Nonetheless, our working assumptions of an impending Trump 2.0 and its effect 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 defense spending, and modest spending cuts elsewhere so that fiscal policy is loosening by 0.5% of GDP in 2026.1
- A significant 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.
Potential growth boost
We expect US gross domestic product (GDP) growth to remain robust next year at 2%, reflecting a cooling, but still solid, labor 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. However, 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 labor supply mean we’ve increased US inflation forecasts. We see core personal consumption expenditures (PCE) inflation at around 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 3.50%–3.75%. Additional rate reductions in 2027 and 2028 are possible as the economy eventually slows.
US
Activity
US growth is being supported by a resilient consumer, a labor market that, while cooling, remains solid, and strong corporate profitability. Trump’s second term will see tax cuts, higher defense spending, and looser regulatory policy, which should further boost growth as the policies take effect mostly in 2026. However, these tailwinds will be dampened by rising tariffs and slower net migration, which constitute negative supply shocks. Indeed, we think these will weigh on growth in 2027 and 2028. There is a risk the policy mix is more disruptive, with broader tariffs and large-scale deportations, or of a growth-friendly mix that focuses less on these policies and more on deregulation.
Inflation
We believe the combination of demand-side stimulus, in the form of looser fiscal policy, and shocks to the supply side, via tariff hikes and deportations, will leave inflation stuck near 2.5% (Chart 1).
Chart 1. US core PCE set to remain stubbornly above target in the face of an inflationary policy agenda
Moreover, risks of a reacceleration have increased, especially in the case of large rises in tariffs or aggressive deportations. Indeed, the pandemic illustrates how swings in aggregate demand and supply can trigger rapid price adjustments. So, only a more toned-down version of Trump’s policy agenda would leave the current trend of disinflation toward the target intact.
Policy
The Fed looks set to cut in December, even if recent firm inflation data have cast some doubt over this move. Assuming no nasty surprises in November CPI, a 25 bps-move would reduce rates to 100 bps over the past three meetings. This adjustment will slow in 2025, when we expect the Fed to cut by just 75 bps, reflecting a careful approach as rates get closer to equilibrium levels and inflation progress is interrupted by Trump’s policy agenda.
After that, we believe rates will remain on hold at 3.50–3.75% through 2026, before cuts resume as growth and inflation slow.
China tariffs and stimulus
In China, we see tentative green shoots in the data, so we forecast 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 – totaling 1% off the GDP level. This would be around double the estimated impact from the first trade war (during Trump’s first term), reflecting the sharper increase in tariffs (Chart 2).
Chart 2. Tariffs facing Chinese exports are likely to more than double as a second trade war unfolds
Chinese tariff retaliation is almost inevitable, 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’ reading of the economy or their de-risking agenda. Currency depreciation may not match US tariff increases because of financial stability risks.
China is, therefore, a source of important risks to our forecasts.
Emerging markets’ potential winners and losers
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 vulnerable (Chart 3). Still, we believe threatening a renegotiation of the United States-Mexico-Canada Agreement is a way of pressuring Mexico to stem migration into the US. Ultimately, as the US distances itself from China, it will need to rely more on other countries, like Mexico and India, which are poised to gain from reshoring.
Chart 3. Domestic demand in Mexico and cross-border uncertainty have dampened growth forecasts
Trump’s reflationary policy agenda will pressure the Fed-sensitive EM central banks (Mexico, Indonesia) and those for which concern about fiscal policy is highest (Brazil). But the second-round effects of 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.
Europe, UK, and Japan
Heightened 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 about 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, making further tax increases possible.
Finally, the Bank of Japan (BoJ) should continue slowly increasing interest rates. We expect the next hike in January. With US rates higher, the BoJ will now bear more of the burden of supporting the yen by closing the US-Japan rate differential, which may encourage more rapid hiking.
Final thoughts
With the coming of Trump’s second administration, we expect higher US growth, inflation, and fewer Fed rate cuts. Material deregulation and reform of the tax code could help boost potential growth and push up equilibrium rates in the long run. For the rest of the world, we have revised our forecasts with growth (down) and inflation (up) in anticipation of more monetary policy divergence. Finally, we believe the Trump effect will likely be less disruptive than many investors may fear.
1 The Tax Cuts and Jobs Act was signed into law on January 1, 2018. This law brought sweeping changes to the tax code and impacted individuals depending on their income level, filing status, and deductions.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
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