Goldman Sachs 2025 Major Macroeconomic Outlook: The "Sword of Tariffs" Hangs Over the Global Economy, and the Path of Interest Rate Cuts Will Continue

The most unconventional president in American history—Trump's return to the White House—could be the tail risk that global markets need to pay the most attention to next year.

The analyst team led by Goldman Sachs Chief Economist Jan Hatzius, in their latest macro outlook report, particularly emphasized Trump's comprehensive tariff policy, which not only exacerbates the upward inflation risk in the U.S. and causes a more severe impact on the U.S. economy but may also trigger broader trade frictions, posing challenges to the global economy, especially emerging markets.

The team pointed out that if this policy is implemented, the U.S. dollar may further rise significantly, increasing downward pressure on non-U.S. stocks and bond yields, and leading to further declines in European sovereign bond yields and the euro exchange rate.

Goldman Sachs expects that by the end of 2025, U.S. core PCE inflation should slow to 2.4%, but if a comprehensive 10% tariff is imposed, this figure will rise to over 3%.

Global economic growth in 2025 is expected to remain at 2.7%, with the uncertainty of Trump's trade policy having a greater impact on European economic growth than on the U.S., leading Goldman Sachs to lower its eurozone GDP forecast to below the consensus of 0.8%, while Asian emerging markets will face more severe tests.

Under Tariff Policy, Europe and Emerging Markets Face Pressure

Goldman Sachs expects global GDP growth in 2025 to be 2.7%, consistent with the momentum of 2024 and slightly above potential growth estimates, with U.S. GDP growth expected to be 2.5%, higher than market consensus expectations.

The report noted that Trump's policy adjustments, including raising import tariffs, tightening immigration policies, and extending and introducing more tax cuts, will have a significant short-term impact on the U.S. economy, but in the long run, they will not fundamentally affect the overall U.S. economy or monetary policy.

Research shows that the uncertainty of U.S. trade policy (TPU) has a significant impact on eurozone economic growth. If TPU rises to the levels seen during the peak of trade frictions in 2018-19, it will drag down U.S. GDP growth by 0.3 percentage points, but the impact on the eurozone could be as high as 0.9 percentage points.

Based on the results of the U.S. election, Goldman Sachs has lowered its 2025 eurozone growth forecast by 0.5 percentage points from previous levels, and if the U.S. implements comprehensive tariffs, Goldman Sachs stated that this forecast may be further downgraded.

Moreover, Trump's high tariff policy will also impact other economies, especially those emerging economies that rely on exports, which may face greater drag.

Overall, Goldman Sachs estimates that changes in U.S. trade policy will drag down global GDP growth by 0.4 percentage points, and if a 10% comprehensive tariff is implemented, the impact could be 2-3 times that figure.

Inflation: Short-term Upward Risks, Long-term Downward Trend Unchanged

Goldman Sachs believes that higher tariffs will also exacerbate the upward inflation risks in the U.S., at least in the short term.

The experience of Trump 1.0 indicates that tariffs are largely passed on to consumers. This can be seen from the personal consumption expenditure (PCE) price index affected by tariffs If the tariff increase is limited to imported cars, the impact on U.S. inflation will be relatively small, rising by 0.3-0.4 percentage points. Goldman Sachs expects that by the end of 2025, the core PCE inflation rate, excluding the impact of tariffs, will drop to 2.1%, while including the expected tariff impact, the inflation rate will be raised to 2.4%.

If the new Trump administration imposes a comprehensive 10% tariff, it will raise the inflation rate by nearly 1.2 percentage points, with the core PCE inflation rate expected to rise to 3.1% by early 2026.

However, Goldman Sachs believes that the impact of tariff increases on inflation is limited and mainly one-time, making it unlikely to lead to sustained inflation increases.

Goldman Sachs expects that by the end of 2025, as energy prices continue to decline, the core inflation rate in the Eurozone will slow to 2%. However, due to rising labor costs, service inflation will continue to face upward pressure.

The report notes that the progress of inflation in Canada will keep the Bank of Canada on hold until it begins to cut interest rates. Rate cuts are expected to start in the third quarter of 2024, with the policy rate ultimately stabilizing at 3.5%, a level significantly higher than the central bank's current neutral rate expectation of 2-3%.

Australia's situation is somewhat unique, as Goldman Sachs points out that the Reserve Bank of Australia is pursuing a higher inflation target of 2-3%, above the 2% target of most other central banks. Goldman Sachs expects that by the end of 2024, Australia's inflation rate will be slightly below 3%, in line with the Reserve Bank of Australia's target.

Interest Rate Endpoint: U.S. Upward, Eurozone Downward, Bank of Japan More Confident in Rate Hikes

Based on the above assumptions, Goldman Sachs believes that the outcome of the U.S. election will not disrupt the global monetary policy normalization process, and expects that by 2025, most major central banks will further significantly ease policies.

Goldman Sachs predicts that the Federal Reserve may cut rates consecutively month by month in the first quarter of next year, then slow the pace of rate cuts, with the interest rate endpoint at 3.25-3.5%, which is 100 basis points higher than the previous cycle.

If there is any difference, it is that the threat of tariffs to recent economic growth and the Federal Reserve leadership's continued preference for preemptively implementing policy normalization have strengthened our confidence in consecutive rate cuts early next year.

Although the pace of rate cuts and the interest rate endpoint after the first quarter may depend on the Federal Reserve's willingness to preemptively respond to potential inflation increases brought about by the policies of elected President Trump, this is undoubtedly uncertain, and our baseline and probability-weighted forecasts are more moderate than current market pricing.

In the Eurozone, Goldman Sachs reiterates its expectation that the European Central Bank (ECB) will implement consecutive rate cuts, and has lowered its interest rate endpoint forecast to 1.75%, based on our downward adjustment to growth.

In the UK, Goldman Sachs has raised its forecast for the Bank of England's interest rate endpoint, citing a more expansionary autumn budget that will bring better growth prospects, now expecting rates to drop to 3.75% by the end of 2025, and reach an endpoint of 3.25% in the second quarter of 2026.

Other developed markets are expected to see more aggressive rate cuts. Goldman Sachs expects the Bank of Canada, Reserve Bank of New Zealand, and Swiss National Bank to each cut rates by 50 basis points at their next meetings, while Australia is expected to start cutting rates quarterly from February next year Emerging markets also have significant monetary easing space, as policy rates remain well above neutral, especially in Latin America, Central and Eastern Europe, the Middle East, and Africa, with Asia also having room for interest rate cuts in the coming quarters.

The main exception is Brazil, where an overheating economy is expected to prompt the Brazilian central bank to raise interest rates by 150 basis points in the first quarter of 2025, followed by a 125 basis point cut by the end of 2025.

Another exception is Japan. After three decades of low inflation pressure, the rebound in inflation and wage growth has led the Bank of Japan to exit negative interest rate policy in March and raise rates again in July. Goldman Sachs believes that the risk of low inflation in Japan has passed, and rate hikes will continue.

Wage growth should remain stable (we forecast that basic wages will increase by 3-3.5% in the 2025 "Shunto" wage negotiations), and become increasingly correlated with price increases, indicating that a virtuous wage-price spiral that helps anchor inflation expectations has emerged.

Additionally, demand appears to be stronger, and the policy space has increased compared to the past, suggesting that if activity weakens, the downside risk to inflation is smaller.

Goldman Sachs expects core CPI (excluding fresh food and energy) to grow by 2.1% year-on-year in 2025 and by 2.0% in 2026, reaching the central bank's target. The positive inflation outlook will support the Bank of Japan in raising rates by 25 basis points semi-annually by the end of 2025 and continuing to raise rates thereafter, with the terminal rate reaching 1.5% by 2027.

Are there opportunities for emerging market stocks and currencies?

Goldman Sachs also pointed out that currently, U.S. stock valuations are at historical highs, and credit spreads are close to historical lows. This means that the market's pricing of risk may be overly optimistic, overlooking potential tail risks.

Due to the unusually high concentration in the market, the long-term expected returns for U.S. stocks now appear low, making the expected returns on government and corporate bonds relatively more attractive.

Under the influence of Trump’s policies, the performance of emerging market stocks and currencies is worth noting.

In 2017, the first year of the Trump administration, emerging market stocks and currencies ultimately outperformed the broader market. If U.S. fiscal policy becomes more restrained, or if the trade agenda focuses more on specific areas, it may provide relief for those emerging market segments where risks are already most clearly reflected.

Moreover, as the Federal Reserve begins its rate-cutting cycle, emerging market central banks also have more room for monetary policy, which could promote economic growth and stock market performance in emerging market countries.

Goldman Sachs advises investors to focus on "Alpha" opportunities in 2025, meaning looking for stocks that can outperform the market average rather than relying on the overall "Beta" performance of the market. Goldman Sachs is particularly optimistic about the Japanese stock market and expects that emerging markets, due to their lower price-to-earnings ratios, may present undervalued investment opportunities.

Tail risks are now a key focus

The report emphasizes that in the current global economic environment, tail risks have become an important area of concern, especially the possibility of the U.S. implementing comprehensive high tariff policies Goldman Sachs believes that the impact of comprehensive tariffs has been underestimated, especially regarding their potential effects on Europe and some emerging market economies. If this policy is implemented, it could lead to a further appreciation of the dollar and increase downward pressure on non-U.S. stock and bond yields, resulting in lower European sovereign bond yields and a decline in the euro exchange rate.

The U.S. election clearly increases the likelihood of additional fiscal expansion and refocuses attention on the sustainability of U.S. public debt. However, our central scenario only anticipates moderate fiscal stimulus, and we are more likely to see a sharp increase in the fiscal risk premium in the U.S. Treasury market.

There are two directions for tail risks in the oil market. In Goldman Sachs' baseline forecast, Brent crude oil prices are expected to remain in the range of $70-85 per barrel; however, the risk of breaking through this price range is increasing.

In the short term, due to tensions between Israel and Iran, the risk of a decline in Iranian oil supply is already high, which could lead to an increase in the upside tail risk for oil prices.

However, in the medium term, the risks tend to lean towards the downside of the forecast range. This is primarily because there remains a substantial amount of supply that is being kept off the market, which could start to re-enter the market system in 2025.

Additionally, broader tariff actions could harm global demand, which may cause oil prices to once again become a factor in deflationary trends