Divergence after US elections

US election results have driven divergence in markets. While more expansionary tax policies are expected to boost growth in the US, fears of rising tariffs have weighed on markets elsewhere. In the euro area, the heightened future uncertainty has coincided with downside surprises in macro data, which has boosted markets' bets on ECB's monetary policy easing. We forecast 25bp rate cuts in every meeting until September, but a larger 50bp cut is clearly possible at the upcoming December meeting.

While we agree on the relatively stronger outlook for the US, we also steer away from the most extreme scenarios in our updated forecasts published today (see Nordic Outlook - More growth, new risks, December 4). We expect euro area growth to remain muted at 0.9% in 2025 but expect a gradual recovery to 1.4% in 2026. In the US, the economy remains on a solid, but cooling trend. We think GDP growth will slow down to 1.9% in 2025 and stabilize near its potential at 2.1% in 2026. While markets have significantly pulled pack their expectations on the Fed's rate cuts after the elections, we still think the cuts will continue in December and beyond. We maintain our forecast for the Fed's terminal rate at 3.00-3.25% by the end of 2025 unchanged.

The level and scope of the tariffs remains highly uncertain. So far, Trump has announced 25% tariff hikes on Mexico and Canada as well as a 10% increase to existing tariffs against China. He has also threatened BRICS countries with 100% tariffs if they attempt to move away from using the USD. In our forecasts, we have assumed Trump will eventually put up 10% universal tariffs on nearly all imports and hike China tariffs to 40%. Even so, we doubt the tariff hikes will lead to significantly faster inflation. Imports' share of US consumption is only somewhat above 10%, and the around 5% appreciation of the trade-weighted USD over past 2M has already compensated for roughly half of the expected increase in effective average tariffs. 

In any case, the tariffs would not be good news for the fragile recovery of the Chinese economy. While some of leading manufacturing indicators have showed early signs of improving orderbooks and the central government has called for more fiscal stimulus in 2025, domestic demand and especially the construction sector remain in weak shape. We forecast Chinese GDP growth at 4.7% in 2025 and 4.8% in 2026.

The elections have also changed the outlook for the geopolitical landscape. On the positive side, Israel agreed on a ceasefire against Hezbollah in Lebanon. But as Trump has already nominated several Iran-hawks to his cabinet, more lasting peace in the Middle East region might still be far away. Biden's decision to allow Ukraine to strike targets on Russian soil using American-made missiles, and Russia's response using ballistic missiles sparked temporary caution in the markets in mid-November. Trump nominated Keith Kellogg as the US Special Envoy for Ukraine and Russia and tasked him to settle a peace in the war that has now lasted more than 1000 days. Kellogg has previously called for a ceasefire by freezing the current frontlines, but details on his plans remain hazy. Read more from Geopolitical Radar: The world prepares for Trump 2.0, 27 November. 

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