Global Economics Analyst_ Macro Outlook 2025_ Tailwinds (Probably) Trump Tariffs

Industry and Company Analysis 1. Global Economic Outlook - US Economic Growth: The US economy is expected to grow 2.5% in 2025, outperforming consensus expectations and other DM economies for the third year in a row. [2] - Euro Area GDP: Cut to a below-consensus 0.8% due to structural headwinds and trade policy uncertainty. [3] - China GDP: Cut to 4.5% due to higher US tariffs partially offset by easier macro policies. [3] - Inflation: US core PCE inflation expected to slow to 2.4% by late 2025, with a risk of rising to 3% with a 10% across-the-board tariff. [4] 2. US Economic Policy Changes - Trade: New tariffs on China and autos, with a 3.4pp increase in the effective tariff rate for US imports. [14] - Immigration: Net immigration expected to slow to 750k/year. [14] - Fiscal: Lower corporate tax for domestic manufacturers to 15% and reinstating more generous corporate incentives. [14] - Regulation: Easier approval of energy projects, expanding LNG exports, and reversing restrictions on greenhouse gas emissions. [14] 3. Impact on US GDP - Base Case: A small hit to growth in 2025 (0.2pp) and a moderate boost in 2026 (0.3pp). [16] - Risk Case: Larger negative impulse from across-the-board tariff, with a net drag on growth averaging 1.0pp in 2026. [18] 4. Impact on Europe and China - Euro Area: Trade policy uncertainty could subtract 0.9% from GDP. [20] - China: US tariff increase expected to subtract 0.7pp from growth in 2025. [22] 5. Global Growth Outlook - Global GDP: Expected to average 2.7% in 2025, with US outperforming relative to consensus. [30] 6. Inflation and Disinflation - US Core PCE Inflation: Expected to slow to 2.4% by late 2025, with a risk of rising to 3.1% with a 10% across-the-board tariff. [37] - Disinflation: Expected to continue across major DM economies, with the US, UK, and Australia likely to cluster around 2½% by late 2025. [45] 7. Monetary Policy - Fed: Expected to cut rates to 3.25-3.5% with sequential moves through Q1 and a slowdown thereafter. [49] - ECB: Expected to continue sequential cuts and lower the terminal forecast to 1.75%. [51] - BoE: Expected to cut rates back to 3.75% by end-2025 and a terminal rate of 3.25% in 2026Q2. [51] - Other DMs: Expected to see more aggressive cuts in smaller DM central banks. [52] - EMs: Expected to see significant room for monetary easing given that policy rates remain far above neutral. [54] 8. Market Outlook - Equities: Expected to see modest positive returns across key asset classes, with US equities outperforming and EM equities likely to outperform fixed income. [79] - Bonds: Expected to see modest positive returns, with US Treasuries and Bunds/Gilts playing an important diversifying role in portfolios. [80] - Commodities: Expected to continue to benefit from a positive roll return, with lower contribution from price shifts. [79] 9. Tail Risks - Broader Trade War: Underpriced risk, particularly for its potential impact on Europe and some non-China EM economies. [67] - Fiscal Risk: Increased possibility of additional fiscal expansion and focus on the sustainability of the US public debt profile. [69] - Inflation Risk: Short-term inflation risks are two-sided, with short-dated US inflation swaps priced well above the forecast. [69] - Oil Market: Risks of breaking the $70-$85/bbl range are growing, with upside tail risk from Iranian supply and downside risk from ample supply and potential demand hurt by broader tariff action. [71] 10. Investment Strategy - Maintain Exposure: Maintain exposure to robust US economic outlook while protecting against key tail risks. [80] - Diversification: Use diversification to address some of the challenges, including US Treasuries, Bunds/Gilts, and mid-cap equities or a more equal-weighted allocation. [80] - Options: Use options to provide protection against macro tails, including long USD positions, long USD optionality, and upside in gold and oil. [82]