Economic and Strategy Viewpoint – Q4 2024
Our economists expect the policies of president-elect Donald Trump to drive stronger growth in the US amid a mixed growth outlook for the rest of the world.
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The global economy is set to continue to deliver growth in the region of 2.5-3% over the next couple of years. We have nudged down our forecast for GDP growth in 2025 to 2.6%, from 2.7% previously, but expect looser financial conditions to drive a rebound to 2.8% in 2026. However, the relative stability of our global forecast masks some major shifts at the country level, as stronger growth in the US is expected to be offset by weaker growth elsewhere.
Trump to push pro-growth policies
We continue to find expectations for the US economy too pessimistic. The consumer is in good shape and, with the labour market cooling rather than collapsing, household spending should continue to drive growth. There is huge uncertainty about the policy outlook once President-elect, Donald Trump, enters office in January. But we believe pro-growth policies, along with relatively mild supply-side measures, will boost growth to around 2.5% in 2025 with a further acceleration to 2.7% in 2026. Faster growth is likely to ensure that inflation remains higher than we previously assumed and that, after some more near-term easing, the focus of the Federal Reserve will eventually turn to rate hikes in 2026.
Tough going for Europe
The eurozone economy is expected to register some improvement in 2025/26, but it will be tough going. While consumers have benefited from lower inflation, sticky price pressures are likely to limit the room for further interest rate cuts. We think the European Central Bank’s terminal rate will be 2.5%, higher than market expectations. Meanwhile, there is no end in sight to the drag from the structural decline of European manufacturing.
Budget to help boost UK economy
The Labour government’s mildly expansionary budget should give some boost to the UK economy, and we have pencilled in an expansion of 1.6% in 2025 and 1.5% in 2026. But with inflation unlikely to return to the Bank of England’s 2% target on a sustained basis, interest rates are likely to fall only gradually. We expect the MPC to stick to its quarterly pace of cuts until the Bank Rate reaches 4.25% in mid-2025.
China’s outlook depends on fiscal stimulus
We have cut our forecast for GDP growth in China to just 4% in 2025, with only a mild rebound anticipated in 2026. Exports were already set to roll over in 2025 even before the election of Trump, which at the very least is likely to see some disruption to trade flows. And domestic demand shows little sign of taking up the slack. Indeed, while Beijing’s recent policy pivot was cheered by markets, the government’s reluctance to stimulate domestic demand means that downward cyclical pressure on growth is unlikely to abate until the second half of 2025. With inflation expected to hover around 0%, we continue to believe fiscal stimulus of at least 4-5% of GDP is required to materially improve the outlook and escape the current deflationary slump.
Risk of more aggressive Trump
US exceptionalism has been the key driver of global financial markets in recent years, and our forecasts imply that the “Trump trade” will deliver even more outperformance in the months ahead. However, it must be noted that conviction in our baseline forecast is lower than usual as we await clarity on the policy priorities of the incoming Trump administration. There is clearly a substantial risk that Trump’s policies will be far more aggressive than we assume, miring the US economy in stagflation and tipping the rest of the world towards recession that would widen the macroeconomic divergences even further.
The full Viewpoint is available as a PDF here.
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