The Economic Outlook for 2025

LAWSON: Good morning. Welcome to the Council on Foreign Relations roundtable on “The Economic Outlook for 2025.” We are now very close to twenty-four hours into the second Trump administration, and there is a lot to talk about that affects the global economic outlook.

So I would love to introduce our panelists. We have Ira Kalish, chief global economist at Deloitte; Anna Wong, chief U.S. economist at Bloomberg Economics; and Elijah Oliveros-Rosen, chief economist for emerging markets at S&P Global Ratings.

So just a quick recap of past—excitement in the past twenty-four hours. We have had a backdrop of markets expecting good growth. Inflation is moderating, although not really enough to take that question off the table, and some of the Trump policies that are proposed could themselves be quite inflationary. So I want to talk about what the administration means in terms of tariffs, trade, immigration policy for the U.S. outlook, for the global outlook, and for key markets like the U.S. dollar and energy markets. And of course, there’s a lot going on the rest of the world with a sluggish if not stagnant recovery in China, very slow growth in Europe, and pockets of risk in emerging markets. So a lot to talk about. We will discuss for about thirty minutes and then open it up to questions.

So I want to start with each of you, asking: How do you see the U.S. growth outlook for 2025? Markets are quite optimistic. Do you think they should be? Are they missing something? Or what could derail their expectations? So, Anna, why don’t we start with you in your role as U.S. economist.

WONG: Sure. So, you know, with—in two months since Trump has won the presidency, we have seen the search of the term “animal spirits” spiked dramatically. But, however, we are now starting to see the search for “animal spirits” starting to come down a bit versus in 2016 it continue unabated throughout 2017 and 2018.

So I think the biggest tailwind to the U.S. economy is this sentiment-driven kind of exuberance. And we think that this positive sentiment would last—would support the investment and economy for six months, but usually after six months that’s when you really need to see the real policies, and it will be the real policies that drive everything else. So in the first half of 2025, we do expect growth, and particularly investment, to see a pickup in response to this improved sentiment particularly coming from small businesses, and also just on the—you know, on the tail—on the tailwind of a productivity boom that we have seen in the past year, that that should lead to more capitals deepening.

Then, in the second half of 2025, now this is where it gets particularly more uncertain. So our baseline is for us to see the first tranches of tariffs, meaningful tariffs, starting in the summer of 2025, and our assumption is that we will start to see increased tariffs for a batch of Chinese goods worth maybe 160 billion go into effect in late summer. But the primary channel that tariff affect the U.S. economy is through trade uncertainty and also through stock markets. So if you tally up every Trump tariff announcement in his first term and its impact on the stock market, the total effect is about 10 percent on the S&P 500, meaning that had he not announced those tariffs and, you know, stir up uncertainty, stock market would have been higher by 10 percent.

Now, this is in the context of the S&P 500 rising 50 percent over his entire first term, so that’s the context. But the question is whether the tax jobs—and jobs cuts act at the end of 2025 would be fully extended and more. Our baseline is it will, but that’s already in everybody’s baseline. And for that to further help us at the sentiment decline from tariff announcement, you need more than the full extension of TCJA, and I don’t—that’s not in our baseline. So we do see that sentiment would be declining, decelerating into 2026.

And in terms of the inflationary impact of tariffs, we see a muted—only a very muted response partly because our view is that tariffs is inflationary to the extent that they are imposed on consumption goods as well as goods that see where the firm is experiencing high demand. So 70 percent of U.S. imports are in intermediate goods; only 30 percent is in consumption goods. And my read of the first Trump administration approach is that they tend to spare the consumption goods from tariffs. A risk here is that the L.A. wildfires stirring up demand for a lot of construction materials, and so you have that demand surge from the wildfire. If you’re—if Trump goes ahead with 25 percent on Canada, where we import a lot of construction material, I think there you will have that inflationary impact, whereas the other stuff from China I see it as a more—a more mixed picture on inflation.

So by the end of the year, I still think that the Fed would not be raising interest rates even though markets are starting to price in some possibility of rate hikes. Basically, you need core PCE to go up to 3.6 percent by the end of this year for the Fed to be hiking. We are currently at 2.8 percent on core PCE, and in the first couple months of this year it likely will further go down to 2.6 percent. So I think the baseline is still for the Fed to be cutting interest rate into the year.

So that’s that.

LAWSON: OK. Thanks a lot. A lot there to unpack.

Ira, let’s turn it to you and zoom out a bit for a global lens on the outlook for growth and particularly what U.S. growth will mean for the rest of the world.

KALISH: Well, I think that the U.S. economy is likely to slow down this year from the gangbuster growth that we saw in 2024, and that was already our baseline even before the election. I think we’re already seeing some slowdown in consumer spending. Throughout most of 2024, consumer spending grew faster than consumer income as consumers dipped into their—the excess savings that they accumulated during the pandemic. That process is now over. Consumers have taken on more debt. And although the debt levels are not onerous yet, there’s been a pretty sharp increase in delinquencies on credit-card debt. So I expect a slowdown in consumer spending, which will slow economic growth.

But still, if you think that GDP grew at, say, 2.8 percent in 2024, which seems likely, we’ll probably get 2.2 percent growth this year. That’s still very strong. It’s on the back of strong productivity growth; strong immigration growth, which I think contributed substantially to economic growth. And the Trump policies, which I think will be inflationary and may also be recessionary, ultimately, if very substantial tariffs are introduced, won’t have a big impact immediately.

As far as the rest of the world, it’s sort of in a funk.

Europe has been growing slowly. It just averted recession in 2024. I think it will speed up a little bit, but there’s almost no productivity growth. There’s very tight fiscal policy. If there is a shift in fiscal policy in Germany following the upcoming elections that could provide some stimulus to Europe, but it’s not clear that that will happen.

China, I think, is still likely to see relatively modest growth going forward. China is still suffering from a number of factors. The property market collapse continues. That’s having a big spillover effect on investment. It’s having a negative effect on consumer spending in China because consumers have lost wealth in the housing market. And until recently China’s growth strategy was to invest in, produce, and export high-value-added products like electric vehicles, electric car batteries, solar panels, information technology, and exports have been growing strongly. But lately, because of frontloading of exports in anticipation of U.S. tariffs, it doesn’t seem likely that exports can continue to grow strongly, especially if the U.S. and even other countries impose tariffs. And so that’s already leading to excess capacity and deflationary pressure in China. They haven’t managed to stimulate domestic demand yet. Monetary policy in China has not really been very effective because they probably are in what we economists call a liquidity trap. And what they need is fiscal stimulus to boost domestic demand, but so far the stimulus measures introduced have probably not been enough and sufficiently well-targeted.

So my expectation is for still slow economic growth in China, very modest economic growth in Europe, very modest growth in Japan. The only major economy that’s likely to grow strongly still will be India. So it’s sort of a bifurcated world of a still strong U.S. economy and some weakness in the rest of the world.

LAWSON: Elijah, I would love to get your thoughts on China, and also on India and the divergence between the two.

OLIVEROS-ROSEN: Yeah, Sandra. Well, you know, I agree with a lot of the comments that Anna and Ira said. I think we have been in a world of U.S. growth outperformance for several years now, and I think 2025 will not be a change in trend from that sense. So we have seen this significant growth divergence between emerging markets that are exposed to the U.S. and emerging markets that are exposed to Europe and China, and I think, you know, we will continue to see that. India will slow down a bit. China will slow down a bit. And a lot of the EMs that are exposed to the U.S. could continue to have some support from strong demand.

Now, the big—the big word here is tariffs, and I would like to pivot the conversation towards that direction. You know, now that we have Jan 20 behind us and a lot more in front of us, you know, one thing that we still think is very likely—even though it wasn’t explicitly mentioned in Jan 20—was tariffs on China, and I think that will be a big mover of the macro needle. We think that of—out of all the tariff scenarios that have been presented and circulated, whether it’s on the U.S.—whether it’s on Mexico or Canada, Europe, or China, China is the one that we still think is the most likely to actually materialize.

What does this mean? It means that the hit on China versus the U.S.—even if China retaliates to the U.S., the hit on Chinese growth is bigger than the hit on U.S. growth because China is a much more export-oriented economy. The U.S. is a much more domestic-oriented economy.

What does this mean for the rest of the world? It means that economies that are exposed to Chinese demand are more vulnerable to lower growth. Most of them are in Southeast Asia—Vietnam, Thailand, Malaysia, et cetera.

Now, an interesting trend or dynamic within this scenario of tariffs on China is trade reorientation, and we saw some of that during the first round of trade war between the U.S. and China in 2018. It’s not that Chinese exports fell when tariffs were put on China; it’s that instead of going to the U.S., they went to other parts of the world. Now, I think we could be in a scenario that’s very similar to that, and this could pose significant challenges to a lot of the emerging markets because EM manufacturing will face fierce competition from very price-competitive Chinese goods going into their country. That’s one dynamic. They will also face fierce competition when they’re exporting to other EMs that are also now facing the competition of Chinese goods. And in some cases, they may actually import disinflation from China, especially if these price—these good are priced lower.

So that’s one of the scenarios on China.

Now let me talk about the other scenario on tariffs that was mentioned towards the end of last night, which is a 25 percent tariff on Mexico and Canada. Now, this is not something that we have in our baseline. The Chinese scenario is in our baseline. The one on Mexico is not in our baseline. We still think it’s—there’s a lot of things that would need to happen for that to actually take place.

The first thing is we think the Mexican government will be very pragmatic to do anything it can do to not go there. The comments were around, you know, putting tariffs in reaction to border security, so stopping, you know, illegal immigration and illegal goods such as fentanyl. And I think the Mexican government has—already have plans to sort of accommodate some of this. During the previous Trump administration, there was a couple of programs. One was called Remain in Mexico, in which people crossing the border illegally were sent back to Mexico until the—their court hearing. That’s one thing. Then there was another one that was called, I believe, Title 42, in which they were sent immediately back to Mexico without a court order; the Mexican authorities cooperated. So I think there’s going to be a lot of cooperation in immigration to avoid going to tariffs.

Now, tariffs also would hurt a lot of U.S. companies, so I think there’s going to be some resistance again, as there was last round. So I think there is that.

And then there’s also a proactive plan from Mexico to sort of counter Chinese goods going into the U.S. through Mexico. So there’s this whole thing called Plan Mexico that’s currently being presented in which they are increasing incentives to sort of relocate some of the Chinese intermediate goods that are going into the—into Mexico and replace that by firms that are producing within the North American bloc. You know, there’s—it’s going to be a very challenging thing to do. I mean, imports from China to Mexico are 7 percent of Mexico’s GDP. About 5 percent of GDP is intermediate goods. So it’s a big chunk of stuff that would need to be replaced. And it would also require high levels of energy, water, other things that are sort of challenges currently for higher production in Mexico.

So a lot on those—a lot to say on tariffs. I’ll leave it there for now because I know we’re running out of time, but stay tuned on more announcements around that side.

LAWSON: OK. I do want to pick up on, related to tariffs, immigration, and we saw action yesterday in terms of trying to shut down the border. I mean, it’s quite interesting that Trump has run on an anti-inflation platform yet the tariffs and the immigration parts of his agenda could be—very well be inflationary. So, Ira, Anna, would love to get your thoughts on that.

KALISH: Well, yeah. I think they will be inflationary, and that’s already expected in the markets. It’s notable that on the day after the election we saw a sharp rise in the value of the dollar, a sharp rise in bond yields. In the weeks that followed the election we saw a sharp drop in the futures markets’ implied probability that the Fed would cut rates a lot, and now there’s a widespread expectation that the Fed will only cut rates once if at all in 2025. So clearly the markets already believe that these—this set of policies will be inflationary.

The major question remaining is what will actually happen and how fast it will happen. We heard the president said last night that on February 1 there will be these 25 percent tariffs on Canada and Mexico. Canadian dollar and the Mexican peso dropped very sharply. But nobody actually knows if this will actually happen or if it’s more performative. And even with respect to China, both Anna and Elijah said that’s in the baseline, that that’s likely to happen, but we really don’t know because it’s been reported that Trump wants to have a meeting soon with the president of China and he proposed last night a hundred percent tariffs on Chinese imports if they don’t dispose of TikTok. So there is a lot of things going on and it’s not very clear.

But if we do get substantial tariffs, if there is an across-the-board tariff on China or on a lot of Chinese products, ultimately it would be inflationary, in my view. As Anna noted, most of the imports from China are intermediate products. That means American companies would either have to take a hit to their margins or raise their prices. It would certainly have an adverse effect on their global competitiveness.

The only thing that would offset the inflationary impact of tariffs is a further rise in the value of the dollar. And the dollar has, of course, risen because even though the president says the goal is to reduce the trade deficit, the trade deficit won’t be reduced by tariffs. The tariffs—the trade deficit is a function of the fact that the U.S. invests more than it saves, and in order to do that has to bring in foreign investment from overseas, which means foreigners have to accumulate dollars, which means the U.S. has to run a trade deficit. And increasing tariffs, while they will initially cut imports, will not reduce the fact that the U.S. still has to run a trade deficit. So that has to be offset by a sharp rise in the value of the dollar. We’ve already seen that rise in anticipation of the tariffs. But if the tariffs are introduced on a large scale, I think the dollar will rise quite sharply against other currencies. And while we might eventually see negative growth from the tariffs, which would bring down the value of the dollar, the initial rise in the value of the dollar could help partly to offset the inflationary impact of the tariffs.

As for immigration, if there are substantial reductions in immigration and if there are substantial deportations—and it’s not clear that that will actually happen. But if it does, I think that would have an inflationary impact, especially on those sectors of the U.S. economy that rely on undocumented aliens. It’s been reported or estimated that more than a quarter of farm workers in the U.S. are undocumented aliens. If a significant number of them are forced to go home, we’ll see a big increase in food prices. So I think it does make sense that financial markets are now expecting a tighter monetary policy than they did a few months ago because of the expected policy mix.

LAWSON: Anna, just quickly on that, you raised the possibility of the Fed raising rates this year. Like, what do you think—

WONG: As an extreme tail risk. So I actually—I think the impact of immigration deportation on inflation is quite similar to my view about tariffs, in the sense that it critically depends on what type of undocumented immigrants are deported. So just like tariffs, if tariffs are imposed on intermediate goods versus consumption goods, you have vastly different implications on inflation. For immigrants, it depends on where these immigrants work, which states are they in. So we did look into—dig very deep into the immigration data in the micro data of the household survey. And what we found is that the immigrants, the new immigrants who have arrived since 2022, disproportionately are based in Florida, Texas, California, New York, Chicago. And they tend to work in leisure, hospitality, and construction.

And so it just so happened that the labor market slack in construction and the leisure and hospitality are loosening very quickly. In fact, those two sectors are the leading cyclical indicators of the economy. So the job vacancy to the unemployed ratios of construction is now below one. So to the extent that the deportations are disproportionately on these workers who tend to work in sectors which are not experiencing labor shortage, it’ll actually have no inflationary impact on a U.S. So empirically, from the micro data, my view—my sense is that a half a million deportation of U.S. workers would have muted impact on U.S. inflation.

LAWSON: OK. I want to switch gears and talk about oil prices, which were relatively muted last year despite the escalating tensions in the Middle East. New year, ceasefire in the Middle East thus far, deregulation as of yesterday of the energy market and, of course, Trump’s saying in his inaugural address, “drill, baby, drill.” So what do you all see as the outlook for energy prices, and also what this means for the renewables market? Ira, I want to start with you.

KALISH: Well, it is notable that over the past year, despite all the tension in Middle East and the lobbing of missiles between Israel and Iran, that oil prices were relatively stable. It says that markets didn’t really perceive the tension in the Middle East as threatening production and distribution of oil. But it also reflects the fact that there’s weak demand in Europe and China. There’s certainly weakening demand in China because half the vehicle sold are now electric vehicles. And there’s been an increase in output in the U.S., especially with fracking. So I don’t see anything that’s going to significantly change that.

We did see a temporary increase in oil prices lately when the Biden administration imposed some new restrictions on the energy industry in Russia, but I don’t think that’s going to be long lasting as the market sorts itself out. So my expectation is for continued stability of oil prices in the coming year. If the Trump administration does actually engender an increase in oil and natural gas production, that would put downward pressure on prices, unless it’s offset by a Saudi decision to restrict output. But on balance, I think stability is the most likely scenario.

LAWSON: Elijah, anything to add on that?

OLIVEROS-ROSEN: Yeah, I mean, I would say on balance stability is the sort of central scenario. I think the risks are for lower rather than higher prices, because we do have, you know, persistent weakness in China, if tariffs do hit more weakness on the biggest consumer of oil. If the war in Ukraine-Russia is solved, for whatever reason, we could take lift sanctions of Russia and then bring more oil into the market. So a lot of uncertainty, about on balance I think lower rather than higher is where the risk balance is on oil. And when we think about it from my perspective, on emerging markets, most emerging markets are now net importers of oil or of energy products. So there is some upside in the sense that this could help them from a trade perspective, also from an inflation perspective, help central banks sort of, you know, be more comfortable with lowering interest rates. So a very interesting dynamic certainly to watch as well.

LAWSON: I want to ask about geopolitics without going into the nuance of what might happen in Ukraine or how the Middle East might play out. Broadly, do you see this as an upside risk to global growth or a downside. Thinking specifically of Ukraine, Middle East, and China-Taiwan, are we looking for surprises this year or lower impact on sentiment and outlook?

KALISH: I guess the problem is this tremendous uncertainty with all of these. I don’t know what the administration is going to do with respect to Ukraine and Russia. But it is notable that just yesterday Trump did, unusually, criticize Putin. So that suggests that he’s not about to pull the rug out from under Ukraine. China and Taiwan, nobody knows. But I don’t think that we’re going to see anything happen this year. And then the Middle East seems to be stabilizing to some degree. The collapse of the Assad regime in Syria seems to weaken Iran and reduces the risk of an Iranian-Israeli conflict.

So it doesn’t seem to me that geopolitical conflicts are a substantial risk to the global economy right now. It’s more geopolitical relations are a risk. So the imposition of tariffs, that sort of thing, and the necessity then of rapidly redesigning supply chains. Those are the kinds of things that could be disruptive to the global economy, in my view.

OLIVEROS-ROSEN: I’d just add very quickly that—you know, because we frame geopolitical risks at S&P global ratings as one of the biggest risks, not because there’s a big probability of any of this already existing, you know, conflicts escalating, but there—but if they do, the impact is very large. So, you know, it’s a matter of thinking probability versus impact. And enough—all the events and risks that are out there, geopolitical risks-related events, could have a very large impact on growth, credit, et cetera.

LAWSON: I see we already have questions in the queue, so why don’t we open it up to questions. Operator, we could take the first one, please.

OPERATOR: (Gives queuing instructions.)

We will take our first question as a written question: There’s a lot of uncertainty and excitement over President Milei’s experiment in Argentina. What’s your view on that? And will he succeed?

OLIVEROS-ROSEN: I’ll take that. Right, so certainly a lot of excitement. A lot of work still needs to be done. But let me just frame on the successes, which have been actually very remarkable. The first one has been on the fiscal front. Milei has turned around a very large budget deficit into a surplus. No small feat to do it in one year. In fact, he did it less than one year because he achieved that in a matter of months. And no small feat to do that—doing that, and still maintain political support and general popular support. That is, you know, not something you see very often in recent history. The other one, which has also been very successful, is inflation. We started 2024, when he started—just after he started his mandate, with month on month inflation running around 20 percent. Then it fell to below 10 percent within the first quarter, then below 5 percent within the second quarter. And now it’s been solidly below 3 percent month on month. Also no small feat.

There is a lot of work to be done, especially on the monetary and external side. That’s the next phase of that experiment. Net reserves are still negative. The Argentine peso is still, in real terms, very strong. And some recent moves to lower the crawling peg. So before there was a regime in which the Argentine peso depreciated 2 percent every month. Now it’s been lowered to 1 percent as inflation fell. That’s going to make it more difficult to accumulate reserves because exports are not as competitive when the exchange rate has appreciated in real terms. So that’s the next—the next sort of postmark that we’re looking for, what happens with the exchange rate? What happens with the with reserve accumulation? And one thing that will play a role, potentially, on this is what happens with the renegotiation of the debt deal with the IMF. So we’re looking into those things, but a lot of the work has been done. But the very challenging work still needs to be done. Back to you.

LAWSON: OK. Ready for the next question, please.

OPERATOR: We will take our next question from Hari Hariharan.

Q: Good morning. Thank you for doing this. And thank you for the opportunity to ask a question.

I want to ask, if you don’t mind, two questions at very different time—in different time scales. The first question is, how should we think about what Donald Trump’s legacy ambitions are? Because this is a unique president who is not going to stand for re-election. So when we talk about, you know, being transactional with China, in the first term you could argue that he wanted to do a deal by the agricultural community, et cetera, because he wanted their votes. I wonder whether those variables are not important now. So I’d like to know how you guys are thinking about legacy shaping what he does.

And then specifically to Anna, who’s been spectacular in her calls on U.S. employment, I just want to ask a quick question saying, how are you thinking about the outlook for employment going forward? Because you mentioned growth. You did not talk about employment. And related to employment and so on and so forth is the most incredible animal spirit out there is the credit impulse. CEO of every large financial institution is going giddy with the prospect for credit growth. So how is that playing into your outlook for growth, employment, and inflation, if you will? Thank you.

LAWSON: Why don’t we start with Anna on the labor question, then go to Ira on the legacy question?

WONG: Sure. Actually, I really want to get at the legacy question. There’s an echo for some reason. OK. So, Hari, you exactly hit the nail on the head on the legacy question. I do—my view is, especially having worked in the first Trump administration and in CEA, is that there is some slight difference here, driven by that legacy issue. I think that the way that the Trump administration is viewing trade policy is that they have this vision of resetting the global trade system in the sense of Nixon, in the—you know, I think the closest historical episode to the current is Nixon, the Nixon shock of 10 percent tariff. There are a couple objectives to this Trump administration’s tariff policy, the guidelines, so you can say.

Number one is the revenues actually matter. There is a view in the administration now that there is an optimal tariff level. And it is not 3.5 percent, as it is here. It is actually between 10 to 20 percent. And there’s also the idea that the trading system is—global trade system is stacked against the U.S., because Trump is very sensitive to this perception of unfairness. And he is really trying to escalate to deescalate. So he has this grand vision of remaking the global trade and monetary system by the end of this four years. And third of all, the national security—so supply chain resilience and also immigration.

So what I think what could possibly happen—and I put—I think that for—on the negotiation tactics part, it will behoove them to go high. And then suppose that he did impose a 25 percent tariff on Canada, Mexico, which I think is quite likely. Those will also go away very quickly. And for tariffs to have real substantial impact on macro, it needs to stay there for at least a year. But in the Nixon shock, for example, Nixon imposed 10 percent tariff on—universal tariff and then took them all away four months later when he has the Smithsonian Accord.

So I think two years from now it’s possible that the dollar would have appreciated by so much in response to this massive increase in tariff as a negotiation tactic that we can see a Mar-a-Lago Accord where he would try to—Trump would try to hash a grand deal, which—he’s also into drama. So he wants a grand deal of trade pact, which is like phase one deal with China, but with multilateral. I think he’s aiming for not just a negotiation with China, but on multilateral trade deals, where every country buy more from the U.S., or there would be some currencies kind of deal in it where the dollar would depreciate against these currencies. And also finally, just a resetting of what’s the protocol etiquette for global trading system.

Now, on the jobs outlook, so I do think animal spirits is running very high. And that could stabilize the jobs market in the next couple months. As I said, the honeymoon period of good sentiment usually post-election usually lasts about six months. And when I said the tariffs, I don’t think the massive tariffs are immediately inflationary if they’re imposed on intermediate goods. The margin of adjustment would be on firm profit margins and the stock market, and eventually jobs. So I do have the unemployment rate going back up again in 2026, on the basis of my assumption that the tariff level will go much higher in 2026 where most of the escalation will happen.

LAWSON: OK. Ira, your views on the legacy question? Think you’re on mute still.

KALISH: I’m not sure what the intended legacy is. I agree with Anna that he does want to redesign the trade system. But he focuses a lot in his comments on the trade deficit. And, in my view, trade deficit is not necessarily a bad thing. And a bilateral trade deficit is actually quite meaningless. So the focus on that in terms of trade policy is not going to be effective in getting his goal of reducing the trade deficit. The comparison to Nixon is interesting. And what Nixon did—not only did he have the tariffs, he had the pulling off of the gold standard, the devaluation of the dollar, and a tax cut at the same time. It was all inflationary in the end. It was combined with wage and price controls, but ultimately when those were lifted, we had a new era of much higher inflation. So that’s not necessarily something that Trump would want to repeat.

Another thing that’s been suggested is that a Mar-a-Lago deal would be similar to the Plaza Accord in 1985 that Treasury Secretary Baker did. That was where he threatened tariffs if other countries didn’t intervene to help bring down the elevated value of the dollar. But the reality was the dollar was likely to come down anyway, so I’m not sure that the Plaza Accord was actually as effective as a lot of people think. The goal of imposing tariffs and at the same time reducing the value of the dollar is not going to happen either. So I guess the bottom line is I’m not sure what the legacy will be, but I think the intended legacy is not actually achievable.

LAWSON: And, Elijah, from an EM perspective, your views on the legacy question?

OLIVEROS-ROSEN: I won’t add too much, but I would say just look who’s around him, right? I think there is this idea of American exceptionalism deeply embedded in how he thinks, and what drives his actions, and who he’s surrounds himself with. So the two ways—the two outlets that are sort of being projected are trade—let’s be the best. Let’s have the best companies. And let’s, you know, not have large trade deficits. Even if that’s not in line with that, as Ira was explaining. And the other one is, let’s be the country where everyone wants to come, but it’s for the Americans. So let’s make sure that our borders are closed or, you know, closed to illegal immigration. So I do think this idea of American exceptionalism is one that’s deeply embedded in how he thinks. And obviously there’s going to be an adjustment by the rest of the world if he does push this through for many, you know, companies around the world that now have to compete under new rules of the game.

LAWSON: Right. We’ll take the next question, please.

OPERATOR: We will take our next question as a written question: The United States might be viewed by some countries as a more unreliable negotiating partner under a Trump administration. Do you all have a view on what this could mean for the growth of alternative economic relationships that don’t include the U.S., like BRICS?

KALISH: Well, I think the BRICS is not a cohesive organization. And despite efforts to try to make it sort of a counterpart to the G-7, I don’t think that’s going to work. So I’m not sure that the BRICS are going to have a cohesive policy regardless of what the U.S. does. But we are already seeing some degree of decoupling from the U.S. and China, at least, where Chinese trade patterns and investment patterns are different than before because of trade wars and because of the likelihood of further trade wars.

So we’ve seen a sharp drop in Western direct investment into China, and a commensurate increase in investment in other places like Mexico, Southeast Asia, and India. We’ve seen China invest less here in the U.S. and more in, say, Southeast Asia. We’ve seen trade patterns shift commensurately. So I’m not sure it’s really a question of whether the U.S. is a reliable trade negotiator. It’s really a question of what the U.S. policies are, and what the Western policies are, and what the Chinese policies are. So I think we are seeing some degree of decoupling. And that’s likely to continue and maybe become exacerbated. And so we’re looking at a somewhat different form of globalization than we saw before.

OLIVEROS-ROSEN: And I’ll just add something quickly, because I think a key word here in terms of thinking about how U.S. policy can shape how other countries relate to the U.S. is rules of origin. Because if we do see changes in, you know, how much content there has to be in an American product to be able to be bought by the U.S., that can shape where investment goes, where relationships go. We’ve seen it already taking place in Mexico and other places in the world. And it will also shape our potentially negative perceptions towards China, or in some cases positive perceptions towards China. So I think, you know, these type of policies will also contribute to how countries relate to the U.S.

LAWSON: OK, ready for the next question, please.

OPERATOR: We will take our next question as a written question. There are already calls for reform at the WTO. How do you think Trump’s trade policies will affect the future of the organization?

KALISH: Well, when Trump was president the first time the U.S. refused to allow the appointment of new people to the body that adjudicates trade disputes. So the number of people on that body fell to a level below the required threshold. And that basically substantially reduced the ability of the WTO to play a role in adjudicating trade disputes. The Biden administration did not change that policy. So I expect that the sort of neutering of the WTO will continue. Which is, in my view, unfortunate, because the WTO exists to engender a global trading system and to facilitate multilateral reductions in trade barriers. That doesn’t seem likely right now.

LAWSON: Question follow up to Anna and Elijah. People used to be very concerned about what they called the spaghetti bowl of trade agreements, where rather than everyone operating under one agreement at the WTO that you had this mix of a sort of spaghetti mess of bilateral agreements or small regional agreements. What do you think the outlook is in a world where the WTO is not going to step up again? What do you think the agreement—the outlook for regional trade agreements is? Will we see more of those? Will we see much more focus on bilateral deals?

WONG: I’ll defer to Ira on this one.

LAWSON: Ira, back to you then.

KALISH: Oh. Well—(laughs)—I mean, we’re not going to see more multilateral deals, that’s for sure. I think we’re going to see more bilateral deals that don’t involve the United States. Deals between, say, Mexico and Europe, Europe and Latin America, maybe China and Europe, Japan and Europe. I think—you know, I think the new administration is going to seek bilateral deals with a number of different countries. I’m not sure what that will entail. When we had the first phase of the agreement with China under Trump in 2019, that entailed not so much reducing trade barriers as agreeing to a kind of managed trade where each side would commit to buying certain products, and a certain amount of certain products, from the other country. That’s not really trade liberalization. It’s just simply managed trade. I think it’s probably likely that the new administration will seek those types of deals going forward. But in terms of free trade agreements, I think we’ll see them—bilateral deals that don’t necessarily involve the United States.

WONG: I will just add a macro note to that. So the biggest leverage U.S. has in driving whatever deals Trump envisioned is our big trade deficit with the rest of the world. In fact, a lot of Trump’s ideas for trade policy stems from the fact that he perceived U.S. as the biggest market for global goods. So to the extent that U.S. growth is able to outpace the rest of the world, and as the rest of the panelists mentioned China’s in doldrums, EU is not doing well, other EMs, to the extent they depend on China, wouldn’t be doing well. Then the U.S. or Trump will perceive that leverage to continue to be there. And everyone—so this—basically, the world order would be very similar to the early 2000s with the Bretton Woods tier three idea about how there’s a core in the global trading system that absorbs all the goods from the periphery countries. If that is the implicit global order, then U.S. will—I think the U.S. will have the leverage to kind of, as Trump envisioned, sucks in all the trade deal vis-a-vis U.S., in that sense. But that’s conditional on U.S. growth outpacing the rest of the world.

OLIVEROS-ROSEN: And I’ll just add one thing. I think a very brief comment. I think a key test of whether we’re moving to bilateralism versus multilateralism will be USMCA. So we have the revision coming in 2026. I think that will be a very important indicator of how future trade deals will be designed under this new, you know, Trump administration-driven school of thought towards trade. So I think that’s also important to know.

LAWSON: Ira, I want to go back to something you mentioned briefly earlier about the federal elections in Germany and the possibility that that will lead to a fiscal stimulus that boosts growth across Europe. What do you think the prospects for that are? And also, does the question of enhanced military spending—the need for enhanced military spending in Europe, does that support the growth outlook there?

KALISH: So—(coughs)—excuse me—in Germany there will be an election. The reason is that the previous government fell apart because the ruling social democrats had a disagreement with the centrist free democrats. The ruling social democrats wanted to get rid of the so-called debt break, which is a limit on German government borrowing, so that a fiscal stimulus funded through debt could take place. The government fell. Now there will be an election. It seems likely at this point that the right of center coalition will be elected. But if they’re elected and have to form a coalition with the centrist free democrats there won’t be an end to the debt break. If, on the other hand, there’s a grand coalition between the center left and the center right, which has happened a number of times before, then it’s likely that there will be an end to the debt break and that Germany would engage in at least some form of fiscal stimulus, which would boost domestic demand and probably have some positive spillover effects on the rest of Europe. So that’s an uncertain aspect right now.

As for defense, there’s already been a pretty substantial increase in defense spending. A fairly large number of NATO countries now exceed the 2 percent threshold. Trump has now said he wants a 5 percent threshold. So I don’t—I don’t think that’s going to happen. But if there were to be an end to the war in Ukraine that was perceived as a victory for Russia, I think there would be suddenly a very sharp increase in defense spending in Western Europe, certainly on the part of Poland, maybe on the part of Germany. And that would probably have some stimulative effect on the European economy as well, although, on the other hand, a perceived victory by Russia could have a chilling effect on investment and especially cross-border investment in Europe. So it’s hard to know the net impact on the European economy in such a scenario.

LAWSON: OK. Thank you. Looks like there are no other questions in the queue. So I would like to finish off with a broad question for all of you. Which is, what are we missing? Where are the pockets of overlooked or underpriced risk? Obviously, there are geopolitical wild cards everywhere, but from a market perspective what should we be focused on that the market really isn’t?

KALISH: Well, as a resident of Los Angeles, I have to say climate events are becoming more frequent and disruptive. And we’ve already seen the private sector respond in a variety of ways, with financial service companies changing the way they price risk, changing how they allocate portfolios on the basis of climate risk. But I’m not sure that the financial markets are fully factoring in the possibility of rapid climate change and rapid disruption. And if that does happen in the coming decade, it could be very disruptive to the global economy.

LAWSON: Anna, thoughts?

WONG: I think the market perhaps is—so I think the fiscal trajectory of the U.S.—because I think there’s a broad consensus that it’s not looking sustainable. Yet, having covered U.S., looking at the U.S. fiscal in the past decade, this kind of call has come back—returned over and over again. And somehow U.S. just inches by ever—maybe because of the role as the reserve currency. So I think in terms of the fiscal math, one thing is to what extent can Scott Bessent stabilize the fiscal math? Because he came into Treasury with a lot of accolades, saying that this person really understands the Treasury debt market. And he said in his testimony that he’s going to—it is one of his priorities.

And second, to what extent deregulation would impact inflation and also the fiscal math. That’s another area that the financial market is not at all priced in anything. Nobody is priced in anything on DOGE. And finally, personnel appointment. You know, if you are asking me what’s my forecast horizon, I could say that, well, the next three to six months, that’s predictable. But twelve to eighteen months, or even two years—which is the horizon of a lot of our clients—that’s much harder because then in spring of 2016—2026, we will have a new Federal Reserve chairman. Who is that person? I mean, is he going to be Arthur Burns or is he going to be Paul Volcker? What is he going to? That will completely reprice everything. And so that’s it.

LAWSON: Elijah.

OLIVEROS-ROSEN: Yeah. Out of all the things that we’ve mentioned, I think one thing that we have not—in a similar—tied to what Anna was saying, but for EMs—is interest coverage. So what I mean is, how much is spent on interest as a share of what’s coming in, so as a share of government revenue. That’s one of the indicators that has been going up across the board. Many emerging markets spend more than 15 percent of what they get just in paying interest.

And in an environment of rates at least maybe not coming down as much as we were thinking, growth potentially being impacted by the uncertainty of tariffs and other policies in the U.S., and fiscal deficits being larger than before and really hard to consolidate fiscal policies under this context of uncertainty, it’s really hard to see how interest coverage improves. And when you have a lot of the government funds going to pay interest rather than paying on education, on defense, on other things, that can be a problem politically and socially as well, beyond the financial aspect of it.

LAWSON: OK. Well, certainly an exciting year ahead. Lots of question marks. And want to thank you all for your thoughts, your time. And, Operator, I’ll turn it back over to you.

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