Since January 2025, the United States has announced major reversals in its foreign and trade policies. For developing countries that depend on international aid, the suspension of USAID and the increase in tariffs on US imports create a double shock that will durably weaken their economic prospects.
Since WWII ended, 80 years ago this week, the US dollar has been the unparalleled dominant currency at the center of the international monetary and financial system. Every now and then, questions have arisen about this dominance and for brief periods became front page material in the financial press. Despite the excitement invariably elicited, the answer was always, sit tight, nothing is going to change. This time feels different. In particular, financial markets’ reaction to the “Liberation Day” tariff announcements, whereby the dollar and US Treasuries sold off instead of being bought as the safe haven of last resort like in all previous crises. But it would be premature to call the end of dollar dominance.
The latest economic news.
Every Spring and Fall, economic and financial policymakers from the whole world gather in Washington DC for the IMF/WB Meetings. Thousands of private financial sector professionals tag along. All over town, in both formal and informal settings, participants share and compare with their peers their own assessments of the world’s economic prospects. In my 25 years of taking part in these Meetings, this was one of the most interesting ones, with a pervasive sense among participants of living through a pivotal moment of economic history. In what follows, I offer a distillation of what this global pulse-check revealed.
• The euro area government deficit decreased in 2024 to -3.1% of GDP.• Italy and Greece posted primary surpluses even though their interest costs remain high• The fiscal adjustment that still needs to be provided by the countries whose deficits increased in 2024 (France, Austria, Belgium, Finland) will nevertheless act as a brake on growth in the zone.
The announcements on April 2, featuring a massive and widespread (albeit differentiated by country) increase in US tariffs, constitute a historic shock. The final extent of the damage and the aftershocks remain to be seen, but there is no doubt that the economic consequences will be negative, starting with the United States. They are already evident in the turbulence on US financial markets. Even if there is a de-escalation in the trade war, which is our base case scenario, uncertainty remains extremely high, and activity will be penalized for a long time.
One direct and immediate consequence of Donald Trump's announcements on 2 April on tariffs, which are reciprocal and reduced in name only, was to accentuate the downside risks to the US economy and to seriously shake up the financial markets. According to our forecasts, the US economy will slow sharply but avoid recession, on the optimistic assumption of a de-escalation in the trade war and an easing of uncertainty.
After the outperformance of 2023-2024, US growth is expected to slow sharply under the impact of the uncertainty and tariff shocks triggered by the new administration. Recession concerns are returning into the spotlight.
The economic scenario for the Eurozone remains dependent on the evolution of the trade conflict and implementation of possible US reciprocal tariffs of 20%. The increase in defence spending will nevertheless support GDP.
Against a backdrop of heightened international competition and trade tensions linked to the United States' new tariff policy, the German economy is seeing its traditional growth drivers challenged. In the short term, the increase in customs duties imposed by the Trump administration will weigh on exports and heighten economic uncertainty.
French growth is set to bottom out in 2025, due to political and trade uncertainties. It should pick up again in 2026, buoyed by a rise in public consumption driven in particular by defence spending and the expected acceleration in German growth.
The mild rebound recorded in Q4 2024 enabled Italy’s real GDP to grow by 0.5% over the year. In 2025, real GDP is expected to grow by 0.8%, while in 2026, it should reach 1.3%. GDP growth is expected to remain subdued in the first part of 2025. It should gain momentum later in the year, mainly driven by consumption, which is projected to benefit from increased disposable income.
Over the next two years, Spanish growth should be stronger than anticipated in our last issue of EcoPerspectives. Continued disinflation and the good performance of the labour market should continue to drive domestic demand, at the expense of foreign trade.
A new government has emerged, with the coalition agreement under immediate pressure from protesting unions and criticism on its underlying assumptions. Growth remains positive, albeit below trend as capex spending could take a hit while net exports still weigh on GDP.
Although the United Kingdom has been penalised less severely than its European neighbours, it has not escaped the 10% tariff floor on US customs duties. The negative impact on activity will add to the pre-existing domestic brakes.
Japan is heading for a year without quarterly growth. Domestic demand is still constrained, with nominal wages rising at a slower pace than inflation. In addition, the trade policy of the United States, Japan’s largest export market, poses a downside risk.
On Wednesday 5 March, the 10-year Bund yield increased 30bp, the biggest rise since the fall of the Berlin Wall. It continued to move higher the following days, reaching a peak on 11 March. The trigger was the announcement by Friedrich Merz (CDU) and the heads of the CSU and SPD during an evening press conference on Tuesday 4 March 2025 that they agreed to reform the debt brake, that defence spending above 1 percent of GDP would be exempt from this debt brake and that a EUR 500bn fund for infrastructure investments would be created. The developments in the German bond market had sizeable spillover effects across markets in the Eurozone. This didn’t come as a surprise.
Last week, the Trump administration announced tariffs against the entire world which, added to those of previous weeks, will raise the average external tariff of the United States to 22%, compared with 2.5% at the end of 2024. Financial markets have reacted extremely badly, and suggest even more serious fears for US growth than for global growth. Many unknowns remain, but this scenario is the most plausible. For the United States' trading partners, it would be better to resist the temptation to escalate and instead to double down on strengthening the engines of domestic growth. Europe is particularly well placed to do this.
How will Beijing react to the imminent US protectionist measures? Will the central bank allow the yuan to depreciate in order to offset the effect of tariff hikes on the price competitiveness of Chinese exports?
The message delivered by Beijing at the annual meeting of the National People's Congress at the beginning of March was clear: whatever the difficulties linked to trade and technological rivalries with the United States, the Chinese economy must achieve growth of close to 5% in 2025. The target has remained unchanged since 2023. It seems particularly ambitious this year, given that external demand, the driving force behind Chinese growth in 2024, is set to weaken significantly due to the rise in protectionist measures against China. The authorities are counting on domestic demand to pick up the slack, but this is still coming up against powerful obstacles
