The most maverick president in US history, Trump returning to the White House, this might be the tail risk that global markets need to pay the most attention to next year.

Led by Goldman Sachs chief economist Jan Hatzius, the analyst team, in the latest macro outlook report, particularly emphasized Trump's comprehensive tariff policy, not only exacerbating the upward inflation risk in the US, causing more severe impacts on the US economy, and may trigger more extensive trade frictions, posing challenges to the global economy especially to emerging economies.

The team pointed out that if this policy is implemented, the US dollar may further appreciate significantly, non-US stock and bond yields will face increased downward pressure, European sovereign bond yields and euro exchange rates will further decline.

Goldman Sachs expects that by the end of 2025, the US core PCE inflation should slow to 2.4%, but if a 10% tariff is imposed across the board, that number will rise to over 3%.

Global economic growth in 2025 is expected to stay at 2.7%. The uncertainty of Trump's trade policy has a greater impact on European economic growth than the US. Goldman Sachs has revised down its Eurozone GDP forecast to below consensus at 0.8%, and Asian emerging markets will face more severe tests.

Under the tariff policy, European and emerging market economies are under pressure.

Goldman Sachs expects global GDP growth in 2025 to be 2.7%, consistent with the momentum in 2024, slightly higher than potential growth estimates, with US GDP growth forecasted at 2.5%, surpassing market consensus expectations.

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

Research shows that the uncertainty of US trade policy (TPU) has a significant impact on Eurozone economic growth. If TPU rises to the level of the peak period of trade friction in 2018-19, it will drag down US 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 US presidential election, Goldman Sachs has lowered its 2025 Eurozone growth forecast by 0.5 percentage points from previous levels. If the US implements comprehensive tariffs, Goldman Sachs says it may further revise down this forecast.

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

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

Inflation: Short-term upward risks, long-term downward trend unchanged

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

Trump 1.0's experience shows that tariffs have largely been passed on to consumers. This can be seen from the Personal Consumption Expenditures Price Index affected by tariffs.

If the imposition of tariffs is limited to imported cars, the impact on US inflation is expected to be relatively small, increasing by 0.3-0.4 percentage points. Goldman Sachs predicts that by the end of 2025, the core PCE inflation rate, excluding tariff effects, will decrease to 2.1%, but with the expected tariff effects, the inflation rate will be raised to 2.4%.

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

However, Goldman Sachs believes that the impact of imposing tariffs on inflation is limited and mainly one-time, unlikely to lead to sustained inflationary pressures.

Goldman Sachs forecasts that by the end of 2025, with energy prices continuing to decline, the euro area's core inflation rate will slow to 2%. However, due to rising labor costs, service inflation will continue to face upward pressure.

The report points out that the progress of inflation in Canada will keep the Bank of Canada on hold until it starts cutting interest rates. Rate cuts are expected to begin in the third quarter of 2024, with the policy rate eventually 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. Goldman Sachs notes that the Reserve Bank of Australia is pursuing a higher inflation target of 2-3%, higher than the 2% target of most other central banks. By the end of 2024, Goldman Sachs predicts that Australia's inflation rate will be slightly below 3%, in line with the Reserve Bank of Australia's target.

Interest rate endpoints: Upward for the USA, downward for the Eurozone, giving the Bank of Japan more confidence in raising rates.

Based on the above assumptions, Goldman Sachs believes that the outcome of the US election will not disrupt the normalisation process of global monetary policies, with most major central banks expected to significantly ease policy further by 2025.

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

If anything is different, the threat of tariffs to recent economic growth and the Fed leadership's continued preference for normalizing policy pre-emptively have strengthened our confidence in continuous interest rate cuts early next year.

Although the pace of rate cuts and the final interest rate after the first quarter may depend on the Fed's willingness to pre-emptively respond to potential inflationary pressures from elected President Trump's future policies, this is undoubtedly uncertain, with our basic and probability-weighted forecasts more moderate than current market pricing.

In the Eurozone, Goldman Sachs reiterated its expectation that the European Central Bank (ECB) will cut interest rates continuously, lowering its forecast for the final interest rate to 1.75%, based on our downgrade in growth.

In the United Kingdom, Goldman Sachs raised its forecast for the Bank of England's final interest rate, citing a more expansionary autumn budget that will bring better growth prospects. It is now expected that rates will fall to 3.75% by the end of 2025, reaching a final point 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, the Reserve Bank of New Zealand, and the Swiss National Bank to each cut rates by 50 basis points at their next meetings, with Australia expected to cut rates quarterly starting from February next year.

Emerging markets also have significant room for monetary easing, as policy rates are still far above neutral, particularly in Latin America and Central and Eastern Europe, the Middle East, and Africa. Asia also has room for rate cuts in the coming quarters.

The main exception is Brazil, where the overheated economy is expected to prompt the Brazilian Central Bank to raise rates by 150 basis points in the first quarter of 2025, then cut rates by 125 basis points by the end of 2025.

Another exception is Japan. After thirty years of low inflation pressure, the rebound in inflation and wage growth led the Bank of Japan to exit its negative interest rate policy in March and raise interest rates again in July. Goldman Sachs believes that Japan's low inflation risk is behind us, and rate hikes will continue.

Wage growth should remain stable (we predict that in the 2025 "Shunto" wage negotiations, basic wages will increase by 3-3.5%), and become increasingly linked to rising prices, indicating the emergence of a benign wage-price spiral that helps anchor inflation expectations.

Furthermore, demand appears stronger, with increased policy space compared to the past, indicating lower downside inflation risks if activity weakens.

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. Positive inflation outlook will support the Bank of Japan in hiking rates by 25 basis points by the end of the first half of 2025, followed by further hikes, aiming for rates to reach 1.5% by 2027.

Opportunities for emerging market stocks and currencies?

Goldman Sachs also points out that currently, U.S. stock valuations are at historical highs, and credit spreads are also near historical lows. This suggests that market pricing of risks may be too optimistic, overlooking potential tail risks.

Due to exceptionally high market concentration, long-term expected returns on U.S. stocks now appear low, leading to relatively more attractive expected returns on government and corporate bonds.

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

In 2017, the first year of the Trump administration, emerging market stocks and currencies outperformed the large cap in the end. If the US fiscal policy becomes more restrained, or if the trade agenda focuses more on specific areas, it may provide relief for those parts of the emerging markets where risks are most clearly reflected.

In addition, as the Fed begins a rate-cutting cycle, central banks in emerging markets also have more room for monetary policy flexibility, which may boost economic growth and stock market performance in emerging market countries.

Goldman Sachs advises investors to focus on 'Alpha' opportunities in 2025, looking for stocks that can outperform the market average, rather than relying on overall 'Beta' performance. Goldman Sachs is particularly bullish on the Japanese stock market and expects that due to the low pe ratio in emerging markets, there may be undervalued investment opportunities.

Tail risks are now a key focus.

The report emphasizes that under the current global economic environment, tail risks have become an important focus, especially the possibility of the US implementing a comprehensive high tariff policy.

Goldman Sachs believes that the impact of comprehensive tariffs has been underestimated, particularly its potential effects on European and some emerging market economies. If this policy is implemented, it could lead to further appreciation of the US dollar, adding downward pressure on non-US stock and bond yields, further lowering European sovereign bond yields and the euro exchange rate.

The US elections clearly increase the possibility of additional fiscal expansion and refocus on the sustainability of US public debt. However, in our base scenario, with only moderate fiscal stimulus, we are more likely to see a sharp increase in the fiscal risk premium in the US bond market.

There are two directions for tail risks in the crude oil market. In Goldman Sachs' benchmark forecast, Brent crude oil prices will 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 the high risk of decreased Iranian oil supply caused by tension between Israel and Iran, this may lead to an increase in the upside risk of crude oil prices.

However, in the medium term, the risk tends to favor a downward trend in the forecast range. This is mainly because there is still a lot of ample supply being held outside the market, which may re-enter the market system starting in 2025.

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

Editor/rice