A new era of trade uncertainty

Moody’s latest Global Macro Outlook 2025-2026 paints a sobering picture of the global economy. While the short-term outlook appears stable, the long-term trajectory is uncertain, primarily driven by potential shifts in US domestic and international policies.

The global economy has shown resilience in recovering from the disruptions of the past few years. Falling interest rates and stable inflation have supported this recovery. However, the potential for increased trade protectionism, particularly from the US, threatens to derail this progress.

As Moody’s warned: “The economic benefits, or peace dividend, from increased globalisation of the last several decades is at risk from a potentially accelerated fragmentation of the global economy.”

The incoming US administration’s policy proposals, particularly in the areas of trade, immigration, and fiscal policy, have the potential to reshape the global economic landscape. While the short-term impact of these policies is uncertain, the long-term implications could be significant.

Increased trade protectionism could lead to higher prices for consumers, reduced economic growth, and job losses.

“Greater trade protectionism in the US will be a clear risk to both US and global economic expansion,” Moody’s noted. Immigration restrictions could limit labour supply and stifle innovation. Moreover, expansionary fiscal policies could exacerbate inflationary pressures and increase government debt.

China’s slowdown

China’s economic growth is expected to slow in the coming years, due to a combination of structural factors, such as declining working-age population and weak productivity growth, and cyclical factors, such as a slowdown in the property market and weak consumer demand.

While the Chinese government has implemented a series of stimulus measures to support the economy, these measures are unlikely to be sufficient to offset the underlying structural challenges.

“China’s real GDP grew by 4.6% in Q3 relative to a year ago, falling short of the government’s 5% target growth rate,” Moody’s reports. “We expect fourth quarter growth to be similar at around 4.5% and have therefore raised our growth forecast for this year to 4.7% from our previous estimate of 4.5%. We expect real GDP growth to slow to 4.2% in 2025, instead of our previous forecast of 4.0%, and further to 3.8% in 2026.”

China’s export sector, a prominent driver of growth, could also face hurdles, Moody’s said, as the US, Europe, as well as large emerging market countries like India, Brazil and Indonesia, adopt trade barriers.

Some of the trade barriers, such as local content requirements or quotas, will be more difficult to circumvent than tariffs,” Moody’s said.

In addition, China faces structural growth constraints from a declining working age population and weak productivity growth related to inefficient resource allocation, which will “become binding over time”.

Europe’s economic recovery, meanwhile, remains “sluggish”, hampered by weak consumer demand, low business investment, and geopolitical tensions. The European Central Bank (ECB) is expected to continue its accommodative monetary policy to support growth. However, the effectiveness of these measures is uncertain, given the underlying structural challenges facing the Eurozone economy.

“Euro area recovery has been particularly sluggish, although there is considerable heterogeneity across member countries,” Moody’s said. “Preliminary flash estimates of Q3 real GDP show economic activity remains soft. Euro area real GDP grew by just 0.9% in Q3 relative to a year ago, marking the sixth quarter of sub-1% annual growth.”

A cautious outlook

Moody’s said that the US economy has proven its resilience, outperforming its G-7 peers and continuing to expand. The third quarter saw a robust 2.8% growth, driven by strong consumer spending and business investment. This strength has led Moody’s to raise its 2024 GDP growth forecast to 2.7%.

While the economy is expected to moderate in the coming years, with projections of 2.0% growth in 2025 and 1.8% in 2026, the underlying fundamentals remain solid. “A broad range of macroeconomic indicators instil confidence in the lasting power of the US economy,” Moody’s said. Recent data suggests that US households are financially healthier than initially anticipated, with strong income, savings, and expenditure. However, income and wealth inequality persists, with a significant portion concentrated at the top.

The incoming Trump administration’s potential policy measures, particularly in fiscal policy, immigration, and trade, could also introduce uncertainty and potentially impact economic activity.

“Our forecasts assume that uncertainty about policy measures of the new Trump administration will exert a small drag on economic activity,” Moody’s said.

Overall, Moody’s maintains a cautious outlook for the global economy, with risks tilted to the downside. The potential for increased geopolitical tensions, trade wars, and financial market volatility could dampen economic growth.

“Trade tensions and geopolitical stresses are the primary risks to the macroeconomic outlook,”

Moody’s warned. “Three of the world’s economically significant regions — Europe, the Middle East and Asia — are troubled by contentious geopolitical issues.”

To navigate these challenges, policymakers will need to adopt a co-ordinated approach to address global economic imbalances and promote sustainable growth. This will require a delicate balance between supporting short-term growth and addressing long-term structural challenges.
Source: Baltic Exchange