Trade Essential for Profit?

The global economic landscape in 2025 is shaping up to be far from "business as usual," according to Deutsche Bank Research's latest World Outlook report, Navigating Trump 2.025, published on 25 November 2024.

In the United States, the re-election of Donald Trump in November 2024 and the Republican sweep in Congress has set the stage for a policy shift that could reinforce economic vulnerabilities. The forecast assumes a 10 percentage point increase in the tariff rate on imports from China during the first half of 2025, rising up a further 10pp in the second half. This policy stance is likely to reinforce the gap in economic performance between the US and the rest of the world.

The large inventory of unsold housing continues to depress prices in China, with the property market downturn now in its fifth year. However, there are tentative signs of improvement, with sales rebounding sharply in the past two months in both new and secondary home markets. The most likely outcome for 2025 in China is a 'muddle through' scenario, with prices continuing to fall, albeit at a slower pace, and new home sales rising modestly, thanks to improved housing affordability and government policy support.

In Europe, the uncertain political landscape, both domestically and internationally, could influence monetary policy in Japan. Structurally, there is a significant and growing challenge for the European economy due to more frictional geopolitics exposing the vulnerability of the EU's trade-based economic model. The European Research team expects growth in the Euro Area to be largely export-led, and as such, vulnerable to external shocks like US tariffs.

The predicted inflation increase in the UK is due to administrative tax changes, the national living wage hike, and the pass-through of higher employer national insurance contributions. Inflation, excluding the effects of government stimulus packages, should remain around 2% in Japan. Inflation in the UK, which rebounded from 1.7% to 2.3% in October, is predicted to rise to 2.9% in 2025 and return to the 2% target in 2026.

In India, the cumulative effective rate cut could be higher at 75bps, as the Reserve Bank of India allows short-term rates to possibly drift 25bps below the repo rate at some stage in 2025. The team anticipates a Bank of Japan policy rate hike to at least 1% in fiscal year 2025 (i.e., by Q1 2026).

The policy mix is expected to stall progress on inflation, with core PCE expected to remain at or above 2.5% over the next two years, leading the Fed to undertake an extended pause. The outlook is driven by the assumption of modest US tax cuts, a strong deregulation push, and more supportive financial conditions.

In Germany, the economy is likely to finish 2024 with a slight contraction "for the second year in a row". However, the team expects 0.5% annual growth in Germany with a meaningful recovery on hold until 2026.

The Deutsche Bank Research economists still believe India's growth will be at 6.5% in 2025 and 2026. Renewed US-China trade tensions under the second Trump administration pose a risk to China's outlook. Should a severe trade war unfold with the US hiking tariffs of 50% on China and 10-20% on the rest of the world, China's growth could fall to around 4% in 2026.

The team is forecasting a reduction in CPI inflation to average 4.1% in 2025 vs. 4.9% in 2024 and 5.7% in 2023. Higher taxation, inflation, lower employment, and lower wage growth in the UK are predicted to result in a smaller real disposable income growth uplift than previously anticipated.

In conclusion, the global economic outlook for 2025 presents a complex and challenging landscape, with the policy decisions of the incoming US Administration playing a significant role in shaping the economic trajectory of various countries. The team anticipates that policy responses from the Euro Area's largest member "are unlikely to be felt until 2026...leaving policy accommodation likely resting on the ECB’s shoulders in 2025".