In bridge or similar card games, a trump is a card or suit that outranks the others, a valuable resource that is used to gain an advantage or win a hand. 

U.S. President Donald Trump has threatened to play the tariff card as a way to gain an advantage in negotiating with other economies.  With the United States as the leading import country worldwide, most economies are more likely to fold than call America’s bluff in this high-stakes game.  We expect gradual tariff hikes by the U.S. administration, keeping the door open to negotiation and reducing the risk of reflation.  

U.S. exceptionalism will persist in 2025, leaving other major economies to play catch-up.  Most governments and central banks will seek a balance between suppressing inflation and making the economic backdrop more conducive for growth.  That said, America’s stances on trade, immigration, and government spending are likely to keep businesses, consumers and markets on edge, especially in Canada, Europe and China. 

Following are our thoughts on how top areas are faring.

United States

• A burst of announcements after inauguration day set a direction for policy, but offered few specifics.  Key priorities included reinstating strict immigration policies, as well as declaring a national emergency to expedite conventional energy projects.  The president stopped short of imposing tariffs on day one, but indicated that they are in sight.
  
  A soft landing is still underway, with activity and labor markets holding up well.  The economy is expected to gradually slow toward its potential rate of growth, with federal economic policy the biggest source of uncertainty for the outlook.
  


• Inflation’s improvement has stalled.  The December consumer price index rose to a 2.9% annual gain, or 3.2% on a core basis (excluding food and energy).  The deflator on personal consumption expenditures also showed a discouraging step up to 2.4% headline and 2.8% core over the past twelve months.  Lack of further progress has prompted the Federal Reserve to pause its easing cycle.  We expect only three cuts in 2025, starting in June.  While the risk of reflation remains low, policy volatility is complicating the outlook for the Fed.

Canada

• After a disappointing 2024, Canada’s economy is likely to benefit from a combination of subdued inflation, looser financial conditions and temporary fiscal stimulus this year. While better prospects lie ahead for the Canadian economy, activity will be constrained by lingering imbalances and vulnerabilities.  High household debt and weak productivity will continue to weigh on growth.  A shrinking population from tighter immigration targets, coupled with uncertainty around domestic and U.S. trade policy, present downside risks to the outlook.  The threatened tariffs by the U.S. could deliver a significant blow to the Canadian economy if implemented to their fullest extent.
  


• The Bank of Canada (BoC) remains in easing mode amid tepid growth and benign inflation.  After delivering two consecutive cuts of half a percentage point each, the central bank reverted to a 25 basis point reduction, leaving the overnight rate at 3%.  The BoC also announced it will end quantitative tightening in early March and restart gradual asset purchases again.  We expect the BoC to cut at its next two meetings, reaching a neutral of 2.5%.  However, U.S. trade hostilities could force the central bank to go lower.

Eurozone

• Recent surveys and hard data have raised hopes that the worst is over for the eurozone economy.  Industrial production surprised to the upside in November, the composite Purchasing Managers’ Index returned to expansion territory, and business expectations improved slightly.  But the economic backdrop is still quite weak.
  
  Eurozone growth flatlined in the fourth quarter of 2024.  Its manufacturing sector remains in recession, with limited prospects for a turnaround.  Services have failed to provide further support as consumers remain cautious.  Falling interest rates, stable inflation and sticky wage growth will boost spending.  But concerns surrounding America’s trade policies, considerable budget complexity and political uncertainty in Germany and France will weigh on growth.  The eurozone will continue to underperform its peers.
  


• The European Central Bank cut policy rates by a further 25 basis points at its January meeting amid signs of weak growth and continued disinflation.  While the central bank has refused to pre-commit to a specific rate path, we expect sequential cuts to 1.75% by mid-summer.  A growth disappointment or U.S. tariffs could trigger more accommodation.

United Kingdom

• The U.K. economy lost momentum in the second half of 2024, with activity data pointing toward stagnation in the fourth quarter. Confidence has been dented by the tax increases announced in the Autumn Budget and the threat of global trade tensions.  Though we expect the economy to regain momentum after its recent soft patch, tightening fiscal policy and the lagged impact of past interest rate hikes will prevent the economy from performing to its full potential.  The recent selloff in gilts has largely reversed, but concerns about fiscal sustainability are unlikely to fade away.  Given the lack of fiscal headroom and softer growth outlook, Chancellor Reeves will likely be forced to make spending cuts.
  


• The labor market is showing signs of cooling, but conditions are still favorable.  The unemployment rate is rising, and vacancies are falling; however, private sector pay growth remains strong.  A rise in employers' National Insurance contributions will likely dampen pay growth while adding to inflation.  Sticky underlying price pressures will prompt the Bank of England to tread cautiously.  We continue to expect a quarterly pace of easing in 2025.

Japan

• In the year ahead, we expect the Japanese economy to preserve its return to normalcy.  Consumption will be the main pillar of growth, as households’ purchasing power gets a further boost from rising wages.  But the outlook for exports is not particularly bright.  Japan is not high on the list of the new U.S. administration’s trade concerns, but weaker demand from Europe and China will weigh on the country’s external sector performance.
  


• With inflation and its underlying drivers trending in the right direction, the Bank of Japan (BoJ) raised its policy rate by 25 basis points to 0.50% last week.  Another round of strong wage settlement from Shunto negotiations this spring will allow for further but careful policy normalization.  We expect the BoJ to hike again in the middle of the year.  However, the impact of the yen and the threat of U.S. administration’s protectionist policies make the timing uncertain.

China

• China’s economic activity bounced back in the last quarter of 2024, supported by more forceful policy easing and factories pushing out exports ahead of Donald Trump’s inauguration.  However, the recovery remains uneven and susceptible to downside risks.
  
  Signs of softening growth are already starting to surface.  The Manufacturing Purchasing Manager’s Index in January slipped back into contractionary levels.  China’s real estate market is still in disarray.  Deflationary forces are taking hold, with consumer inflation hovering just above zero and producer prices in negative territory.  Near-term growth will be underpinned by an expansion of the consumer goods trade-in program and strong export front-loading, but a durable rebound is unlikely due to lingering structural issues.  Another wave of U.S. tariffs and restrictions, potentially more disruptive than prior policies, are forthcoming.  The Chinese economy is entering a new era of much slower growth. 
  
  
• In order to reflate the economy, the central bank has shifted its policy stance from being prudent to moderately loose.  More proactive support in the form of quantitative easing, reductions to benchmark policy rates and lower reserve requirement ratios are in store.  These measures will likely be accompanied by a large demand-side push.  We expect fiscal policy to do more heavy lifting after the March National People’s Congress meeting, but policymakers will find themselves constrained by the country’s high debt burden.  

Australia

• The Australian economy avoided a recession last year, led by strong population growth and a large expansion of public demand.  Tight monetary conditions restrained the private sector.  But there are better prospects in store.  Consumption growth is set to improve steadily, with labor market dynamics shifting from loosening to tightening.  Australia is unlikely to get directly caught up in a tit-for-tat trade battle, given the country’s relatively small share of trade with the United States.  But export performance could get tempered by developments in China and commodity markets.
  
  
• The Reserve Bank of Australia (RBA) is “gaining some confidence that inflation is moving sustainably towards target.”  Given the clear dovish guidance and easing inflationary pressures, we expect the RBA to begin a short, shallow easing cycle in February.  The recent tightening in labor market conditions could stall disinflation progress, delaying the long-awaited pivot.