Who's next? As soon as he became the 47th President of the United States, Donald J. Trump drew the weapon of tariffs, “the most beautiful word in the dictionary”, as he put it. Mexico, Canada and China were the first to be hit, while the European Union (EU) was explicitly targeted.
While the Fed lowered its target rate by 100 bps from 18 September 2024, bond yields rose by around 80 bps (as at 7/2/2025). This rare divergence is reminiscent of an inverse version of the ‘Greenspan conundrum’ (2004–2005): during this episode, which spread to Europe, the rise in short-term rates had little effect on long-term rates. What are the reasons for these contrary movements between short- and long-term rates, and what might the implications be?
Since taking office, President Trump has confirmed his threats to raise tariffs, but fears of universal and widespread application have abated somewhat. He will decide whether to carry out his threats once an audit of the United States' trade relations with all its trading partners has been completed, which should be by the beginning of April. Between now and then, and even over 2025 as a whole, the divergence in the trajectory of world trade between advanced countries and emerging and developing countries (EMDs) is set to increase. Trade between EMDs is expected to grow significantly faster in 2025 (5%) than during the 2012-2018 pre-COVID period (+3.9% per annum on average), whereas it will be the opposite for advanced countries
After a good start to the year, Chinese economic growth will slow down in 2025 due to still weak domestic demand and the effects of the upcoming protectionist shock on exports. China has tools at its disposal to respond to President Trump’s new tariff plans, even though its room for manoeuvre to offset the effects of rising tariff barriers with a depreciation of the yuan and a drop in export prices has narrowed compared to 2018. The authorities will continue to ease their monetary and fiscal policies in the short term to stimulate activity and boost private consumption, and try to support a rebalancing of China’s economic growth model.
Economic growth forecasts for the fiscal year 2024/2025, which ends on 31 March, have been revised significantly downwards. The outlook for the next three years could also be downgraded unless the government and the private sector significantly increase their investment. However, the international economic climate is not conducive to either domestic or foreign investment, even if the direct impact of a potential increase in US tariffs on Indian economic growth would be limited. The recent downward pressure on emerging currencies has not spared the Indian rupee, and the depreciation trend is likely to continue, especially as the new Governor of the Central Bank seems to be focusing on supporting economic growth rather than currency stability.
South Korea's economic growth slowed throughout 2024, with limited prospects for a rebound. The political crisis and unprecedented government instability in the country are likely to result in a marked slowdown in domestic demand. The outlook for the export sector (mainly semiconductors) will depend in part on the trade policy adopted by the new US administration. South Korea is not directly targeted by tariff measures for the time being, but the resulting upheaval in value chains will adversely affect exports. Economic policy will remain accommodative: the Central Bank and the interim government have already proposed support measures, but the stimulus will not be enough to significantly boost growth, which is likely to continue to slow in 2025.
GDP growth remained robust in 2024 and the outlook for 2025 is favourable. Consumer spending is expected to remain strong, but investment is expected to slow. Monetary easing by the central bank is expected to be constrained by pressures on the rupiah, while real interest rates - already high - have risen further. In fiscal terms, the government is expected to favour its social policy over capital expenditure. This will impact economic growth in the short and medium term. Exports are expected to suffer from the Chinese economic slowdown. In addition, although modest, the direct impact of a potential increase in US tariffs could also have a negative impact on the Indonesian economy.
The Vietnamese economy posted strong growth of 7.1% in 2024. The conditions for this success could continue on into 2025: the export sector is benefiting from buoyant global demand for electronic goods and is continuing to increase its production capacities thanks to FDI; the property sector is recovering from the 2022-2023 crisis; private consumption is likely to increase further; and the government has some room for manoeuvre for increasing its spending and investment. However, Vietnam’s economic outlook is also exposed to high downside risks. Firstly, a strong dollar and unchanged interest rates in the US pose a risk of capital outflows, and pressures on the dong and external liquidity would then constrain monetary policy
Poland stands out from neighbouring countries with an outperformance of its economy. It has also experienced an uninterrupted positive GDP growth since 1992, with the exception of 2020. Growth prospects are strong in 2025 and 2026, due to the expected rebound in public investment and despite the uncertainties related to the presidential elections in May 2025. Inflation is accelerating once again this year and is not expected to converge towards its target before 2026. Monetary authorities are likely to maintain their status quo for the time being, and then move towards policy easing later in the year. Regarding the impact of "Trump 2.0," Poland has limited direct trade exposure to the US, but remains vulnerable to the rise of protectionism.
The economy ended 2024 in a state of overheating (reacceleration of inflation, tensions in the labour market) – a situation fueled, in large part, by the prolonged extension of public support measures. Throughout the year, the fiscal trajectory has steadily undermined market confidence – eventually culminating in significant capital outflows in December. The resulting pressures on equities, interest rates and the exchange rate, prompted the Central Bank to take defensive measures to stabilize the BRL. In 2025, a gradual slowdown in economic activity appears inevitable, as domestic demand will be constrained by fiscal adjustment measures, tighter credit conditions, persistent inflation and a deteriorating business climate
The Mexican economy is slowing down and the short-term outlook is not favourable. The constitutional reforms enacted in recent months (including the reform of the judicial system) are damaging the institutional framework and deterring investment. In addition, consumption could be hit hard by the fiscal consolidation plan announced by the government. Above all, Mexico is one of the most vulnerable countries to the US economic policy change. The new migration measures could significantly reduce money transfers from foreign workers, which significantly support the country's growth. The expected customs tariffs applied would also have severe consequences for the Mexican economy in terms of growth and inflation.
Argentina's economy is back on track. Since mid-2024, growth has returned and inflation has slowed significantly. There has been a high social cost to the severe cuts in public spending, but the government budget is in surplus for the first time since 2010. With the recessionary impact of fiscal austerity, the current account balance has turned into a surplus as well. But exports have also been rebounded , despite low prices of agricultural commodities. For the time being, the central bank's foreign exchange reserves are still insufficient for exchange controls to be lifted before the mid-term elections in October. The renewal of an agreement with the IMF is already a prerequisite
Economic growth is being restrained by OPEC+ restricting oil production. Excluding hydrocarbons, activity is holding up well however, driven by consumption and the government’s intensive investment policy under the Vision 2030 economic diversification programme. This solidity comes with large budget deficits, and now also current account deficits, which are requiring record-high debt issuance. Fortunately, the country still has comfortable financial leeway. However, Donald Trump's return to the White House could have a deep impact on a number of areas.
The massive support of international donors has restored a degree of optimism to the Egyptian economic outlook. The depreciation of the exchange rate is under control and inflation is clearly on a downward trajectory, which should make it possible to ease monetary policy. Nevertheless, structural problems remain and will only be resolved very gradually, both in terms of public finances and external accounts. The policies of the new US administration should have a limited impact on Egypt's external accounts.
In Kenya, further fiscal consolidation is proving increasingly difficult. The efforts required of the population were strongly protested over the summer of 2024, forcing the government to withdraw the finance bill it had drafted with the IMF. Now, for the current fiscal year, the deficit is to be reduced mainly through spending cuts, which are adversely affecting economic growth. While this alternative offers a brief respite, a sustained increase in public revenues remains essential to ensure debt sustainability and safeguard the IMF’s financial support in the medium term. This could prove all the more necessary as Donald Trump's return to the White House could pose new risks for Kenya's public and external accounts.
GDP figures for Q4 2024 confirm a clear divergence between growth which is sustained in the US (0.6% q/q) or accelerating in China (1.6% q/q), and mixed performances in Europe with a stagnating GDP: -0.2% in Germany, -0.1% in France or stagnation in Italy, compared to +0.8% in Spain. In Japan and the UK, these figures have not yet been published, but our estimates are 0.2% and 0.3% q/q, respectively.
Economic surveys - for households and companies - started the year on a slightly more positive note. Consumer confidence (+0.3 points) benefited from a slight fall in indicators for unemployment and inflation prospects. The composite PMI index returned to expansion territory (+0.6 points to 50.2), with the contraction in the manufacturing industry easing slightly (+1.5 points to 46.6), while the services index fell dipped (-0.2 points to 51.4).
The German business climate is being driven down by the prolonged recession in industry. Industrial production (in the broad sense, including construction) has contracted in 10 of the last 12 quarters (including a further negative quarter likely in Q4 2024), for a cumulative drop of 8.4% (-14.7% compared to the peak seen at the end of 2017). This momentum explains the low IFO index.
The French economy remains weak, although it is showing signs of stabilisation. The Insee business climate indicator remained stable at 95 in January, while the composite PMI rebounded slightly (47.6 in January compared to 47.5 in December).
As expected, Italian growth failed to outperform that of the Eurozone in 2024 (average annual growth of 0.5% versus 0.7% respectively). In addition, it remained at a standstill in Q4 (0.0% q/q) for the second consecutive quarter.
After growing four times faster than the Eurozone in 2024 (3.2% as an annual average versus 0.8% respectively), the Spanish economy is set to maintain its dynamism throughout 2025. On the back of growth of 0.8% q/q in the last three quarters of the year, real GDP is set to continue its momentum, with expected growth of 0.7% q/q in Q1 2025, marking the seventh consecutive quarter of growth above or equal to 0.7%.
The US economy ended 2024 with its real GDP growing +0.6% q/q in Q4, a solid figure, though slightly down on the previous quarter (-0.2 pp). Household consumption (+1.0% q/q, +0.1 pp) was once again the main growth driver. The government also contributed positively, in contrast to private fixed investment (-0.1% q/q), despite the growth in residential investment and intellectual property products.
Les dynamiques de consommation et de production industrielle restent défavorables. Les ventes au détail (hors carburant) ont reculé de 0,5 % m/m en décembre et de 1,1 % au T4 par rapport au T3. La production industrielle qui a enregistré, entre septembre et novembre, trois mois de baisse successifs demeure sur une dynamique très difficile au démarrage de l’année 2025. Certes, le PMI manufacturier s’améliore (+1,3 point à 48,3) tout comme l’enquête mensuelle du CBI, mais l’enquête trimestrielle du patronat britannique chute à nouveau lourdement au T1
According to the Jibun Bank PMI survey, the Japanese economy has started 2025 in different directions. The manufacturing PMI fell to 48.7 in January (-0.9 pp, the lowest since March 2024), against a backdrop of a wider deterioration in production and new orders. By contrast, the services PMI accelerated according to the flash estimate, with Business Activity rising from 50.9 to 52.7.
Chinese economic growth accelerated in Q4 2024 (+1.6% q/q and +5.4% y/y), driven by strong export performance and a recovery in private consumption. These supporting factors should persist in early 2025, but economic growth will then resume its downward trend. Domestic demand is likely to remain fragile and the rise in US tariffs will be a significant negative shock to exports.
