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Transition or turmoil?
Global Economics Quarterly
- As the policy agenda of the new US administration starts to become clearer…
- government policy reactions from Europe to China are being stepped up…
- with implications for global growth, monetary policy and the reconfiguration of global trade
The wait is over.
It had long been clear that tariffs would be part of the new US administration’s agenda, but the pace, magnitude and manner of some policy changes – in trade, government jobs, finance, and foreign policy – have rattled financial markets.
As risks to US growth rise, it is already apparent that 2025 will be a transition period, not just for the US but for the world.
European leaders have realised that their economic future is in their own hands. They have softened fiscal rules as they embark on the Herculean task of rebuilding their own security umbrella. Germany plans to deliver a massive fiscal programme of infrastructure and defence spending.
China has announced further cyclical and structural measures to transition to a more consumer-led economic model. It is also accelerating legislation to support ongoing technology innovation, building on the recent momentum in artificial intelligence. Elsewhere in Asia, in anticipation of more US tariffs, India has started to lower its own longstanding hefty import tariffs.
The policy outlook remains highly uncertain. More US tariffs are likely to come soon, with more countermeasures set to follow. This is likely to drive a marked slowdown in world export volume growth, weigh on business and consumer confidence, and make economic forecasting – arguably – harder than ever.
2.5%
HSBC global GDP growth forecast, 2025
3.4%
HSBC global inflation forecast, 2025
We have lowered our 2025 global GDP forecasts from 2.7% to 2.5%. Unsurprisingly, the biggest downward revisions are to America’s neighbours, Mexico and Canada, who have been first in line for tariffs.
We continue to think the US will avoid recession, but have lowered our 2025 GDP forecast from 2.2% to 1.9%. There are risks both ways: tariffs and inflation concerns could intensify, but consumer spending, the labour market and industrial output could remain even more resilient.
We have also cut our forecasts for Europe for 2025, mainly reflecting US tariffs and retaliation, but have lifted next year’s eurozone GDP growth forecast from 1.3% to 1.6%. This is almost entirely because of the German stimulus and spillovers to the rest of the union.
One of the biggest upward revisions for 2025 is for mainland China, where we think the most recent stimulus and reforms should help to deliver a growth rate close to the official 5% target.
Inflation and central banks
Inflation and central banks
Our global inflation forecast for 2025 remains at 3.4% as we continue to see diverging stories across different markets. Some countries, particularly in the emerging world, are vulnerable to commodity price pressures. Elsewhere, and notably the US, there is enormous uncertainty regarding the impact of tariffs on goods prices.
Anchoring inflation expectations is crucial
In this highly uncertain world, maintaining policy credibility and anchoring inflation expectations is critical for any central bank. Communication regarding the need for “caution” on further easing from the European Central Bank and “waiting to see” from the US Federal Reserve is understandable but holding out for a clear signal from the hard data is not without risks: risks that they get behind the curve in either direction. We continue to see three more cuts from the Fed, and one more from the ECB.
Overall, then, it is a very uncertain picture – with policy choices in the US, Europe and China likely to reverberate around the world.
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