This autumn, the focus has been more on politics and military conflicts than on what is happening in the economy. The world is preparing for the presidency of the “predictably unpredictable” Donald Trump. The 47th President of the United States who represents an economic superpower, will control both Congress and the Supreme Court, and, in the worst-case scenario, he will also influence the monetary policy of the United States. It is difficult to objectively assess the potential consequences of Donald Trump’s policies, as the importance of politics in the economy is often overestimated, overshadowing people’s creativity and ability to solve problems and adapt, according to forecasts in the latest SEB Nordic Outlook Economic Report.
A slowdown in global growth
Global growth will be just over 3% per year from 2024 to 2026, which is slower than before the COVID-19 pandemic. The US economy is on the verge of a soft landing, but the election outcome harbours new risks. After strong growth in the first three quarters, we are raising our forecast for US GDP growth for 2024 and 2025 to 2.7% and 2% respectively, while lowering our forecast for 2026 to 1.7%. The US economy will continue to be driven by strong household consumption. Import tariffs are likely to be a weapon in the negotiations and should be used with caution as they can undermine US growth. Tariffs may have a greater indirect impact on economic development by creating uncertainty over trade policy and affecting financial conditions, including a rise in interest rates. US growth could also be hurt by lower immigration, which has so far supported it and boosted employment.
“Although Trump’s policies are unlikely to significantly impact the eurozone in the short term, they could have a negative impact in the medium term. It is difficult to estimate this impact as full information on the level of tariffs is not available. The impact will depend on both the level of tariffs and the reaction of the European Union,” says Dainis Gašpuitis, Macroeconomist at SEB banka.
The upturn in the eurozone will continue in the second half of 2025. However, the situation in the individual economies is very different. Germany is dragging the region down, while Spain is recording strong growth and is even outperforming the US this year. One of the factors that made this development possible was the stable labour market. The GDP data for the third quarter was a positive surprise, but the outlook for the future is gloomy. Consumer confidence has improved, but this is not reflected in consumption. The industrial economy is weak in many countries and will remain so for some time. The differences between individual countries and sectors are determined by conditions such as access to cheap energy and restructuring processes in sectors such as the chemical and automotive industries. As interest rates fall and people’s confidence increases, the housing market and consumption can be expected to pick up. The development of the global economy and political developments will be decisive for the export-orientated countries in the eurozone. Germany has been hit particularly hard. Its GDP is only a few tenths above its pre-pandemic level and the manufacturing sector has shrunk by almost 10%. Industry is suffering from high costs and moderate demand. Tariffs and trade barriers could exacerbate these problems. However, unemployment is low and German households have savings that could boost consumption.
China is preparing for Trump’s policies
China has been burdened by an earlier credit boom that caused problems in the property market and an export-led growth model that is now struggling with trade barriers and tariffs. China is endeavouring to improve low private sector confidence in the future and is also in the process of resolving the property and regional debt crises. Overcapacity in the economy is lowering inflation, which stood at 0.3% in October and is weighing on the rest of the world due to falling export prices. Beijing is trying to drive up the stock market and property prices, pay off large regional debts and prepare for Trump’s policies. Beijing has no shortage of ways to boost economic growth. More direct growth-boosting measures are likely to follow, but first preparations must be made to make the most of the new stimulus policy.
The fight against inflation is almost won, but the risks remain
The battle against inflation has largely been won without a recession, although many countries are experiencing stagnation. Despite some inertia in service prices, inflation is on track to reach the central bank’s target. Lower inflation means that the high price level will rise more slowly, but it will continue. Lower inflation and the reduction in key interest rates will boost purchasing power, investment spending, and growth. However, it is important that households are willing to spend money and entrepreneurs are willing to invest. General confidence will therefore be an important factor. Falling inflation leads to higher real interest rates and the interest rate reduction cycle must keep pace so not to slow down the economy or create "stress" in asset prices.
“Military conflicts will have a direct and indirect impact on the world. Trade barriers and tariffs, as well as escalating conflicts, can quickly push up transport and energy prices and “revive” inflation. According to surveys, companies in both the US and Europe have lowered their price plans. In some cases, however, they still include a slightly higher increase than before the pandemic,” points out Dainis Gašpuitis.
The growth rate of goods prices has largely normalised, but it is higher for services. China’s export prices are falling, lowering inflation in the rest of the world. The impact of tariffs must also be considered – tariffs could lead to higher inflation, push up interest rates and trigger countermeasures that would increase uncertainty and weaken investment spending.
In the coming years, fiscal policymakers will face the difficult task of limiting budget spending without slowing down the economy. At the same time, they must prioritise growth-promoting structural reforms, which in many places include defence spending. The desire to avoid difficult but necessary decisions and attempts to divert expenditure outside the budget will make this expenditure "invisible" in the statistics, but will not solve the problems. Fiscal policy will therefore be restrictive in many areas, but public debt will continue to grow.
Latvia’s economic outlook for next year is more optimistic
Growth in the Nordic and Baltic countries will accelerate slightly between 2025 and 2026. Due to the vulnerability of these economies to high interest rates, the previous headwinds are now turning in favour of development. However, there are still significant differences between the countries. Most homeowners in Sweden, Norway and Finland have taken out mortgages with variable interest rates and are now benefiting from the interest rate cuts. However, the recovery has been delayed. A weak Finnish economy and a weak Swedish construction industry are affecting the economies of the Baltic countries, especially Estonia. This year, the Estonian economy will shrink by 0.9 %, but next year, it will recover by 2.2 %. Conversely, Lithuania will see stronger growth, rising by 2.4% this year and accelerating to 2.8% in 2025.
The performance of the Latvian economy in the third quarter shows that the economy fell by 0.7% and will end the year with a decline of 0.4%. The expected recovery in the second half of the year has slowed down. The main reason for this is the persistently weak external economic environment, as a result of which the decline in exports and the manufacturing industry is continuing. The difficulties in obtaining EU funding are reflected in the low level of construction activity. Domestic consumption is only recovering very slowly. Part of the population is still struggling with the consequences of high inflation, while others have changed their habits and are also choosing to save more, as shown by the increase in bank savings accounts. The outlook for next year is a little more optimistic. Although wages will not rise significantly, purchasing power will continue to increase due to lower inflation. This will create favourable conditions for more active domestic consumption. Lower interest rates will strengthen the property market and the construction industry and support a recovery in export growth. After a long delay, the inflow of EU funds will have a material impact. We expect economic growth of 1.8% next year.
