President Trump's return is likely to bring a significant increase in US import tariffs in 2025. China will be hit hardest, but Europe will also be affected, leading to a sharp slowdown later in the year. Import tariffs threaten the recovery of domestic demand in the eurozone and China, while in the US deregulation and tax cuts will partially cushion the shock of tariff hikes on real incomes. This was shared by ABN Amro.
The Dutch bank expects inflation to rise in the US but fall just below the 2% target in the eurozone. All this is likely to lead to a divergence in Fed and ECB policy, with the Fed's policy rate being cut more slowly and less frequently and the ECB's rate falling to 1%. This will push the euro-dollar euro exchange rate towards parity during 2025.
Global view: 2025 is likely to be a year of big changes
China will usher in the Year of the Snake in 2025. According to Eastern lore, the snake is associated with wisdom, charm, elegance and transformation. In Western culture, the snake has other associations, but transformation - not necessarily of the positive kind - seems an apt description for the year ahead. President Trump's return to the White House is already causing geopolitical shockwaves well before his inauguration on 20 January. The most notable of these, the short-term consequences of which will be difficult to foresee, is his handling of the war between Russia and Ukraine. More broadly, and thinking purely of the macroeconomic impact, a weakening of the US commitment to NATO allies could mean European governments spending more on defence in the coming years, with possibly a loosening of fiscal rules to allow for this.
While at the moment we can only speculate on the geo-economic impact of Trump's second term, the potential impact of trade tariffs on the short-term outlook is much more concrete. The flagship of Trump's economic policies are massive new tariffs on imports to the US, especially against the US's 'favourite' trading partner, China. Trump is also threatening much broader tariffs in his upcoming presidency, including against allies in Europe. In the US, the growth impact of the tariffs - at least initially - will be partly offset by the boost in business confidence that comes with Trump's deregulation campaign and a host of new tax cuts. There will be no such compensation for Europe, and if the tariffs are levied as planned, European exports to the US are likely to be hit hard, halting the eurozone's recovery later next year and beyond into 2026. Tariffs are also likely to push US inflation well above the Fed's 2% target, while eurozone inflation is more likely to fall below target. As ABN Amro pointed out last summer, this will lead to a renewed transatlantic divergence in interest rate paths - making the dollar stronger and the euro weaker.
Are there any positives? The starting position for the major economies is relatively good. In the US, the expected cooling has not materialised, even at the cost of increased vulnerabilities, such as a persistently low household savings rate and rising consumer credit arrears. In the eurozone, growth figures are also much better than PMI indicators suggested, thanks to a timely pick-up in consumption. In the short term, activity is likely to continue to benefit from falling interest rates - which are already leading to an increase in mortgage lending - and solid gains in real income. Another bright spot could be policy changes outside the US. First, China is going to more actively stimulate demand, and while this is unlikely to boost global growth as much as in the past, it is still likely to provide a positive boost. Second, the German elections in February offer an opportunity for a reversal of the government's notoriously frugal fiscal policy. Germany certainly urgently needs more public and private investment to meet its competitiveness challenges, and it is also one of the few countries with the fiscal space to do so. Whether it chooses to do so ultimately depends on politics - and the electorate.
New US import tariffs: 10%? 20%? 2000%?
Trump's proposal for a 10% universal tariff on all US imports, in addition to a 60% tariff on imports from China, first surfaced in September 2023 as part of his candidacy for the Republican presidential election. In August 2024, he raised the stakes even further by proposing a basic 20% tariff. In his most recent remarks - in which he said "tariff" is "the nicest word in the dictionary" - he even proposed a 2000% specific tariff on car imports from Mexico.
The wide range of proposals makes it difficult to know what to expect. Besides, could the tariffs be a negotiating tactic to persuade US trading partners to drop their own trade barriers? Leading candidates for Trump's economic team have made comments along these lines. Scott Bessent, nominated for the Treasury Secretary position, called the strategy "escalate to de-escalate", as a way to get trading partners to drop tariffs against the US auto industry, for example. Moreover, it seems logical for the US to impose tariffs on products it competes with, but not on products it does not make itself.
A clear argument against the 'bargaining theory' is that Trump's tax cut plans depend to some extent on revenue from new tariffs. Because of the tax cut proposals, even with revenue from a 10% universal tariff, budget deficits would increase from an already high level. While Republicans are not as fanatical about the budget deficit as before, the alternative of fully funded tax cuts may be too hard to stomach, making at least some rate hikes the path of least resistance. An additional layer of uncertainty about both the rate and tax cut plans is the reaction of Congress. On paper, policy implementation looks easy given the Republican trinity holding the presidency, the Senate and the House. However, Republican majorities are small and it will only take a handful of defiant Senators or Republicans in the House to run Trump's plans (whatever they will ultimately entail) into the ground.
Read ABN Amro's full article here .