Despite rising geopolitical tensions, the global economy showed surprising resilience in early 2025, and inflation continued to normalise. However, by disrupting the post-WWII economic order, weaponising trade — even against long-standing allies —, constantly shifting policy direction, and undermining the confidence of both households and businesses, D. Trump's economic strategy may ultimately weigh significantly on global activity.
China: Between Excess Savings and Trade War
Although growth remained solid at the start of the year, PMI surveys now point to a slowdown in both manufacturing and services. Youth unemployment — particularly among university graduates — remains high, and household confidence is weak. When asked how they plan to use their income, six in ten households say they prefer to save rather than consume or invest in real estate — a sharp increase compared to the previous decade [1]. Deflationary pressures, therefore, remain persistent.
The real estate sector is still burdened by past overbuilding and has yet to recover. At the same time, widespread overcapacity across many industrial sectors continues to dampen corporate investment. As a result, China’s growth remains heavily reliant on the strength of its external trade.
Amid escalating trade tensions, this dependence on exports is becoming problematic. China is attempting to circumvent US tariffs by rerouting exports through third countries and to offset the shock on growth by expanding into new markets. However, this strategy is running up against growing resistance from trading partners — many of whom are also facing US protectionism and pressure from the Trump administration to scale back trade with China. The 90-day truce with the United States provides a welcome reprieve. But unless there is a fundamental shift in US trade policy, Beijing will need to significantly ramp up domestic stimulus in the coming months to meet its 5% growth target for 2025. The key question though is whether China is willing to move beyond short-term support measures and commit to deeper structural reforms in its social model. Developing more generous public health and pension systems could help reduce precautionary savings. Should China make that pivot, it would mark a major strategic shift — one that signals a move toward more autonomous growth, less dependent on external demand... and more resilient in the face of geopolitical shocks!
United States: Robust Growth — But for How Long?
At the beginning of the year, US economic momentum remained fueled by strong domestic demand. Job creation has held up, though it is slowing — from over 200,000 jobs per month at the end of 2024 to under 150,000 since January [2]. Business surveys now suggest that growth may weaken in the second half of the year: household confidence is eroding, corporate investment intentions have softened, and export orders are falling sharply. Assessing the potential severity of the slowdown remains however difficult. Uncertainty surrounding US economic policy has rarely been so high. Will the Trump administration secure trade deals with key partners before the July 9 deadline? Where will tariff levels ultimately settle? What will the “Big Beautiful Bill” Act contain?
We expect a significant slowdown in activity — to just under 1% in 2026. This is based on tariffs stabilising at a slightly higher level (around 15%), well below those seen on “Liberation Day.” It also assumes modest fiscal support, contributing about 0.3 percentage points to GDP in 2026 — less than one might expect given the deterioration in government primary balance. Indeed, planned cuts to major social programs will primarily affect low-income households, while much of the proposed tax relief is likely to benefit higher income earners and be saved rather than spent. Given the uncertainty around both economic growth and inflation, the Federal Reserve has every reason to remain cautious in the months ahead. It is unlikely to resume its rate-cutting cycle until the slowdown is firmly established — likely toward the end of the year.
Over the longer term, Trump’s policies could put the economy on a risky trajectory. The federal deficit is expected to remain near 6.5% of GDP, leaving the US with very limited fiscal room when the next recession hits. Stricter immigration policies are also set to undermine growth potential. Finally, the administration’s stated aim of weakening the dollar is fraught with risk: persistently large public deficits will not help rebalance the US current account, while the “America First” policy is encouraging major economies like Europe and China to invest more of their savings at home. This could lead to a sustained rise in the term premium on US Treasury bonds. By opening multiple fronts and seeking constant confrontation, Trump’s high-stakes strategy is unlikely to deliver its intended results — except, perhaps, for a weaker dollar.
Eurozone: Confronting the Trump Administration’s Challenge
The eurozone experienced a strong GDP rebound in Q1 2025, posting an annualised growth rate of 2.5% [3]. However, much of this surge is due to a dramatic 45% annualised jump in Irish GDP, driven by a spike in pharmaceutical exports ahead of anticipated US tariff hikes. Excluding Ireland, annual growth in the eurozone remains modest — just under 1%. Consumption is still struggling to regain momentum, with households increasingly pessimistic about both the economic situation and job prospects. Business investment remains subdued, given the ongoing uncertainty and weak demand growth. However, the monetary easing implemented over the past year should help revive residential investment.
The eurozone’s future trajectory will hinge heavily on the outcome of trade negotiations with the United States. The value added content of eurozone’s exports of manufactured goods to the US amounts to nearly 2% of overall eurozone’s GDP. At current tariff levels, American trade policy could shave 0.5% off eurozone growth. Europe could also face additional pressure if China ramps up efforts to expand into the European single market. Some of these shocks could be cushioned by Germany’s fiscal plan and EU efforts to ramp up defense spending. However, if trade tensions escalate further, the risk of a material slowdown becomes real. This would likely prompt the ECB to resume cutting rates, potentially bringing the deposit rate down to 1.5% by year-end.
Even if growth slows, Trump’s foreign policy has had at least one merit: by shaking European confidence in the US security umbrella, it has forced Europe — especially Germany — to respond. Long dependent on cheap Russian energy and strong global demand, particularly from China, Germany had neglected its infrastructure and social investment. This short-sighted focus on competitiveness and fiscal discipline has reached its limits: since 2019, German GDP has stagnated. In this context, the fiscal shift under Chancellor Mertz and the launch of the ReArm EU initiative are welcome steps. But they will not be sufficient. Mario Draghi’s report on European competitiveness leaves no doubt: the EU must invest at least €800 billion per year — 5% of GDP — over the coming years to regain its competitive edge. Closing the gap in digital technologies (AI, cybersecurity, etc.) is essential to avoid long-term decline.Yet Draghi’s proposal to finance these European public goods — energy, defense, innovation — through common debt issuance remains a divisive issue. For some EU members, fiscal discipline and national sovereignty remain non-negotiable. The challenge is thus not only economic, but above all political.
[1] Source: Central Bank of China
[2] Source: Bureau of Labor Statistics (BLS)
[3] Source: Eurostat
