US President Donald Trump takes a question as he speaks during the signing of executive orders at his Mar-a-Lago resort in Palm Beach, Florida, on February 18, 2025. Photo: AFP
David Rees, George Brown, Tina Fong and Irene Lauro
The first 100 days of the Trump presidency will remain very noisy as the new administration sets out its stall on key policy objectives. But in our opinion, the early signs are in line with our baseline assumption that key economic policies will be milder than those promised on the campaign trail, clearing the way for solid global growth of 2.5% in 2025 and 2.8% in 2026.
US labour market in rude health
The US is still set to lead the way. Consumer spending has continued to exceed expectations, and with the labour market still in rude health we expect solid real wage growth to drive demand for a while longer. GDP growth is likely to be robust at 2.5% this year and 2.7% in 2026, but is likely to come at the cost of higher inflation.
Indeed, following January’s blockbuster inflation print, we now expect the core CPI rate to remain around 3% through this year and next. The Federal Reserve is likely to remain on pause in the months ahead as it assesses the impact of Trump’s policies, but we continue to expect it to start raising rates again in 2026.
Inflation remains a concern for Europe…
Eurozone growth should show some improvement as political clouds start to lift and looser financial conditions feed through to activity. But inflation is still a concern and is likely to stay elevated as wage growth remains stickier than is generally expected. As a result, interest rates are unlikely to fall as much as is generally expected. We have pencilled in just two more 25 basis points (bps) cuts to leave the deposit rate at 2.25%.
Scope for interest rate cuts in UK also limited
The UK economy looks similarly stagflationary as supply side constraints limit scope for faster growth. We expect inflation to climb above 3% later this year and exceed the 2% target throughout the forecast horizon leaving the Bank of England (BoE) with little room for manoeuvre. Indeed, with Governor Bailey signalling that the Monetary Policy Committee will now proceed “carefully”, we continue to expect just one more 25 bps rate cut in May to 4.25%.
China’s problematic near-term outlook
We remain pessimistic about the near-term outlook for China. While the economy showed some improvement towards the end of last year, leading indicators remain consistent with much softer activity in the first half of 2025, while uncertainty about trade policy and a lack of meaningful fiscal stimulus also cloud the outlook. Green shoots of recovery are emerging, but these are unlikely to become evident until much later in the year.
Mixed prognosis for emerging markets
Of the other major emerging markets, falling inflation and interest rate cuts are brightening the outlook for India. We expect growth to begin accelerating from mid-year. By contrast, growth in Brazil is likely to slow as aggressive interest rate hikes and rising inflation finally bring the economy back down to earth.
High level of uncertainty around US policy
Risks to our forecast remain unusually high due to uncertainty about US policymaking. Our Aggressive Trump scenario, that assumes high trade tariffs and large deportations, would be stagflationary for the US economy and probably tip the rest of the world into recession. Meanwhile we are concerned that rising US Treasury yields could expose fiscal frailties in other, much weaker sovereigns such as the UK.
But upside risks are also emerging. DeepSeek could speed-up the adoption of AI, macroeconomic reform has come back onto the agenda for governments desperate to find growth and bank lending shows signs of life. Steep falls in oil prices could also conceivably relieve inflation pressures later this year.
Schroders’s David Rees, the head of global economics; George Brown senior economist; Tina Fong strategist and Irene Lauro environmental economist.
BUSINESS REPORT