The US will enter a period of reflation in 2025, following Donald Trump’s triumph in the US election in November, says Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.
“A resounding victory for the Republicans in November’s election has shifted the economic outlook for 2025 meaningfully. The US soft-landing scenario that we confidently held as our base case for most of 2024 should give way to reflation as we move deeper into 2025, but an economy whose exceptional growth propped up the rest of the world in recent years may also now turn inward and become more protectionist,” said Ahmed.
According to Ahmed, growth-supportive policies propped up by more fiscal easing should push inflation higher, reducing the risk of a US recession. However, other major economies, including Europe and China, will have to navigate a shift in US trade and industrial policy that is likely to weaken their own growth prospects and put downward pressure on domestic inflation as external demand slows.
“Put together, these divergences will support US growth but rising government debt burden is the underlying, long-term trend. We believe public finances are fast reaching their limit limits and that above target inflation is likely to become the least costly option for an orderly resolution to the problem of debt sustainability,” commented Ahmed.
Ahmed believes expensive fiscal policy and significantly higher tariffs are set to be the centrepieces for Trump’s second presidency. Against the backdrop of a good economy, the changes the new administration has set out meaningfully increase the odds of outright rises in US inflation from the second quarter, he said.
“We assume that the much discussed tariff rates – 60% for China and 20% for the rest of the world – are maximalist rates aimed at negotiations that may take place if the new administration presses ahead with its protectionist goals. The rates that emerge may well be lower but their impact on an economy that has outperformed expectations over the next year would be substantial.
“That said, recession only returns as a serious risk if, in the face of an inflation shock, the Federal Reserve pivots to a hiking cycle,” he added.
Europe’s structural challenge
Fidelity is anticipating a cyclical upswing for the Eurozone economy in 2025 as falling inflation and lower interest rates help resurrect corporate capex and consumer confidence. Stronger real disposable income and easier financing conditions should start releasing elevated savings to drive consumption growth, the firm said. However, potential tariffs from the US pose a downside risk and the resulting trade uncertainty could reduce growth to half a percentage point.
“We expect the European Central Bank to cut rates quickly to 2%, followed by gradual easing to 1.5% by the end of 2025. More aggressive tariffs risk provoking additional and accelerated easing, although the central bank will need to keep one on any currency weakness against the dollar,” said Ahmed.
Facing similar headwinds, the UK has slightly outperformed the Eurozone in 2024 and Ahmed expects this momentum to strengthen in 2025, with the UK economy less exposed to the risk of a trade war.
China’s policy pivot
Fidelity said China’s quest for a slower but more sustainable model of growth focused on domestic consumption and higher-end manufacturing is advancing, but not without bumps in the road.
“The policy pivot by the politburo in late 2024 signals a decisive move to resolve the issues that have depressed domestic demand, namely the property sector, local government debt, a lacklustre equity market, and poor consumer confidence.
“One big question is whether the levels of growth China needs can be delivered if the US simultaneously burdens companies’ biggest sales market with heavy tariffs. The manufacturing sector is steadily upgrading, especially in new and emerging industries, providing support for overall growth.
“If additional US tariffs are imposed, past experience also tells us that Chinese companies are likely to prove agile in response, softening the impact on corporate earnings. Beyond that, macro stabilisation policies will be crucial in deciding China’s economic fate over the next year,” added Ahmed.
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