The Resilient Global Economy & Trump 2.0

Two storylines for 2025’s global narrative 

In our new Global Economic Outlook & 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. 

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. 

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. 

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. 

What’s driven the global economy’s resilience? 

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. 

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. 

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. 

Where are we headed in 2025? 

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.

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.

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.

The outlook for central banks

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. 

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.

Our “baseline Trump scenario”

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:

• 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.
• 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.
• 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.
• 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.
• 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.

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.

That said, we do have a few thoughts.

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.

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.

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.

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.

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.