-term interest rates.</li></ul>

In a new Citi Research report, a team led by Chief Economist Nathan Sheets finds our basic narrative for the global economy remains intact, with global growth continuing at a solid — though not spectacular — pace. It’s a narrative we expect to continue in 2025, though the upward march in global long-term interest rates and uncertainty about the Trump administration’s policies are factors to watch.&nbsp;2024 growth has come in at 2.7%, matching 2023’s pace and just below our estimated trend. In each of the past two years, we’ve expected slowing, but it simply hasn’t materialized: Global demand has endured the central-bank hiking cycle remarkably well, while strength in global services spending has supported labor markets and wage growth and has ultimately fed back into consumer spending.&nbsp;The U.S. economy has kept powering ahead, outperforming most other developed markets. But strong performances have also come from the southern part of the euro area, especially Spain and Greece, and emerging-markets Asian countries such as India, Indonesia and Singapore have also recorded favorable growth. Strong economic expansion has continued in Brazil, though that’s triggered renewed inflation pressures.&nbsp;Our baseline forecast is for this global story to broadly persist in 2025, with global growth running at 2.6%. The U.S. economy shows few signs of meaningful slowing, growth in Japan is expected to bounce up to 1.25%, and the euro area should record another 1% expansion.&nbsp;Emerging-markets growth looks a little softer than last year, largely reflecting our projection for China. We see Chinese growth retreating from 5% in 2024 to 4.2% this year, as expected U.S. tariffs create headwinds. But we see upside risks from fiscal policy as authorities respond and we await the early-March announcement of China’s 2025 growth target, which could be set as high as 5%.&nbsp;We also see global inflation moving in line with our narratives. Headline inflation has now returned to near its pre-pandemic pace thanks to a sharp drive in food and energy prices, with core inflation also declining significantly. Core services inflation has descended more gradually, but we expect it will continue to move down. The fact that longer-term inflation expectations are generally well anchored near central banks’ targets reinforces our confidence.&nbsp;Global labor markets, however, remain tight, with unemployment rates having risen relative to their post-pandemic troughs, but generally by 1 percentage point or less. The fact that labor markets have remained tight, and the implications for wage growth and services inflation, remain the principal constraints on how quickly central banks cut rates.&nbsp;<h3>“In each of the past two years, we’ve expected slowing, but it simply hasn’t materialized.”</h3>&nbsp;In considering risks to the global economy, we’re watching two things closely. The first is Trump’s economic policies; the second is the upward streak in long-term rates in the U.S. and other countries that we’ve seen over the past few months. Either could potentially slow or even derail the global expansion’s vibrance.<o:p></o:p><h5>The environment for sovereign yields<o:p></o:p></h5>We considered the uncertainties around Trump 2.0 policies and our “baseline Trump scenario” in December, with a summary of our thinking available <a href="https://www.citigroup.com/global/insights/the-resilient-global-economy-and-trump-2-0">here</a>. A new consideration is the rise in long-term interest rates; since the Fed’s September meeting, 10-year sovereign yields have increased roughly 100 basis points (bp) in the U.S. and the UK and 40 bp in Germany, France and Japan.<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/678fca9db4790379f269a615.png" width="975" height="432">&nbsp;Strikingly, though, central banks have continued to cut rates. The Fed has done so by 100 bp, the European Central Bank by 75 bp, and the Bank of England by 25 bp. The divergence between the short end and the long end of global rates curves is a striking feature of the current economic and financial environment, one we see as largely (though not entirely) a reflection of some important U.S. developments.<o:p></o:p>The first development is the continuing strength of the U.S. economy. U.S. real GDP growth accelerated to an above-trend 3% pace during last year’s second and third quarters, and many estimates see fourth-quarter growth running at 2% or higher. A sustained loosening of the labor market saw the unemployment rise high enough to trigger the Sahm rule, which states that a recession is under way when the three-month moving average of the U.S. unemployment rate rises by 0.5 percentage point or more from its 12-month low. Conditions have arguably now stabilized, with the unemployment rate hovering at just slightly above 4% over the past six months.<o:p></o:p>The second development is that with the U.S. economy showing momentum, the perceived need for Fed rate cuts to “shore up the economy” has diminished. Expectations for Fed policy have shifted appreciably of late; markets now see the 2025 year-end federal funds rate at 3.9%, suggesting only one or two rate cuts this year. Expectations for other developed-markets central banks have also shifted, though not nearly as much.<o:p></o:p>Third, some market participants clearly fear Trump 2.0 policies will be more aggressive and more inflationary than we envision. We note that the first Trump administration often saw a wide divergence between the president’s political statements, his policy proposals and policies that were ultimately implemented. That said, we acknowledge the outsized uncertainties around Trump’s agenda and the corresponding risks.<o:p></o:p>Fourth, the rise in global long-term rates clearly reflects market unease with the fiscal trajectory in several major economies. This is particularly true of the U.S. and the UK, which have seen the sharpest rise in rates since September. But it’s also probably at work in the ongoing gap between French and German yields, given France’s fiscal challenges.<o:p></o:p>The ultimate question is what this run-up means for the economic outlook. We think some of the bite of higher long-term rates should be offset by central banks’ rate cuts. And to the extent that higher rates reflect stronger economic performance, they’re a natural equilibration mechanism to guard against overheating.<o:p></o:p>Finally, we note that such run-ups don’t always persist. In the fall of 2023, U.S. 10-year yields touched 5%, but fell to 3.9% by year’s end. If recent rate moves prove more durable, they will likely restrain the pace of growth in economies world-wide. It’s too early to consider cutting our 2.6% global growth forecast for 2025, but we do increasingly wonder when (or if) the global economy will achieve growth above its 3% historical trend.<o:p></o:p><o:p></o:p><o:p></o:p>

Our new report, Global Economic Outlook &amp; Strategy: Resilient Global Growth, Higher Long-Term Rates, &amp; Trump 2.0, also includes country-by-country discussions. The report is available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3Vtkd">here</a>.<o:p></o:p>

In a new Citi Research report, a team led by Chief Economist Nathan Sheets finds our basic narrative for the global economy remains intact, with global growth continuing at a solid — though not spectacular — pace.

Resilient Global Growth, Higher Long-Term Rates, & Trump 2.0

<ul><li>Trump 2.0 has brought speedier and more ambitious policy initiatives, more confrontational foreign policy and less targeted use of trade tariffs. </li><li>Targeted trade tariffs appear to be serving a number of different administration goals. </li><li>The resulting environment is one of heightened trade uncertainties that could create a drag on economic growth.</li></ul>

In a new Citi Research note, a team led by Johanna Chua looks at what we’ve seen from the opening weeks of the second Trump administration through an emerging-markets lens: greater uncertainty, bolder trade tariffs, a more assertive U.S. foreign policy and signs China may want to negotiate. We then look at what’s next, assessing the impact of targeted tariffs on semiconductors, pharmaceuticals, steel and aluminum and assessing emerging-market vulnerabilities from the forthcoming America First Trade Policy review.<h4>Four Lessons From the Opening Weeks</h4>We draw four lessons from Trump’s opening weeks. The first is that policy initiatives are emerging with greater density and ambition; the speed with which executive orders have emerged is unprecedented in American history, and the use of the International Economic Emergency Powers Act to override existing legislation and/or agreements makes U.S. policy hard to predict.Second, Trump 2.0 has seen bolder and more confrontational foreign-policy stances, including with traditional allies. For instance, Canada and Mexico received a heavier opening tariff blow (25%) than China (10%). We see the Trump administration as willing to deploy larger-scale tariff threats, such as in the case of Colombia, in part because of its expectations that concessions will be quickly offered. That’s a riskier approach with China, which arguably has more economic and policy leverage and is less likely to be pressured into quick concessions, in our view.The Trump administration appears willing to pursue a more assertive foreign-policy approach to secure U.S. geopolitical and commercial interests, as high-profile disputes related to Greenland and the Panama Canal show. China’s rising trade and investment influence in Central and Latin America could face constraints, with Mexico, Central America and Colombia likely to face the strongest U.S. pressure.We don’t see the freezing of U.S. foreign aid as having a significant impact in emerging markets. It’s possible U.S. foreign assistance will increasingly be linked to strategic or other concessions, with Ukraine standing out as relatively vulnerable: The Trump administration is reportedly seeking rare-earth resources from Ukraine in exchange for military aid.An important issue for emerging markets would be if the Trump administration looks to withdraw U.S. support for multilateral institutions such as the International Monetary Fund and the World Bank, which are critical lifelines for many emerging-markets countries with fragile finances. No such actions have been mentioned, but the Project 2025 framework includes a proposal to do just that.Third, China policymakers appear to prefer patience and negotiations, with investors seemingly sanguine about U.S. tariffs against China for now. China’s response to across-the-board 10% tariffs has been to use a broader set of policy tools instead of tariff-to-tariff retaliation, a response we think is meant to demonstrate its capabilities. These tools have been deployed only sparingly so far, though their use could be scaled up.The market reaction to the U.S. tariffs was relatively muted following the Lunar New Year holidays. It’s not clear if China policymakers would prefer to negotiate issue by issue (such as offering concessions on fentanyl in exchange for a tariff reprieve) or seek a broader deal taking multiple issues into account.Fourth and finally, the early use of tariffs seems less targeted than in the past. Despite reports of a flurry of lobbying, only Canadian energy exports secured a special carveout (a 10% tariff vs. 25%). While the Mexico and Canada tariffs have been suspended for a month, uncertainties may linger about them resurfacing. We’ve estimated GDP growth hits of 0.3 percentage points (ppts) in China and 0.7 ppts in Mexico if tariffs are maintained, as well as broad spillovers to emerging markets from weaker growth in China. Emerging markets may also be impacted by supply-chain linkages to U.S. imports from China, Mexico and Canada.<h4>Examining targeted tariffs</h4>The Trump administration has proposed tariffs on semiconductors, pharmaceuticals, steel and aluminum. Pursuing broad-based tariffs on exports of semiconductors to the U.S. could impact Malaysia, Taiwan, Costa Rica (if no carve-out emerges), Israel, Vietnam and Thailand. It’s not clear if the Trump administration will be more targeted with chip tariffs; the main motivation appears to be a desire to reshore production for national security reasons, which raises the possibility that the administration may target high-end chip fabrication in Taiwan and Korea and not more commoditized chips and related activities that are more predominant in Malaysia and Costa Rica. Broad tariffs on chips would likely raise costs for U.S. buyers, given capacity constraints and cost inefficiencies of shifting production to the U.S.In the aftermath of DeepSeek’s AI announcements, we also see growing risks that U.S. controls could harden on chips and chip-related supply chains targeting China.<img class="image_resized" style="aspect-ratio:1430/683;width:96.87%;" src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/67adcf0d1eb9297ccbae2724.jpg" alt="cargo ship in a port" width="1430" height="683">We see two major drivers for potential Trump administration tariffs on pharmaceuticals. First, in the wake of the pandemic, the U.S. has become increasingly aware of national-security risks associated with its vulnerabilities to pharma supply chains, an issue that was also of concern to the Biden administration. Second (and likely more important), the Trump administration may seek to scrutinize tax-avoidance strategies of U.S. pharma companies that have been offshoring production/jobs in high-income/low-tax jurisdictions so as to book profits offshore for goods sold in the U.S., with Ireland, Switzerland, Singapore and Belgium identified as offshoring destinations.Motivations for tariffs on steel and aluminum are likely similar to what we saw during the first Trump administration: the view that steel and aluminum are strategically important for U.S. defense and the overall U.S. industrial base, and tariffs can be a form of industrial policy to nurture domestic production. But both metals are inputs to downstream manufacturing, with autos an example, and so could undermine competitiveness. Canada is the largest source of U.S. steel and aluminum imports by far; within emerging markets, Mexico, the United Arab Emirates, Brazil and South Africa are relatively more exposed.(On Feb. 10, after our note’s release, Trump announced 25% tariffs on steel and aluminum imports, which are set to go into effect on March 12.)<h4>Exposures to “America First Trade Policy”</h4>Trump issued a memorandum outlining his “America First Trade Policy,” calling for agency evaluations of U.S. trade policy and reports due in April. We expect China and the European Union (EU) will bear the brunt of scrutiny of goods trade deficits, but Mexico and many parts of East Asia (including Vietnam, Thailand, Japan, Korea, India and Taiwan) likely remain vulnerable as well. While China and the EU are the largest sources of the U.S. trade deficit, we suspect the administration will also look at how this trade gap has evolved. The U.S. trade deficit has grown nearly 52% since before 2017 and the first Trump administration’s earlier tariff actions; with the biggest surges seen for Thailand (+343% since 2017), Canada (+298%) and Vietnam (+222%).India has already taken preemptive steps to avoid being targeted for its significant tariff barriers: Its FY26 budget unveiled measures to lower tariffs, with cuts on key items perceived as key to American interests.With most central banks having lost reserves to defend their currencies on a strong U.S. dollar, we don’t expect the Trump administration’s currency-manipulation review to translate to significant risk of a tariff backlash. But this does demonstrate U.S. sensitivity to significant FX depreciation among surplus countries, predominantly in East Asia.Scrutiny of Chinese trade circumnavigation looms high, and we continue to think that beyond Mexico (where tightened Chinese investment screening is likely), Vietnam and Thailand are the countries most at risk of being targeted. Both have been significant recipients of Chinese foreign direct investment and have seen an above-world-average surge in reliance on Chinese imports in recent years. The Trump administration could target Chinese-owned exporting firms in Vietnam and Thailand; one likely option for those countries is to offer U.S. goods purchase deals, though it’s unlikely they could be meaningful enough to close the trade gap.Looking at all these factors together yields an environment of heightened trade uncertainties that could create a drag on economic growth. Besides China, this raises the risk of damping growth in trade-dependent East Asia emerging-markets economies (Singapore, Malaysia, Taiwan, Vietnam, Korea and Thailand), in Central and Eastern Europe, and in targeted countries close to the U.S. trading orbit, such as Mexico.More domestic-driven emerging markets that are arguably further from Trump administration scrutiny (such as Argentina, Brazil, Egypt, India, Indonesia, the Philippines and Turkey) or smaller countries that can “fly under the radar” appear less exposed to direct impact from the America First Trade Policy.

Our new report, EM Under “America First Trade Policy”: What’s Next, Who’s Exposed?, is available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3Y7wk">here</a>.<o:p></o:p>

In a new Citi Research note, a team led by Johanna Chua looks at what we’ve seen from the opening weeks of the second Trump administration through an emerging-markets lens: greater uncertainty, bolder trade tariffs, a more assertive U.S. foreign policy and signs China may want to negotiate.

Emerging Markets Under “America First Trade Policy”: What’s Next, Who’s Exposed?

<ul><li>China’s markets have rallied this year, with tech names fueling the gains.</li><li>We see a number of potential tailwinds that could sustain and broaden this rally, as well as headwinds that could derail it.</li><li>The tech-driven rally can be seen as a sign that the decade-old “Made in China 2025” plan aimed at evolving China’s economy has borne fruit.</li></ul>

In a new Citi Research report, a team of analysts and economists led by Xiangrong Yu and Pierre Lau look at the economic and equity-market trends supporting China’s market rally, assessing factors that might become tailwinds to sustain and broaden the rally, as well as ones that could become headwinds and derail it.China’s markets started the Chinese New Year with a new rally, lifted by multiple catalysts. Hong Kong’s equity market has outperformed that of the U.S. so far this year, U.S. tariffs have so far turned out milder than expected for China, and the news around DeepSeek and President Xi’s meeting with business leaders were a reminder to markets of China’s capacity for innovation.So far the rally has been driven largely by tech-led sentiment. The Hang Sang Tech Index has gained ~25% since mid-January, with strength in tech helping boost consumer discretionary names. But consumer-staples and real-estate names continue to lag, which wasn’t the case during last September’s rally. Fixed income and commodity markets haven’t shown much appreciation for the tech narrative, and data releases haven’t pointed to significant changes in economic fundamentals.<h4>Potential tailwinds…</h4>What would it take to sustain and broaden this rally? From an economic perspective, we see four possible catalysts.The first is property-market stabilization. China’s property downturn has now entered its fifth year and remains a major overhang on the economy. But we could be closer to stabilization than at any time in the downturn: Property sales and prices have turned out better than expected, and there are signs of support from policymakers. Our baseline remains that stabilization will arrive in the second half of this year or early 2026, as we think lower-tier cities still need assistance to make progress. Fiscal policy strikes us as essential to that progress.A second potential catalyst is a rebound in consumer confidence. Both wealth and income matter to helping consumer confidence escape the trough it’s been in for the last two and a half years. A wealth effect from stable property prices and equity markets could help, as could cash support through efforts such as this year’s pay hike for civil servants and expanded trade-in programs. If consumer confidence stops deteriorating and households start to tap into their excess deposits, we could see a broad-based improvement in macro indicators.Supply-side reform 2.0 refers to a potential second round of policies aimed at improving production by addressing imbalances on the supply side of the economy, notably excess capacity in industries. Such a program could be a catalyst, with corporate profitability concerns triggering such efforts. Industrial utilization hasn’t dropped to the levels seen in 2015–2016, when the last round of supply-side reform was instituted, and the overall overcapacity issue may be less severe. But China’s Producer Price Index has been negative for 28 months, with no sign of a decisive pickup. Fiscal policy and revenue are also under pressure, making a more plausible case for a new round of supply-side reform.&nbsp;<figure class="image image_resized image-style-align-center" style="border-radius:10px;display:flex;overflow:hidden;width:fit-content;"><img style="aspect-ratio:900/600;" src="https://apps.citi.net/rcs/citigpa/storage/public/China_US_Containers_Research.jpg" width="900" height="600"></figure>&nbsp;Finally, a catalyst could come from a U.S.–China trade deal. So far, U.S. tariffs on Chinese goods have come in broader than expected but also milder than expected, with China’s responses measured. We also see differences between the first Trump administration and the second in their dealings with China. The U.S. is targeting other countries besides China with its America First Trade Policy and reciprocal tariffs. China’s exports to the U.S. as a percentage of its total exports have dropped to 14.7% in 2024 from 19.0% in 2017; even with additional U.S. tariffs, we think the direct impact on China’s economy could be smaller scale. China’s dominant share of global trade makes implementation of tariffs challenging. And U.S. inflation worries could be more pronounced than they were in 2018–2019.<h4>…and possible headwinds</h4>So what could derail China’s market rally?U.S.–China trade disputes could escalate, a risk we think remains material. There are several potential pathways for escalation, from reciprocal tariffs to the forthcoming review of U.S. trade policy.&nbsp;We also note that almost every recent market bounce has been followed by fiscal-policy hopes and then disappointment. A number of factors could lead to policies arriving later and smaller than expected. 2024’s 5% GDP growth, a solid start to 2025 growth, tech breakthroughs and trade disputes so far proving milder than expected could also drive policy complacency. Monetary policy has already moved into wait-and-see mode, and we don’t expect cuts until the second quarter. We see March as the real test for the economy and markets, with the 14th National People’s Congress (NPC) beginning March 5th. Our expectations for the NPC are for a fiscal expansion of RMB2.5 trillion, with trade-in subsidies doubling to RMB300 billion in 2025. On the economic front, we expect mid-March data to show a solid start, with potential upside from front-loading of exports. But a broad-based macro recovery marked by reflation may not yet be imminent. &nbsp;<h4>“Made in China 2025” bears fruit</h4>China stocks seeing the biggest share-price gains so far this year are ones with investment themes related to robotics, electric-vehicle capex, edge AI for smartphones and PCs, as well as DeepSeek-related plays. Investors have shown more risk appetite for tech names, and the valuation of Chinese tech companies have been inexpensive compared with U.S. peers. The Hang Seng Internet &amp; Information Technology Index has risen 27% to date and 37% from its January trough, boosted by AI technology breakthroughs.&nbsp;We also note that seeds planted in the “Made in China 2025” plan are bearing fruit. “Made in China 2025” is a national industrial-policy and strategic plan originally advocated in May 2015 to deepen development of China’s manufacturing industries. Its goal is to evolve China’s economy from producing primarily low-tech products that leverage inexpensive labor and raw materials to a more tech-intensive manufacturing base that produces higher-value-added goods. While the plan has seen less emphasis since 2018, recent press accounts have suggested it’s largely succeeded, with China achieving a leadership position in several key technologies, a signal of its increasing influence in industries critical to future economic growth.

Our new report, Bearing Fruits From “Made in China in 2025”; Chase the Laggards, also includes further suggested strategies for investors. It’s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3aJIH" target="_blank">here.</a>

In a new Citi Research report, a team of analysts and economists led by Xiangrong Yu and Pierre Lau look at the economic and equity-market trends supporting China’s market rally, assessing factors that might become tailwinds to sustain and broaden the rally, as well as ones that could become headwinds and derail it.

Bearing Fruits From “Made in China in 2025”

<ul><li>Europe’s plan for joint defense spending and further softening of fiscal rules is a big moment.</li><li>U.S. exceptionalism has also been challenged by weaker U.S. growth, a trend that may have room to run.</li><li>The amount of overall stimulus for Europe may prove exaggerated, given that spending is likely to be slow.</li></ul>

Europe in general, and Germany in particular, plan significant increases in defense spending at a time when U.S. growth has been softening. That combination is putting U.S. exceptionalism at risk, as we explore in a new Citi Research note from Adam Pickett and his Global Macro Strategy team.We explore this shift by considering multiple key points.For Europe, joint defense spending and further softening of fiscal rules is a big moment. EU Commission President Ursula von der Leyen has announced a EUR800 billion package with three parts. The first is the EUR150 billion ReArm Europe Fund providing joint borrowing for defense spending. The second is the activation of the escape clause in the Stability &amp; Growth Pact, which creates fiscal space of 1.5% of GDP that EU member states can use for defense spending. The third is allowing cohesion program funds — ordinarily earmarked for reducing economic disparities between member states and promoting sustainable growth — to be diverted to defense-related investments.German defense spending is ramping up more aggressively than we’d expected. Going into the German election, our expectation was for a EUR100 billion defense fund to be drawn on over three years, and for a loosening of the debt brake from 0.35% to 1% in 2028. This now looks much too conservative. German policymakers are discussing EUR500 billion for defense (partly accounted for in the European number above) and a vote is expected relatively quickly.Germany’s infrastructure spending plans are also aggressive. Coalition negotiations between the Christian Democratic Union (CDU) and the Social Democratic Party (SPD) include an infrastructure fund valued at EUR400 billion to EUR500 billion. Together, the two German funds are around 20% of German GDP. This fiscal U-turn is even more surprising as there was no clear external shock to have changed the mindset of the CDU’s fiscally conservative policymakers. The infrastructure fund will be voted on by Germany’s new parliament; it’s not clear whether the country’s debt brake will be changed as well, and in theory the two special funds may mean that it doesn’t have to be.Despite the above, the overall stimulus is exaggerated as spending is likely to be slow. We note that European policymakers have a clear incentive to demonstrate to both Presidents Trump and Putin that they’re serious about defense. This suggests actual spending may fall short of the lofty numbers discussed above, and it’s unclear over how many years the proposed spending would be spread. It seems unlikely to be spread out for more than 10 years, suggesting that Germany’s spending might grow an extra 2% of GDP. Isolating public investment, Germany’s single-largest ramp-up was around 1% of GDP following the 1990 reunification, with the 2020 jump in COVID spending more like 0.5%. It’s likely difficult to ramp up infrastructure and defense spending much more quickly than that.The majority of European defense spending is going to U.S. contractors, though less so over time. Our defense analysts estimate that prior to the Russia–Ukraine conflict, around 60% of European defense budgets ended up in the coffers of U.S. companies, a percentage that grew to 80% during the Ukraine conflict as European firms struggled to scale up quickly enough. European policymakers will now try to source more defense spending locally, but even getting back to 60% will take quite some time. This means in the near term, a meaningful part of the additional defense spending will benefit the U.S. more than Europe.What’s the effect on U.S. exceptionalism from Trump administration policies? U.S. exceptionalism has been challenged by weaker U.S. growth, with U.S. policy seeming to have encouraged upside fiscal surprises in the EU and China while being underwhelming on the domestic front. At the same time, U.S. growth has been challenged by a combination of tariff uncertainty, DOGE job cuts and sticky inflation. Moreover, weaker U.S. growth has longer to last given the normal seasonality of our U.S. economic surprise index and the fact that DOGE job cuts aren’t yet reflected in the numbers.&nbsp;Tariffs are coming for Europe, but the U.S. is vulnerable too. Given that Mexico and Canada weren’t spared U.S. tariffs, it seems reasonable to assume some tariffs on Europe are still likely. But our economists’ simulations suggest the negative growth impact will be worse for the U.S. than for the rest of the world, reinforcing stagflationary trends in the U.S.

Our new report, Auf Wiedersehen, U.S. Exceptionalism, also features trade ideas and explores the investment implications of this shift. It’s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3dpJy">here.</a>

Economics

IN THIS SERIES

Auf Wiedersehen, U.S. Exceptionalism

Bearing Fruits From “Made in China in 2025”

Emerging Markets Under “America First Trade Policy”: What’s Next, Who’s Exposed?

Research

Sign up to receive the latest insights from Citi.