Economic and financial risk insights: Geopolitical and tariff uncertainties dominate as Trump hits the ground running

• Growth: US growth outperformance is set to persist despite higher protectionism. Increasing trade tensions will continue to constrain already-weak growth prospects in Europe and China.
• Inflation: US inflation pressures may prove stubborn as a result of the new administration's policies. Euro area disinflation is broadly on track, with risks skewed to the downside.
• Interest rates: We expect the Fed to slow the pace of rate cuts; the ECB's cutting cycle remains on track. We largely maintain our existing long-dated bond yield forecasts.

US relative outperformance set to persist; tariffs present downside risks. The US economy has started the year on firm footing with still-solid jobs growth and declining unemployment last month (see Figure 1). The main growth drag from protectionist policies will likely show in 2H only, and we expect 2025 GDP growth to remain above long-term potential (we estimate the latter at 1.9%). Our baseline continues to assume broad-based tariff increases by the US on China and selective, reciprocal tariffs on other countries, with retaliation posing a larger threat to US growth than to inflation.

Figure 1: US non-farm payrolls, Net Change, 3m MA

For China, we maintain our forecast of 4.6% growth for 2025, in spite of the tariffs. This is based on expectations of continued policy support, with additional measures likely to be announced at next month's National People's Congress. Meanwhile, muted growth recovery in Europe remains the state of play (see Figure 3) in the face of trade tensions and ongoing structural headwinds. The German election will be key to watch for the developments on the fiscal side, but in 2025 policy accommodation will rest primarily on the ECB's shoulders, in our view.

Figure 2: Economic policy uncertainty

Figure 3: Change in business/consumer confidence (EA)

Bumpy disinflation trajectory expected to continue. The rise in US CPI inflation to 3% y/y in January exceeded expectations. Similar to last year, January inflation data was noisy and we hold our 2.5% forecast for 2025 and expect the underlying disinflation trend to continue. Nonetheless, we signal upside risks from rising inflation expectations, higher tariffs, and potentially tighter labour market conditions due to immigration policy lifting wage growth. In the euro area, CPI inflation has also ticked up of late. However, this is mainly due to energy base effects rather than an acceleration in underlying price momentum (see Figure 4). A redirection of Chinese excess supply to Europe from the US, alongside CNY devaluation could add downward pressure on CPI. We lower our CPI inflation forecast for China by 0.2 ppt given persistent soft demand.

Figure 4: Energy inflation base effects in the euro area

Monetary normalisation in the US may be delayed. We still see two rate cuts in the US in 2025 (see Figure 5), but later in the year, with inflation uncertainty adding risks of a longer pause. For the euro area, we pencil in a total of 125 bp cuts in 2025, amidst weak growth and slowing inflation. The rate outlook for the UK is less clear, given our view of higher inflation but weaker growth in the near term. Upside risks to bond yields persist, with fiscal concerns a driver, especially in Europe. The Bank of Japan is the only major central bank expected to hike rates in 2025.

Figure 5: Monetary policy outlook ahead

Figure 6: Change in developed market yields per driver

US growth outperformance to persist. Yet global risks are skewed to the downside, with a potential trade war escalation being more harmful to growth than inflation. Divergence in central bank policies could be amplified by differing regional growth and inflation outcomes.

Swiss Re Institute key forecasts for 2025 and 2026