Trump versus trade: the global economic outlook for 2025 in five charts

The global economy is entering the new year with rising geopolitical tensions looming over its prospects, as the world’s leading central banks attempt to cut interest rates after the worst inflation shock in decades.

Donald Trump’s second term in the White House is expected to dominate the economic agenda. Global trade tensions are on the horizon as the president-elect threatens to impose sweeping tariffs on US imports.

Britain’s economy is faltering while inflationary pressures remain. The largest economies of the eurozone are engulfed in political turmoil. Beijing is battling to revive the Chinese economy, while countries in the global south are facing soaring debt interest payments.

Here are the five key charts underpinning economic prospects for 2025.

Trump trade wars 2.0

Trump’s unambiguous victory has raised the prospect of global battles on a much bigger scale than in his first term, when his clashes with China rippled through world trade. However, many economists are hopeful he will stop short of deploying the full arsenal of threats he made on the campaign trail, which included import tariffs of up to 60% on China and up to 20% on America’s enemies and allies alike.

The president-elect’s pledges to cut business taxes and regulations have investors hoping for a surge in the American stock market, but there are fears his measures would open up a gaping hole in the US federal budget. Households being hit with higher taxes on imports could also stoke inflation.

Elsewhere, tensions remain high with conflicts in Ukraine and the Middle East, while political uncertainty is mounting in the eurozone core, where the French and German governments are under strain.

Stubborn inflation

The world’s most powerful central banks began cutting interest rates in 2024 after inflation cooled more quickly than expected. The big focus for the year ahead will be on how much further borrowing costs will be reduced amid fears over lingering inflationary pressures and the outlook for economic growth.

The Bank of England has signalled a gradual approach after forecasting inflation would remain above its 2% target until 2027. Headline inflation has fallen back from a peak of 11.1% in the second half of 2022, and briefly dipped below 2% in September 2024, but has risen back to 2.6%.

Wage growth has remained stronger than anticipated, with potential to stoke inflation. The Bank is also monitoring the impact of Rachel Reeves’s autumn budget, after the chancellor announced a £25bn rise in employer national insurance contributions from April. Business leaders have warned this could hit jobs or be passed on to consumers through higher prices.

City investors have reduced expectations for deep interest rate cuts in 2025. Financial markets predict two cuts from the current rate of 4.75% by the end of the year, far fewer than anticipated in the autumn when some analysts were forecasting a rate reduction to as low as 2.75%.

Stagflation nation?

Britain’s economy is on the brink of stagnation, raising the prospect of a period of “stagflation” – when growth is stalling but inflation is high. The UK grew at the fastest rate in the G7 in the first half of 2024, partly as it was bouncing back from a shallow recession in the second half of 2023. However, a sharp fall in consumer and business confidence has weighed on the economy, which some analysts have blamed on Labour’s gloomy rhetoric and tax-raising plans.

In an early blow to Keir Starmer’s target to hit the fastest sustained growth in the G7 by the end of the parliament, the economy contracted by 0.1% in October, while the Bank forecasts zero growth over the final three months of 2024.

Some experts are, however, more optimistic. Kallum Pickering, chief economist at the stockbroker Peel Hunt, said economic confidence should recover, as Britain’s political backdrop is far more stable than in recent years, and compared with other countries.

“Politics is kind of boring here. This will basically be the first normal year. The last time you could say that is probably 2015. I just think it’ll take another six months until people realise we’ve returned to normal.

“The UK has had PTSD ever since the EU referendum, the pandemic, and the first war on European soil since the 1940s.”

Employment rate

Britain is one of the few developed countries with a lower employment rate than before the Covid pandemic. More than 9 million people are “economically inactive” – neither working nor looking for a job. For almost 3 million, the main reason is long-term ill-health, which is near to its highest level on record. Getting more people back to work is seen by the government as one of the most powerful ways to reboot economic growth, and will be one of its top priorities in 2025. Part of this effort will be targeted at fixing battered public services, while there will be changes to jobcentres and employment support from the spring.

Bond vigilantes

Governments around the world are facing challenges from higher borrowing costs. Unlike the years of ultra-low interest rates after the 2008 financial crisis, when debt-fuelled public spending helped bolster fragile growth, the risk of stickier inflation and higher interest rates in 2025 will make this tougher.

“In a new regime of higher real interest rates, expansionary fiscal policy in bad times is no longer a free lunch. It now requires proper fiscal consolidation in good times,” analysts at Bank of America wrote in a note to clients.

Trump’s tax-cutting plans could widen the US fiscal deficit. Reeves will face a challenge in her 2025 spending review to meet her self-imposed fiscal rules without raising taxes or cutting spending. France is also battling to reduce its budget deficit amid political turmoil.

Investors could demand higher returns if lending to governments with elevated deficits, in the return of “bond vigilantes” who might further drive up sovereign borrowing costs.

Marc Seidner and Pramol Dhawan of the asset manager Pimco, the world’s largest bond investor, said: “At some point, if you borrow too much, lenders may question your ability to pay it all back. It doesn’t take a vigilante to point that out.”