January Global Macro Monthly - A new Golden age

Global Macro Monthly Summary January 2025

By David Page, Head of Macro Research

Inauguration

US President Donald Trump delivered his inaugural address on 20 January and it is no exaggeration to suggest the rest of the world watched – in the main with trepidation. A new policy direction in the world’s largest economy would always be important but now more than ever as the US has enjoyed strong growth in recent years while other large economies have struggled. Trump’s expected unorthodox set of policies would always have drawn attention but all the more so given the direct impact they are designed to have on some countries.

Tariffs are a key concern and although Trump started with few concrete tariff proposals, by the end of his first week he had suggested 10% tariffs on China, 25% on Canada and Mexico and that European Union (EU) tariffs would be forthcoming. Beyond tariffs, the President caused fresh concerns by suggesting expanding “our territory”, having voiced ambitions to buy Greenland, absorb Canada and “take back” the Panama Canal. It is unclear how literally to take these ambitions but they add to the unease. Finally, we watch broader geopolitical developments. Trump has suggested a Ukraine settlement could take six months, rather than being resolved in his first day – reality over rhetoric. However, he also proposed judging success by “wars we never get into”. There are concerns the isolationism implied in that statement could create power vacuums which destabilise Eastern Europe, the Middle East or the South China Sea.
 

International partners cannot expect normal service

China will be paying closest attention. It has been the target of much of Trump’s ire. Despite facing tariff proposals of 10% so far – small relative to a threatened 60% – it will watch developments and see if this proves the first of several. China must manage this external growth threat with material domestic concerns. The housing market continues to fall – a material drag on the economy. Meanwhile inflation recorded just 0.2% in 2024, similar to 2023 and barely avoiding deflation. The policy stance unveiled in December seemingly acknowledged the scale of its problem. However, we await March’s National People’s Congress to see China’s growth target for 2025 and the exact calibration of stimulus to achieve it, in turn depending on events between now and then.

The Eurozone has also been warned of tariffs. Its concerns likely focus on the risks of a broader trade war than on the direct impact of specific US tariffs. But the Eurozone’s own growth remains lacklustre – far short of either recent US or Chinese expansion. On the upside, supply-side headwinds have started to fade and inflation has fallen closer to target, allowing the European Central Bank (ECB) to deliver faster monetary policy easing to support growth, something we expect to lead to a gradual acceleration in growth this year and next. However, economic progress has been slow, and risks being held hostage by US trade developments. European political developments have been faster. The German coalition collapsed in 2024 and sees elections in February. The Austrian coalition talks have suffered similarly. Meanwhile France is on its second government since elections mid-last year. European political weakness leaves it vulnerable and poorly placed to react to US developments.

The US’s neighbours have long kept watchful eyes over the border. Mexico has seen a reprise of first-term Trump policies with regards to migration. It also faces the threat of tariffs from its trade partner associated with its trade surplus, Chinese investments and non-trade issues, including fentanyl operations. Canada also faces such a tariff threat. With migration and fentanyl less of an issue for the Canadian border, US grievances with it are less obvious. Both face renewed negotiations over the USMCA trade agreement next year, but uncertainty risks impacting growth prospects before then.

Indirect effects are just as important for some economies. The pre-inauguration rise in long-term yields had an impact across the globe. However, in the UK where the new government had eschewed the opportunity to reduce public borrowing with tax increases, markets again fretted over the fiscal outlook, driving UK yields higher. Over the coming months we expect a demonstrated commitment to fiscal rules, signs of slowing growth, fading inflation and expectations for greater Bank of England easing to dampen fiscal concerns and lower rates. But persistently higher global rates will make things more difficult for the UK’s public finances and broader activity outlooks.

These financial spillovers will also be relevant for emerging markets – over and above any direct trade or geopolitical developments. The pace of central bank easing has slowed across most emerging market regions as inflation pressures have revived – in part because of idiosyncratic measures, including rising food prices and looser fiscal policy – but also reflecting exchange rate weakness in the face of a rampant dollar.