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

Global Economic Outlook & Strategy
Economics  •  Article  •  January 21, 2025
Research

KEY TAKEAWAYS

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

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. 

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. 

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. 

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%. 

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. 

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.

 

“In each of the past two years, we’ve expected slowing, but it simply hasn’t materialized.”

 

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.

The environment for sovereign yields

We considered the uncertainties around Trump 2.0 policies and our “baseline Trump scenario” in December, with a summary of our thinking available here. 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.

 

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.

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.

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.

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.

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.

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.

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.

Our new report, Global Economic Outlook & Strategy: Resilient Global Growth, Higher Long-Term Rates, & Trump 2.0, also includes country-by-country discussions. The report is available in full to existing Citi Research clients here.

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