Five optimistic scenarios for the global economy

Happy Sunday. Many thanks for your responses to the last newsletter, which went viral in Canada. I waded into the online debate on Ben Mulroney’s radio show (link here).

Now to this week. Tariffs, uncertainty and a slowing US economy are leading analysts to cut their 2025 and 2026 annual growth projections for the global economy. That’s hardly surprising. Most did not expect Donald Trump’s return to the White House to be this disruptive from the get-go.

Given the gloominess, I went looking for pockets of optimism. So here are five scenarios that could mean global economic forecasts surprise on the upside in the near term.

Scenario 1: Trump dilutes his tariff plans

The recent plunge in the S&P 500 has not been enough to deter the US president from his tariff-raising agenda. But, as the Biden administration showed, the stock market and approval ratings don’t always move together. The latter tends to track consumer confidence (particularly for Republicans when Trump is in power), which has dipped recently as inflation expectations have risen.

As the effects of import duties come through to households, confidence and approval could dip further. With Americans still reeling from a 20 per cent post-pandemic jump in the price level, their threshold for further pain is limited. This could raise pressure from the White House or the GOP to dial things down. The 2026 midterms will quickly come into view.

Most analysts reckon this is unlikely. But Trump has a knack for watering down tariffs and easing deadlines. Even a slight pull back — including carve-outs, a more structured approach to trade policy or a delay to his April 2 “reciprocal” tariffs — would improve global growth forecasts relative to how damaging his tariff agenda could be in totality.

Scenario 2: European growth surprises

Most forecasters expect Germany’s plans for higher investment spending — and appetite for higher defence expenditure across Europe — to boost euro area growth. But there are three further potential upsides to consider.

First, a number of positive developments are converging in the EU. Higher government spending, rising domestic stock markets and a “rally round the flag” effect in reaction to Trump’s tariff and Nato threats will boost consumer and business confidence. That could then generate a higher-than-anticipated real economic impact.

For instance, with household savings ratios still close to 3 percentage points higher than pre-pandemic, there is ample room for less cautious consumers to rev up euro area growth. For companies, higher equity valuations and capital inflows could push more investment decisions over the line. Policy reform might be more forthcoming, too.

Second, how the continent interprets its security spending needs matters. Goldman Sachs estimates that building up Europe’s materiel and matching Russia’s annual investment in new supplies could require at least €160bn per annum (around 0.8% of GDP). How the spending impacts near-term growth depends on its size, pace and nature, again leaving room for upside. (For instance, defence R&D spending could have positive impacts on other industries.)

However, Andrew Kenningham, chief Europe economist at Capital Economics, is more sceptical. “Few countries will match Germany’s increase in deficit spending, multipliers on defence are likely to be low-ish as a lot of the money will be used for equipment rather than current spending, and some will be imported,” he said.

Third, a ceasefire in Ukraine could bring down gas prices, increase risk-on sentiment in markets and raise confidence — boosting the euro area’s GDP by up to 0.5 per cent, according to Goldman.

Scenario 3: China picks up global growth slack

Likewise, upsides in China — the world’s largest exporter and manufacturer — would also boost global forecasts. How?

First, rising private sector confidence could boost hiring and investment activity above expectations. Chinese artificial intelligence company DeepSeek’s shock progress in model development, Beijing’s stimulus measures and President Xi Jinping’s efforts to rebuild ties with China’s business titans following a clampdown on private wealth and tech are all positives. Global investors are encouraged, too; inflows into China-exposed equities have surged.

Second, AI could boost China’s growth. DeepSeek’s low-cost, open source large language model raised optimism that the technology might be adopted faster. It will spur higher investment in data centres. Productivity gains may come through faster, too. Recently, businesses spanning the auto industry to telecoms have announced plans to use DeepSeek’s technology.

Third, Beijing’s economic support could surprise. In this month’s National People’s Congress, the government committed to a fiscal deficit target of 4 per cent of GDP — the highest in three decades. Though analysts were hoping for more evidence of support for households, the communist party has become more vocal on the need to prop up demand.

“A key difference in this year’s policy messaging compared to previous years is Beijing’s emphasis on maintaining flexibility and adaptability in policymaking,” said Jing Sima, China Strategist at BCA Research. “This suggests the central government remains open to providing additional economic support if necessary.”

For both European and Chinese exporters, the hit from US tariffs will also depend on how easily American importers can switch to domestic suppliers. That could be harder than expected for some sectors, particularly amid broader US economic uncertainty.

Scenario 4: US growth surprises

Even if Trump pursues tariffs, other domestic economic developments could cushion their effect.

First, tax cuts and deregulation are still in the White House’s back pocket. An extension of the provisions in Trump’s Tax Cuts and Jobs Act (most of which expire at the end of 2025) will support consumption and investment at the margin. The Tax Foundation estimates this will boost long-run economic output by 1.1 per cent.

A plan to cut corporation tax would build on that. Concerns over higher borrowing — which could push yields higher — risk eating into any upsides. (Extending the TCJA alone without offsets would raise the deficit by $4.6tn.) But if the bond market allows Trump to enact even some of his tax plans, that could reduce the growth hit from tariffs. A further boost would come from efforts to cut red tape, particularly to onerous planning requirements.

Second, faster AI adoption is in the realm of possibility. Matthew Martin, senior US economist at Oxford Economics, suggests a combination of lower interest rates and tax reliefs next year could expedite AI investment. Though AI use across American businesses remains tame, diffusion is rarely a linear process. It’s possible breakthroughs and new applications of the technology could speed up its impact on productivity.

Scenario 5: Lower interest rates

Finally, central bank policy rates could fall faster and further than consensus expects, propping up consumption and business activity.

Right now inflation in advanced economies is driven by domestic factors — particularly services inflation, which is underpinned by wage growth. But indicators of labour market tightness such as hiring intentions and vacancy rates are easing. This means salary price pressures could fall faster than expected, allowing central bankers to make extra cuts.

The prospect of imported inflation (as a result of tariff wars) is pushing up inflation expectations and raising concerns that high rates could have staying power. China could be an offsetting factor here. Sima at BCA Research notes that, in the last trade war, Beijing mobilised tax subsidies to cushion its exporters. This, combined with the possible diversion of US-bound Chinese exports to elsewhere, could help offset the inflationary impact of retaliatory tariffs on America.

Are these scenarios too hopeful? Possibly. Each is underpinned by assumptions, ranging from blind spots around policy developments to the hard-to-measure economic effects of household, business and investor mood swings.

Still, gauging how economic trajectories might change is a valuable exercise in itself, given that several prevalent market narratives have done a 180 in recent months (see: US exceptionalism, China’s “un-investability” and Europe’s unloved equities).

However, the sheer scale and influence of the US economy and its capital markets means that for global growth forecasts to surprise notably on the upside (rather than being simply less bad than currently projected), the White House would need to alter its economic agenda. That’s not impossible. But I’ll leave the precise odds to the Trump- and MAGA-ologists.

Send me your upside scenarios and thoughts at [email protected] or on X @tejparikh90.

Food for thought

Following a series of recent breakthroughs in automatons enhanced by AI, the University of Edinburgh unveiled the world’s first AI robot barista. The associated research paper underscores the economic opportunities that could come with smarter robot technology, beyond cups of coffee.