Key Highlights
We expect higher US growth and inflation, and fewer Fed rate cuts, due to the incoming Trump administration. For the rest of the world, we’ve revised our growth forecasts down and inflation forecasts up, and anticipate more monetary policy divergence. That said, the Trump effect is likely to be less disruptive than many fear.
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Figure 1: Global forecast summary
Source: abrdn, November 2024
The Trump effect
The precise contours of the coming policy shifts under president-elect Donald Trump remain uncertain. Nonetheless, our working assumptions include:
- A sharp increase in the average tariff on China from 15% to 40% starting early in 2025, isolated spats with other trade partners,but the avoidance of a global baseline tariff.
- Extension of the Tax Cuts and Jobs Act in late 2025, with some additional measures including reducing corporation tax from 21% to 20% (15% for some companies), higher defence spending, and modest spending cuts elsewhere, so that fiscal policy is loosening by 0.5% of GDP in 2026.
- A large rise in deportations to 750,000 a year which, alongside border restrictions and deterrence, means net migration falls from 3 million per annum to essentially flat.
- Deregulation, including a relaxation of anti-trust measures and more lenient bank capital requirements.
Growth boost but…
We expect US gross domestic product (GDP) growth to remain robust next year at 2%, reflecting a cooling, but still solid, labour market and strong corporate profitability.
We’ve upgraded our 2026 forecast by 0.2% to 2.2% because we expect fiscal loosening and deregulation to more than offset tariffs. But this boost is likely to fade as the immigration changes take effect, and the level of real GDP could be lower than it would have been by the end of Trump’s term.
Higher tariffs, strong demand, and lower labour supply mean we’ve increased our US inflation forecasts. We see core personal consumption expenditures (PCE) inflation some 0.2% and 0.4% higher in 2025 and 2026 respectively, leaving it stuck at around 2.5%.
We therefore expect the Federal Reserve (Fed) to deliver fewer rate cuts. We forecast just three in 2025, with the fed funds rate target range settling at 3.5%-3.75%. Additional rate reductions in 2027 and 2028 are possible as the economy eventually slows.
Many risk scenarios
While these are our ‘base case’ assumptions, it is possible the Trump administration proves more disruptive. For example, we’ve specified a ‘Trump unleashed’ scenario, in which trade policy is more restrictive and deportations higher.
Alternatively, in ‘Trump delivers for markets’, the policy mix is more supportive, helped by a net boost to aggregate supply.
On foreign policy, US military support for Ukraine is set to reduce significantly. We now think some form of de-facto partition or negotiated settlement next year is the most likely outcome.
In the Middle East, we expect Trump to be a less restraining influence on Israel and he will adopt a more hawkish approach to Iran. We’ve specified an ‘oil price surge’ scenario as an important risk to our forecasts.
China tariffs and stimulus
In China, we see tentative green shoots in the data so that we’re forecasting GDP growth of 4.8% in 2024. However, we have made meaningful downgrades to our 2025 (to 4.3%) and 2026 (to 4.1%) numbers, totalling 1% off the level of GDP. This would be around double the estimated impact from the first trade war (during Trump’s first term), reflecting the sharper increase in tariffs.
Chinese tariff retaliation is almost certain, although we do not 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 in China.
Policy stimulus is likely to continue as the trade war intensifies. But it could continue to fall short of market expectations. Large-scale consumption support does not align with policymakers’ read of the economy or their ‘de-risking’ agenda. Currency depreciation may not match the increase in US tariffs because of financial stability risks.
China is therefore a source of important risks to our forecasts. In our ‘China opens the floodgates’ scenario the authorities deliver ‘big bazooka’ stimulus that lifts Chinese and global demand. By contrast, in ‘China balance sheet recession’, the policy response falls well short of what’s needed, and the country becomes trapped in a very weak growth environment.
Winners and loser among other EMs…
Heightened trade uncertainty and a more inflationary backdrop in the US will be difficult for emerging markets (EMs) to navigate. EMs with large trade surpluses (Mexico, Vietnam, Korea and Taiwan), those re-exporting Chinese goods (Vietnam, Malaysia, Mexico), or countries with high tariffs on their imports of US goods (Brazil, India) are likely to face at least periodic market pressure.
Mexico’s deep economic links with the US make it very vulnerable, but we think threatening a renegotiation of the United States-Mexico-Canada Agreement is a way of pressuring Mexico to stem migration into the US. Ultimately, the more the US decouples from China, the more it will need other countries – Mexico and India, in particular, seem well placed to benefit from reshoring.
Trump’s reflationary policy agenda will put some pressure on the Fed-sensitive EM central banks (Mexico, Indonesia) and those for which concern about fiscal policy is highest (Brazil). But the second-round effects from trade actions on China may trouble more countries in the long-run. Weaker Eurozone growth and the risk of more competition from China may hurt Eastern Europe, in particular.
Europe, UK and Japan
Heighted trade uncertainty means we have lowered our Eurozone GDP forecasts by 0.2%-0.3% for 2025 and 2026. We’ve also increased our inflation forecasts by some 0.1% each year. We think the European Central Bank will pursue a slightly more aggressive easing path than previously expected – lowering the policy rate to 2% by the second half of 2025.
Beneath these relatively limited aggregate effects, there is divergence. In particular, the German auto industry could suffer from trade measures, while broader headwinds from global industrial weakness and unnecessarily tight fiscal policy will remain in place.
The UK’s exports are dominated by services and less likely to see tariffs. In fact, we’ve increased our growth forecast for 2025 after the recent budget delivered easier fiscal policy support. But higher gilt yields have removed the government’s fiscal headroom, so further tax increases are possible.
Finally, the Bank of Japan (BoJ) should continue slowly increasing interest rates. We expect the next hike in January. With US rates higher, more of the work to support the yen by closing the US-Japan rate differential will now fall on the BoJ, which may encourage more rapid hiking.