2025 international economic outlook

A new horizon: The economic outlook in a new leadership and policy era.

Summary

Key themes

• With Donald Trump elected as president with unified congressional support, economic policy in the United States is set to change rather dramatically. President Trump campaigned on making radical adjustments to U.S. trade policy, specifically reverting to tariffs as a means to balance trade deficits and extract concessions from key trading partners. While clarity on tariff policy is limited at this point, we feel comfortable assuming President-elect Trump will impose levies early in his term. To that point, underlying our 2025 global economic, central bank and FX forecasts is an assumption that President-elect Trump imposes a 5% tariff on all U.S. imports and a 30% tariff on all Chinese exports into the U.S. starting in H2-2025.

• Trump 2.0 tariffs are likely to disrupt, not upend, the U.S. economy. Economic expansion is still likely, albeit at a slower pace, while inflation could remain above the Fed's target as consumers at least partly bear the cost of tariffs. Overall disinflation and a less robust jobs market relative to a few years ago suggest the Federal Reserve is likely to continue lowering interest rates; however, resilient economic trends combined with somewhat firmer inflation should see the FOMC ease monetary policy more gradually going forward. Given our implicit tariff assumptions, we now believe the Federal Reserve will achieve a terminal target range for the fed funds rate of 3.50%-3.75%.

• Exposure to U.S. tariffs is likely to create diverging paths for economic growth for countries around the world. Emerging economies with strong trade linkages to the United States could see the most acute decelerations. China and Mexico are significantly exposed, and while China has offsetting policy mechanisms it can deploy, Mexico has limited monetary and fiscal space to respond to an external trade shock. Based on the growth, inflation and market reaction to tariffs, central banks could adjust monetary policy settings at different speeds, and in select cases, different directions. In particular, we expect the European Central Bank to ease quicker than previously envisaged, while institutions in the emerging markets could operate with more caution, or restart tightening cycles.

• Even following its post-election rally, we continue to believe the U.S. dollar can strengthen going forward. A less dovish Fed, more dovish major central banks internationally, trouble in China and uncertainty around U.S. economic policy should create an environment where the U.S. dollar performs particularly well. We believe those same dynamics will place significant depreciation pressure on emerging market currencies, with “high beta” currencies in Latin America and EMEA underperforming. Idiosyncratic factors can also contribute to particular underperformance from select developing currencies. We expect the euro to fall below parity relative to the U.S. dollar. Currencies associated with more closed economies—such as the Indian rupee—or linked to hawkish central banks—such as the Japanese yen and Australian dollar—can be more resilient in 2025.

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