- President Trump signed a flurry of executive orders on his first day as the new President of the US, including a withdrawal from the Paris Accords and the WHO. But cracking down on unauthorized and legal immigration topped the agenda. We expect the number of deportations per year to reach 500,000, which could stall US population growth, pushing the economy’s potential growth below +2% by 2026. The President will likely announce tariff hikes on 1 February against China and potentially the EU, Mexico, and Canada. Executive orders were also signed to boost oil & gas production and unravel green-friendly policies, especially for electric vehicles. Overall, some policies could be inconsistent with each other, such as maintaining high growth while reducing inflation. Ultimately, the success of Trumponomics will mostly hinge on the administration's ability to substantially reduce the public deficit, which would lead to lower inflation and lower interest rates.
- Central banks: Red light, green light. The coming days will be packed with central bank decisions, but not everyone is driving in the same direction. The Bank of Japan will be on the starting block on Friday, likely raising its policy rate by 25bps to 0.50%. The Fed meeting follows on 29 January, and we expect a pause in its easing cycle (Fed Funds rate target in the 4.25-4.5% bound) after three consecutive rate cuts in end-2024 amid persistent core inflationary pressures. With policies likely to keep inflation above target, and political pressure on the Fed to favor growth, we still see little scope for further decreases this year. We still expect only one last 25bps rate cut in March, which will keep the Fed Funds rate in the 4-4.25% bound for the rest of the year. In contrast, the ECB (30 January) is set to continue its easing cycle this year, lowering the deposit rate again by 25bps to 2.75% as economic headwinds persist. We expect 25bps cuts at each of the following meetings, reaching a terminal rate of 2.0% by June 2025. Lastly, the Bank of England is likely to cut the bank rate by 25bps on 06 February, and to cut in one of every two meetings until Q3 2025 as it balances weak economic activity and sticky inflation.
- China: A slippery trade surplus in the year of the snake. China ended the year of the dragon with a fiery trade surplus of nearly USD1trn, boosted by exports to the US at the end of the year ahead of the looming trade war. But the year of the snake will be more slippery, with President Trump warning of setting 10% tariffs against China as soon as 1 February. While details are still lacking, we estimate that China’s export losses would range between USD22bn and USD57bn over 2025-2026 in a contained trade war scenario. Weaker export prices and currency may partly mitigate the impact, though we expect a milder CNY depreciation this time around (2.6% in 2025 vs. 10% in 2018) as Chinese authorities worry about confidence effects and the risk of capital flight. The USDCNY rate is unlikely to exceed 7.50 in 2025.
What to watch