Trump’s expected policy shifts

The specific details of the policy changes that President-elect Donald Trump will implement remain uncertain. Nonetheless, at abrdn we believe it’s highly likely there will be a sharp increase in the average tariff on China from 15% to 40% starting early in 2025. There could be some additional isolated spats with other trade partners but it’s unlikely we’ll see the introduction of a global baseline tariff on all US imports.

We also believe it’s likely there will be an extension of the Tax Cuts and Jobs Act in late 2025, with some additional measures being introduced such as, reducing corporation tax, higher defence spending, and modest spending cuts elsewhere.

We also have reason to believe there will be a large rise in deportations to 750,000 a year. Combined with stricter border controls, this will reduce net migration from 3 million per year to nearly zero.

While these are our ‘base case’ assumptions, it’s possible the Trump administration proves more disruptive. For example, trade policy could be more restrictive and deportations higher.

Growth to surge amid rising inflation risks

In the US, we expect gross domestic product (GDP) growth to stay strong at 2% next year, this shows a bit of a cooling but still a solid labour market and strong corporate profits.

Our 2026 forecast is now 2.2%, up by 0.2%, due to expected increased government spending and banking deregulation. However, this boost may fade with incoming immigration changes, potentially lowering real GDP by the end of Trump's time in office.

Higher tariffs, strong demand, and a lower labour supply have also led us to raise our US inflation forecasts. We predict inflation to be 0.2% higher in 2025 and 0.4% higher in 2026, keeping it around 2.5%. With this in mind, we expect the Federal Reserve (the Fed) to cut rates less frequently, with only three cuts in 2025.

Foreign policy risks

Regarding foreign policy, US military support for Ukraine is expected to decrease significantly in 2025. We now believe that a de-facto partition or a negotiated settlement is the most likely outcome next year.

In the Middle East, we anticipate Trump will be less of a restraining influence on Israel and will take a more aggressive stance towards Iran. We’ve identified an 'oil price surge' scenario as a key risk to our forecasts.

China – tariffs and retaliation

In China, we’re seeing early signs of recovery, forecasting 4.8% GDP growth in 2024. However, we've downgraded our 2025 and 2026 forecasts to 4.3% and 4.1%, respectively, due to the proposed higher tariffs.

Chinese tariff retaliation is almost certain, although we don’t expect it to match the size of US measures given China’s cyclical weakness. Instead, we anticipate targeted measures such as agricultural tariffs, critical mineral export restrictions, and action against US companies operating in China.

China’s attempts to boost monetary policy will likely continue but may fall short of market expectations. As a result, China poses a risk to our forecasts. In a positive scenario, strong stimulus measures could lift China and boost global demand. Conversely, an inadequate policy response could trap China in a very weak growth environment.

Emerging markets – winners and losers

Trade uncertainty and increased US inflation will challenge emerging markets (EMs). Countries with large trade surpluses or those re-exporting Chinese goods, like Mexico, Vietnam, Korea, Taiwan, Malaysia, and Brazil, will likely face some market pressure.

Mexico's close economic ties with the US make it particularly vulnerable, especially if the US threatens to renegotiate the United States-Mexico-Canada Agreement to curb migration. As the US decouples from China, countries like Mexico and India could benefit from the return of production and manufacturing of goods to the company's original country.

Trump's policies will also pressure EM central banks that are sensitive to Fed actions such as Mexico and Indonesia. The long-term effects of trade actions on China could impact even more countries – weaker Eurozone growth and increased competition from China may hurt Eastern Europe in particular.

Europe, UK and Japan

Again, heighted trade uncertainty means we’ve lowered our Eurozone GDP forecasts for 2025 and 2026. We’ve also increased our inflation forecasts by some 0.1% each year as we think the European Central Bank (ECB) will pursue a slightly more aggressive easing path than previously expected.

In Germany, the auto industry could be hit hard by trade measures. Global industrial weakness combined with the government’s policy to reduce spending and increase taxes will continue to pose challenges.

Meanwhile in the UK, service-dominated exports are less likely to face tariffs. As a result, we've raised our 2025 UK growth forecast due to recent Budget measures that eased UK fiscal policy. However, higher gilt yields have since reduced the government's fiscal flexibility, making further tax increases a possibility.

Finally, the Bank of Japan (BoJ) is expected to keep gradually raising interest rates, with the next hike likely in January. As US rates rise, the BoJ will need to do more to support the yen by narrowing the US-Japan rate gap – possibly leading to faster rate hikes.

Looking ahead

Overall, we enter the new year and the incoming Trump administration with cautious optimism – with the Trump effect likely to be less disruptive than many fear. We anticipate higher US growth and a slight increase in inflation, along with fewer Fed rate cuts.

For the rest of the world, we've lowered our growth forecasts and raised our inflation forecasts, expecting to see more differences in monetary policies.

There’s support if you need it

If you’re not sure how market and economic events may affect your investments consider speaking to a financial adviser.

If you’re already an abrdn client, get in touch with your financial planner. If you don’t have an adviser, you can find out more about how our financial planning services can help you.

The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in. Information is based on abrdn’s understanding in December 2024.

abrdn Financial Planning and Advice Ltd is registered in England (01447544) at 280 Bishopsgate, London EC2M 4AG and authorised and regulated by the Financial Conduct Authority.