Trump, tariffs and tensions occupy economists in 2025

Top economists at some of the world’s largest money management firms took a region-by-region approach to their outlook interviews with Pensions & Investments, revealing that what happens in the U.S. under a second Trump administration is key for the rest of the world.

That’s the known. The unknown and therefore huge risk is what he does with those policies and how the rest of the world responds.

“The key part of thinking about the U.S. is what does Trump’s reelection mean for policy and the momentum in the U.S.,” said Karen Ward, managing director and chief market strategist for Europe, Middle East and Africa at J.P. Morgan Asset Management. At face value, it looks like a further divergence between U.S. growth and economic and market performance vs. the rest of the world.

But while Donald Trump’s return to the White House looks like it means a continuation of policy and approach from his previous term in 2017 to 2021 — with deregulation, tariffs and tax cuts once again on the agenda — there’s a major factor that may change how these play out, she said.

“One point I’ve been making to clients is the economy that he inherits this time is different to the one in 2016 — therefore, some of the possible policies perhaps carry a few more risks.”

When Trump took office in 2016, the U.S. was running a deficit of just over 3%. The U.S. deficit now represents over 6% of GDP, “so doing a big tax break across the economy, which was hugely beneficial for the economy and markets (in Trump’s previous term) doesn’t seem like an option,” Ward said. Going down a route of significant tax cuts — beyond extending what’s already in place — “could be more risky,” she added. JPMAM has $3.5 trillion in assets under management.

It's also an economy on a comedown from high inflation, and that has, in his four years since being in office, seen interest rates rise from zero to a top target of 5.5%, and now coming back down to a range of 4.5% to 4.75%. The Fed has forecast a drop in the funds rate to 3.4% at the end of 2025, and 2.9% at the end of 2026.

Devil is in the details

“From a macro standpoint, we worry most about a resurgence in inflation should aggressive tariffs be implemented,” said Simona Mocuta, chief economist at the $4.73 trillion State Street Global Advisors. “But we also worry about what tariffs and deportations may do to economic growth. The truth is that, for many policy areas, the devil will be in the implementation details. And we worry about the unsustainable fiscal trajectory that so many economies, including the U.S., are in,” she added.

For Martin Moryson, chief economist for Europe at DWS Group, political uncertainty is “what you get if you elect Trump. For the U.S., you have very high uncertainty regarding the outlook — because on the one hand, everybody at the moment is quite positive on his policies because he wants to cut red tape, get done with regulation, cut taxes,” he said, adding that the “market is almost priced for perfection in the U.S.”

Moryson and other economists expect Trump not to cut taxes, but rather prevent automatic tax increases that would come when the Tax Cuts and Jobs Act of 2017 expire in 2025.

While markets seem positive, Moryson said it cannot be ruled out that Trump’s policies — increased tariffs, a pledge to seal the border, and to cut regulatory red tape and taxes — are “long-term negative for the economy” because of their inflationary impacts.

Tariffs also are “distorting — protecting your industry prevents them from being more productive. Less productivity (means) you have lower potential growth,” and that may lead to a stagnation scenario, Moryson said.

An anti-immigration policy pushes up inflation and brings down growth, he added. “That is not a very good idea … and with that, you are back again with this very high uncertainty” amid the fact that the administration’s “two most favorite policies are inflationary.” DWS Group has €963 billion ($1.02 trillion) in assets under management.

Other economists are thinking about the uncertainty over policy.

“The risk to market expectations for short-term rates in the U.S. comes from the potentially inflationary impact of the new Trump administration’s policies,” said Daniel Morris, chief market strategist and co-head of the Investment Insight Centre at BNP Paribas Asset Management, which has €591 billion in AUM. “At this point, however, one can only speculate on what will actually be implemented.”

He agreed that any extension or expansion of tax cuts “would only lead to a further deterioration in the fiscal outlook,” and Treasury yields over the longer term “could rise to reflect the uncertainty about the outlook for inflation, to say nothing of the U.S. budget deficit,” Morris added.

While Andrew Pease, chief investment strategist and managing director at the $327.5 billion Russell Investments, dislikes agreeing with the crowd, he does on the general outlook for markets.

“Everyone is saying the same thing — U.S. first, dollar strength, hate Europe, hate China. All those things make a fair bit of logical sense. It’s always a cliché to say ‘uncertainty is high’ … but normally that’s about the business cycle outlook. It’s hard enough working out where you are, let alone where you’re going,” he said.

And he also agreed that this time, things are different. “The challenge in 2025 is we have an additional layer this year: policy uncertainty.”

One way to deal with that is to think in scenarios, he said. Russell’s central scenario is 1.5% to 2% GDP growth for the U.S., the Fed takes policy down to neutral, inflation gets back to target, and Trump’s “stance on immigration, deportations, tariffs all turn out to be noise,” Pease said.

Sources were unanimous in expecting the Federal Reserve, European Central Bank and Bank of England to continue on their interest-rate cutting paths — albeit potentially at a slower pace than in 2024 and previously forecast — and for the Bank of Japan to diverge and hike.

“True, the pace of decline may be somewhat slower than once envisioned due to resilient growth and balky inflation numbers, but the key point is that monetary policy is still substantially restrictive by any reasonable definition, and there is scope to make it less restrictive without seriously overheating the economy,” said Eric Lascelles, chief economist at RBC Global Asset Management, which has a total $503 billion in AUM.

The uncertainty related to U.S. policy will also keep central bank decisions and monetary policy on the center stage in 2025. Should Trump’s policies prove inflationary, the Fed will find itself with less room to maneuver. “The Fed has less room than most due to greater economic resilience plus the presumed growth-enhancing and inflation-enhancing effects of a Trump presidency,” Lascelles said. “But even there, some additional easing is likely.”

Melanie Baker, senior economist at Royal London Asset Management, added: “At current policy rates, the bar to rate hikes is high, but as 2025 progresses, that bar looks set to fall.” RLAM has £170.3 billion ($216.9 billion) in AUM.

As signposted by Trump over the years, China is expected to remain the key target for tariffs, sources said.

But it’s not just the U.S. that JPMAM’s Ward expects to cause tariff-related bother for China. She thinks actions “will happen organically from other countries increasing borders toward China. Europe is increasingly struggling to compete with the excess supply that’s coming out of China — I think we will see increasing protectionism in the West towards China — the question then is how does China respond?”

Authorities in the country need to recognize that China “is now too big to have export-driven growth — the rest of the world is not willing to continue absorbing — so they have got to… focus on their domestic consumer. I suspect we will see a sizable fiscal package there … focused on trying to make sure products are bought domestically,” Ward added.

RBC GAM is assuming a 10% tariff on China for its forecasts, with Lascelles adding that China “remains deeply intermeshed with the rest of the world, including profound trading relationships with the rest of Asia, South America, Africa, Europe and Australasia. These are unlikely to go away,” he said.

However, China’s trading routes may be impacted, potentially finding “that its capacity to tranship through such markets as Mexico and Vietnam into the U.S. becomes more constrained due to American pressure on those third parties.”

The specter of tariffs does present “a burden on growth,” DWS’ Moryson said, dampening positive measures by the Chinese authorities to stimulate the economy. “We normally would have revised upwards our forecast on China, from 4.4% to something like 4.7% or so. But with all these tariffs looming, we are going for a downgrade to 4.2%,” he said. The downward revision is not more because while tariffs will have an impact, the policy “won’t bring China trade with the U.S. to a standstill,” Moryson said.

With Trump back in the White House, and tariffs and protectionism back on the table, geopolitical risk also remains high on the list of worries.

“Aside from the impact on trade tensions, it appears the Trump administration will also look to take a more interventionist approach in global conflicts to bring about resolutions,” said Alex Joiner, chief economist at IFM Investors. “This is particularly true on Russia-Ukraine and the Middle East,” he said.

“The unpredictability of these flash points will be key for markets, particularly in the energy space where a deterioration (of geopolitics) may again prompt volatility and inflation,” Joiner said. IFM Investors has $114 billion in AUM across infrastructure and other strategies.

Ironically, Pease added, Trump’s return to the world’s political stage may actually reduce geopolitical tensions.

“Consensus is that geopolitics get worse next year. One thing Donald Trump is quite good at — not a conscious thing — is bringing down the geopolitical temperature gauge,” he said, citing the Geopolitical Risk Index — a measure of adverse geopolitical events and associated risks that’s based on wording in newspaper articles. The index was created by the Federal Reserve Board’s Dario Caldara and Matteo Iacoviello.

That index shows clear spikes around 9/11 and throughout George Bush’s presidency from 2001 to 2009, for example. However, it “trended lower in Trump Mark I,” Pease said — and was higher under President Joe Biden. Pease attributed the lower index numbers under Trump to his unpredictability, with others less likely to test him as they’re unsure of what may come back to them. “So Trump’s presidency, even though it might be a lot of noise, might be a period of geopolitical calm,” he added.