The Global Macro Environment and who benefits in a Trump 2.0

JC: The inauguration of Donald Trump as the 47th President of the United States has seen some radical departures from the previous administration. Trump’s proposed election policies were strongly pro-growth and pro-business and the cut in income and corporate taxes will be stimulative. These measures will contribute to ongoing fiscal deficits, add to existing high US government debt levels, limit the expected (pre- election) quantum of reductions in the Federal funds rate, and will place a 4% plus floor under long bond yields.

Tariffs will result in upward pressures on supply chains, with input prices keeping US inflation somewhat elevated, and slowing the pace of global trade growth. In particular, China tariffs will impact those companies highly leveraged to China demand, or that manufacture in China. While tariffs appear problematic at first, the most recent presidential executive order entitled The “Fair and Reciprocal Plan” on Trade suggests that inter-country tariff wars are not just about the levels, but also about opening the door to political negotiation on fair trade principles that will be beneficial for both parties. The announcement refers to the “art of the international deal”, an homage to Trump’s 1987 memoir, The Art of the Deal signalling a dealmaking approach to evening out US perceived unfairness in trade relations. Ausbil’s view on tariffs under Trump is that the US is expected to benefit at the marginal cost of higher inflation. Moreover, the impact of tariffs will be significant for the net exporters running trade surpluses to the US, such as China, Mexico, Canada, European Union, Japan, South Korea and India. However, tariffs will be less problematic for net importers running trade deficits with the US, The Netherlands, Saudi Arabia and the United Kingdom. Overall, the risk of unknowns remains high, but we think that the risks of a US drive to equilibrate trade relations and reciprocity through tariffs and negotiation are in favour of strong US growth, and positive global growth, with some relatively minor drag from trade friction.

 

JC: Global macro settings are expected to remain within their ‘back to normal’ levels in 2025 and 2026, supported by a shallower global easing cycle. We are forecasting a sustainable step-up in global growth to 3.5% for 2025, elevated but stable inflation relative to central bank target levels and limited real rate cuts. The recalibration of restrictive policy settings appears to have run its course, closing in a new higher neutral level relative to recent history. The US Federal Reserve has pivoted and paused rates in the target range of 4.25-4.5% as “inflation remains somewhat elevated.” The structural themes of decarbonisation and accelerating de-globalisation will continue under Trump 2.0, and will underpin activity. Taken together, global GDP is continuing on a positive upward trajectory towards its trend rate, as illustrated in Table 1, and as a consequence our forecasts have remained unchanged since November 2024. Underlying resilient private demand, business investment, employment growth, and easier financial conditions will sustain the expansion of the global business cycle. We remain vigilant with respect to unpredictable geopolitical events, including the risk of underestimating the impact from Trump’s tariff policies.
 

Real GDP	Long run average	Ausbil
% year average	2010 to 2019	2025 (f) %
United States	2.3	2.2 to 2.5
Japan	1.2	1.2
Eurozone	1.4	1.6
China	7.7	4.6
India	7.0	7.0
Australia	2.6	2.5
Global GDP	3.7	3.5
Source: Ausbil, FactSet as of January 2025.

We are forecasting a resilient US, and a modest recovery for Europe. The US growth outlook sustained in the mid-2% range will be driven by Trump’s pro-growth and pro-business policies. This forecast builds on a resounding year average real GDP growth outcome of 2.8% for 2024, following 2.9% in 2023 and 2.5% in 2022. Growth is driven by a resilient labour market remaining at full employment levels, underlying strength in the consumer from real wages growth, a positive wealth effect and private capex investment. The US is experiencing a sustained productivity uplift, where the pace has stepped up to 2.0% from a low pre- pandemic 5-year average of 1.4%.

Europe experienced shallow growth conditions that felt more like a recession, especially for Germany. We are forecasting a gradual recovery in growth, assisted by European Central Bank rate cuts. Year average real GDP growth was a subdued 0.9% in 2024, following 0.4% in 2023 and 3.4% in the post-pandemic rebound of 2022.

The Asia-Pacific growth engine will continue outpacing the rest of the world. China’s ongoing piecemeal expansionary fiscal and easier monetary stances are stimulus measures aimed at stabilising local government debt levels and the property sector. Remarkably, year average real GDP achieved 5% in 2024, matching the government’s official target following 5.2% in 2023, and after the pandemic drag of 3% in 2022. Chinese President Xi, Premier Li and Central Bank Governor Pan have reiterated the government’s commitment to domestic stimulus. Collectively, these should sustain growth in the mid-4% plus range and will enable a forcible domestic final demand response to the imposition of Trump 2.0 China import tariffs. Encouragingly, the World Bank revised higher their 2025 growth outlook for China from 4.1% to 4.5%. The IMF upgraded by 0.1ppts to 4.6% in 2025 and by 0.4ppts to 4.5% in 2026.

3. Inflation is under control but will remain elevated 
JC: We are forecasting elevated but stable inflation relative to central bank target levels in the US and globally. Core inflation dynamics continue to see persistent sticky services inflation (ex-housing), moderating housing inflation at a much slower rate, and upside risk from goods inflation from potential supply and tariff driven input price shocks.

4. You can stop worrying about recession 
JC: In our view, lingering market fears of a US recession are unfounded and the risk is mitigated by the fact that central banks have significant room to cut nominal rates if recessionary signals eventuate.

5. 2025 will be a good macro environment for equities, with some risks. 
JC: In summary, Ausbil’s house view is that the global economy is on a positive upward trajectory in 2025, with lower inflation and real rate cuts.

We remain vigilant on unpredictable geopolitical events that may materially impact our view. War in the Middle East remains a risk to the price of oil and supply chains. The war in Russia and Ukraine carries some existential nuclear risks. These risks are unpredictable but at this stage we do not expect material market disruption.

That said, underlying resilient private demand, business investment, employment growth, and multiple rate cuts are expected to sustain the expansion of the global business cycle.