The new year presents itself with new challenges, some uncertainties and some certainties. The main change, with multiple effects, will be the policy developed by the new Trump administration after his inauguration as the 47th of the United States on January 20. Some of the main factors to follow are the following:
– Tax reduction. Trump has announced the extension of the 2017 tax cut that expires at the end of 2025. Additionally, he has announced the reduction of corporate tax for companies that manufacture in the United States. Both measures mean lower tax revenues. In any case, these measures will have effects on the 2026 federal budget. Trump intends to compensate for these lower revenues with more tariffs, which should come into force in 2026 at the latest.
– Department of Government Efficiency (DOGE) led by Elon Musk. Its goal of reducing public spending by $2 trillion by 2029 is a challenge that will have to be followed closely. Some of the spending cut measures are intended to be implemented immediately. If successful, it would be a true revolution that, sooner or later, would have to be imitated by Europe, although today it seems like a chimera.
– Trade policy with Mexico and Canada. Although Trump has already threatened tariffs on Mexico, Canada and the EU, it is highly likely that this is a negotiating tactic from a position of strength. In fact, the tariffs on its neighbors are conditioned on the control of immigration and the entry of fentanyl into the United States. For now, the new president of Mexico has stopped a caravan of immigrants heading to the border.
– Tariffs to the EU. Just four days after Trump’s election, Ursula Von der Leyen already mentioned the possibility of buying more gas from the United States to the detriment of Russian gas. It seems that this will be one of the negotiating weapons to mitigate the increase in tariffs.
– Obligation for greater defense spending. Additionally, Trump has announced tariffs on NATO members that do not increase their defense spending to 5% of GDP. Although the increase in defense spending by European NATO countries seems inevitable, today this level of spending is unattainable. Again, it seems like a negotiating tactic, but it will put pressure on the European budgets and the rest of the items in the public accounts.
– Trade war with China. Tariffs of 60% on Chinese products will lead to retaliation by China, as is already happening with the limitation of exports of key minerals and rare earths for the military industry. Predictably, as happened in 2018, negotiations will take place between both countries that would reduce the scope of the trade war. In 2020, both countries reached an agreement in which China committed to purchasing US goods worth $200 billion over two years. Due to the pandemic, such purchases did not occur. First there will be tariffs, then negotiation.
– End of the war in Ukraine. If this occurs, as Trump has advanced on different occasions, it will be crucial to what extent the sanctions against Russia are lifted, especially the exclusion from the SWIFT system of international transfers and the return of your frozen reserves in euros and dollars. Such measures would help mitigate the incipient de-dollarization of trade between countries in the Global South (non-Western countries).
– Tough position towards Iran. New sanctions on Iran and unconditional support for Israel are foreseeable, even in the face of preventive attacks on Iran to prevent it from achieving the atomic bomb.
– Reduction in the price of energy. One of Trump’s assets is to reduce the price of energy in the United States, through the deregulation of the energy sector with the much more agile granting of exploration licenses or nuclear power plants, including SMR (Small Modular Reactors). The United States will continue to have significantly lower energy prices than Europe.
– Policy towards Venezuela. The United States has recognized Edmundo Rodríguez as elected president of Venezuela. The inauguration of the new Venezuelan president will be on January 10, before Trump’s inauguration. Given the weight of Venezuela due to its oil reserves, US movements regarding Venezuela cannot be ruled out.
– Evolution of inflation. Despite the sharp reduction in inflation in the last two years, Trump’s anticipated policies are inflationary. Additionally, prioritizing defense spending over industrial production is also inflationary. The monetary policy of central banks will depend on the evolution of inflation.
Other factors to follow in 2025 beyond the actions of the Trump administration:
- The elections in Germany. Despite the predicted victory of the CDU and its initial refusal to agree with the AfD (Alternative for Germany), it is not clear that the electoral results allow for a large CDU-SPD government coalition. The possibility of political instability in Germany beyond February 23 is a reality. Its impact would be felt throughout the EU. In the event of an eventual CDU-SPD agreement and an increase in the constitutional limit of permitted public deficit, the interest rate of the German bund would suffer, affecting the rest of European sovereign bonds.
- Political instability in France. France has become the weak link in the Eurozone. With a public deficit above 6% of GDP and a public debt of 110%, it is immersed in an excessive deficit file that leads it to reduce its public deficit or face sanctions. The parliamentary weakness of his newly appointed government makes it extremely difficult for him to carry out the necessary reforms to balance public accounts. That said, it is almost a certainty that during 2025 we will experience some episode of tension in the French bond markets. The question is how much it will extend to the rest of the peripheral bonds.
- The Central Banks will continue to act in case of emergency. Although central banks’ balance sheets continue to shrink for now, they will act again if problems arise in the debt markets, as they have done in the past.
The year has only just begun. It will surely bring us surprises, beyond the points mentioned, that will impact the economy and the financial markets. Happy Jubilee Year 2025 AD
