Macroeconomics

    Goldman Sachs Research expects continued growth from the UK economy in 2025, although its expansion may be slower than some economists anticipate. Our economists forecast the UK’s GDP to increase 1.2% in 2025, which is slower than the Bank of England’s projection of 1.5% and just below the consensus estimate of economists surveyed by Bloomberg of 1.3%. The team forecasts 0.4% growth in the first three months of 2025 relative to the last three months of 2024, slowing to around 0.25-0.30% quarter on quarter in the rest of next year. The British economy will be impacted by several key factors including uncertainty around trading arrangements with the US, a less expansionary budget, and proposed changes to the planning system for housing and development. Our economists expect inflationary pressures to ease through 2025, introducing the potential for deeper interest rate cuts than the market has priced in. Market prices suggest the BoE will stop reducing interest rates at 4%, but our economists believe the central bank will continue cutting as far as 3.25%. “We continue to think that the BoE will likely cut further than the market currently expects as measures of underlying domestic inflation fall back and demand comes in somewhat weaker than the Monetary Policy Committee’s latest forecast,” Goldman Sachs Research’s Chief European Economist Sven Jari Stehn writes in the team’s report, which is titled “UK Outlook 2025: A Gradual Pace, but More Cuts Than Priced.”  How will US tariffs impact the UK economy? The UK’s trading arrangements will be a major focus next year. Uncertainty surrounding potential tariffs from the administration of US President-elect Donald Trump will likely weigh on confidence and is expected to notably reduce euro area growth. These tensions could also spill over into the UK, though probably to a lesser degree. Given the openness of the British economy, a global shift towards increased tariffs could hurt the country’s growth prospects. On the other hand, recent reports have indicated that the US may consider offering the UK a free-trade agreement in return for potential changes to food standards and greater market access for US healthcare companies. The UK could also pursue closer ties with the EU: The government plans to strike a veterinary agreement, and Chancellor Rachel Reeves has hinted at regulatory harmonization in the chemicals sector. But the growth boost from these developments wouldn\’t be enough to meaningfully reduce the costs of Brexit, and it could run counter to closer trading relations with the US. The outlook for the UK budget The UK’s autumn budget was more expansionary than expected, raising the prospect of stronger demand in the near-term. Even so, the updated plans still indicate consolidation in 2025, and growth is expected to cool in the second half of the year. The Office for Budget Responsibility will deliver a forecast update in the spring, which will be closely watched by markets. “The government has left limited headroom against its new fiscal targets, and relatively small changes in the OBR’s macroeconomic forecasts could eliminate this headroom entirely,” Stehn writes. Our economists think economic growth may prove lower than the OBR’s projections, increasing the chances that the OBR will revise its debt-to-GDP forecast upwards. Planning reform could gradually boost UK GDP growth The government also intends to reform the planning system for housing and development. Although it’s difficult to quantify the effect of the reforms without further policy details, our economists broadly expect the changes to result in a boost to residential investment over the next five years. But the impact of any planning reforms on GDP growth over the medium term will depend on whether they increase labour productivity. A range of studies show that wages and productivity are higher in large cities, so relaxing planning restrictions could boost aggregate productivity by allowing urban areas to expand. “Some studies have indicated that this effect could be sizeable in the very long run,” Stehn writes. “But we would expect any boost to productivity to occur gradually over an extended period of time.” Inflation is forecast to ease in 2025 Inflation is expected to be firmer in the near term, easing throughout 2025. Public sector pay deals and government consumption following the autumn budget will support strong demand, while increases in vehicle excise duty and the introduction of VAT on private school fees could drive up prices in the services sector. Nonetheless, Goldman Sachs Research sees domestic inflationary pressures falling back next year. Data from surveys conducted by the BoE suggest that tightness in the labor market is also likely to ease. “This continued easing in labour market tightness — together with reduced catch-up effects now that inflation has returned close to target — are likely to result in a notable slowing in pay growth next year,” Stehn writes. Reduced pay pressures are likely to result in services inflation declining gradually. This could lead to headline inflation undershooting the BoE’s latest projections: Our economists’ analysis puts headline inflation at around 2.3% in the final quarter of 2025, four-tenths below the BoE’s November forecast. They expect core inflation to fall to 2.5% by the end of next year. The outlook for BoE rate cuts Goldman Sachs Research expects the BoE to cut interest rates further and over a longer period than the market anticipates during this cutting cycle. Our economists anticipate that the BoE will hold rates steady at 4.75% in December, given that inflation and growth are likely to remain firm in the near term. But with slowing inflation now likely in 2025, Goldman Sachs Research predicts quarterly cuts to interest rates throughout next year and into 2026, until the Bank Rate hits 3.25% in the second quarter of 2026.

    China’s economy is projected by Goldman Sachs Research to grow at a slower pace in 2025, as the government’s stimulus efforts partially offset the impact of potential tariffs from the US. Real GDP growth is predicted to decelerate to 4.5% next year from 4.9% in 2024. Goldman Sachs Research’s forecast assumes a 20 percentage-point increase in the effective tariff rate imposed by the incoming Trump administration on Chinese goods, which would weigh on China’s real GDP by 0.7 percentage point in 2025. The forecast also assumes that Chinese policymakers will introduce fresh stimulus to blunt the impact of tariffs. “The choice in front of Chinese policymakers is simple: either to provide a large dose of policy offset or to accept a notably lower headline real GDP growth,” Chief China Economist Hui Shan writes in the team’s report. “We expect them to choose the former.” In other aspects, the focus for China’s leadership hasn’t changed: Officials are determined, over the medium term, to steer the economy toward a technology-driven and self-reliant growth model. The cost of doing so — climbing the ladder to produce higher quality growth — is slower economic expansion, according to Goldman Sachs Research. Our economists forecast real GDP growth to average 3.5% from 2025 to 2035, compared to 9.0% during 2000-2019. “The Chinese economy faced significant growth headwinds in 2024, and policymakers finally started more forceful easing in late September,” Shan writes. “How Chinese policymakers will lean against the wind to stabilize domestic consumption and the property market, and to manage renewed US-China trade tensions, will be the overarching theme of 2025.” How will China support its economy? Historically, China’s government has looked to support its economy through infrastructure and property construction. This time around, Goldman Sachs Research believes China’s policymakers will likely react by cutting policy rates considerably and increasing the fiscal deficit. Strong exports have been the sole bright spot in the Chinese economy this year, contributing 70% of the expected 4.9% headline real GDP growth, according to Goldman Sachs Research. Even though Chinese exporters may continue to gain market share in emerging-market countries, amid significantly higher US tariffs, growth of total exports is likely to decelerate sharply. The contribution to real GDP growth from exports may drop materially next year.  Chinese exports to non-US countries (which are estimated to be more than 85% of China’s total exports) will likely increase modestly in 2025, thanks partly to strong price competitiveness and potential currency depreciation. Goldman Sachs Research expects China’s total goods export volume to be flat next year relative to this year (versus a 13% gain in 2024). The outlook for inflation in China Goldman Sachs Research’s inflation projections are notably below the consensus estimates of economists. Shan expects CPI and PPI inflation to be 0.8% and 0% next year, respectively, compared to Bloomberg’s consensus of 1.2% and 0.4%. “There are structural factors weighing on inflation, including the multi-year housing downturn and persistent industrial overcapacity,” Shan writes. “Restoring consumer confidence and strengthening labor markets and wage growth are likely to take time.” Policymakers in September pledged a raft of measures to support everything from China’s property sector to its equity market amid slowing consumption. Household consumption contributed just 29% to headline GDP in the third quarter of 2024, down from 47% in the second quarter and 59% before the onset of the pandemic. Goldman Sachs Research expects growth in household consumption to stay flat at 5% in 2025. “The weakness in domestic demand has finally struck the ‘policy put,’ and the current easing emphasizes local government debt resolution, household consumption, and equity market performance,” Shan writes. Is China’s property market near the bottom? Still, China’s ongoing property downturn is likely to continue to be a significant drag. New home starts and government revenue from land sales plunged by 60-70% from their peak in 2020-21. New home sales and completions almost halved in the latest data. Given the many structural challenges, our economists see “no quick fix” for the nationwide property sector and expect the downturn to be a multi-year drag on growth for the Chinese economy.  Goldman Sachs Research projects that the property sector will likely weigh on China’s GDP growth by 2 percentage points in 2025 (versus -2.1 percentage points in 2024). The team expects the growth drag to narrow starting from 2026 but to linger until 2030. “With incremental housing easing measures ahead, it is possible to see a stabilization of home prices in some large cities next year — but probably not nationwide,” Shan writes. “For many construction-related property activities, their multi-year downtrend appears inevitable.” While our economists’ 4.5% forecast for GDP in 2025 is in line with consensus expectations, they note the range of possible outcomes is wide for next year. Higher-than-expected tariffs by the US administration is a key downside risk; US president-elect Donald Trump has threatened to raise them by as much as 60 percentage points, and revoking China’s Permanent Normal Trade Relations status would see the effective tariff rate climb by 40 percentage points. Regarding the upside risk, Chinese goods exports could prove more resilient than expected, which could cause growth to come in higher than forecast.

    Germany’s economy, which has lagged behind its peers in recent years, faces a series of headwinds in 2025, including trade uncertainty with the US, still-high energy prices, and growing competition from China. Elections in February will provide an opportunity to tackle the country’s challenges. Europe’s largest economy is forecast to expand 0.3% in 2025, which is slower than the estimate for the euro area of 0.8% and for the UK of 1.2%, according to Goldman Sachs Research. The country’s real (inflation adjusted) GDP is unchanged since the fourth quarter of 2019. For all the challenges, there are also signs of German industry finding ways to adapt. “Even though industrial production is down significantly over the last few years, the amount of value added has actually been much more stable,” says Goldman Sachs Research Chief European Economist Jari Stehn. “German companies have been able to respond by moving out of relatively low-margin production in chemicals or paper, and so on, into higher value production. I think the way forward essentially is for German companies to continue to do that.” We spoke with Stehn and analyst Friedrich Schaper about Goldman Sachs Research’s forecast for GDP growth in Germany, competition from China, and the prospect for some easing of high energy prices. Why has Germany’s economy underperformed other advanced economies in recent years? Jari Stehn: Since the end of 2019, the statistics are quite striking. GDP in Germany has been flat over that period while the rest of the euro area has grown by 5%, and the US has grown 11%. There are a few obvious reasons for that. One is the energy crisis that hit Germany particularly hard since it was so reliant on Russian pipeline gas. Germany has a lot of energy-intensive production, and its economy is quite heavily focused on manufacturing activity. So it’s natural that the increase in energy prices had a bigger effect on Germany than on other countries. Second, Germany is highly exposed to China. This has been a big asset in the past because China has grown a lot. But over the last few years growth in China has slowed, so Germany has sold fewer goods into China. Also, China has become more of a competitor over time, particularly over the last two to three years. China now produces goods that are more like the goods that Germany produces. So essentially, China has transitioned from a key export destination to a key competitor, and it has gained market share, particularly in sectors where Germany has seen big cost increases. Third, Germany has a number of broader structural issues, such as the degree of regulation that business startups face and public underinvestment. Cumulatively over the last few years, they have put Germany in a less competitive position. When you take all of that together, it explains a good chunk of the of the underperformance. Your GDP growth forecast of 0.3% for 2025 is below the consensus. What explains the difference? Jari Stehn: First, we think that many of the structural headwinds that we just talked about will continue. But then, on top of that, we also expect significant trade tensions from the second Trump administration. Germany is likely to be particularly exposed to those tensions because it\’s a very open economy. It\’s heavily focused on industrial activity. When you look back at the first Trump term, we saw a very sharp growth slowdown in 2018 and 2019. The day after the US election we downgraded our forecast for all of Europe, but particularly for Germany. Are you expecting most of the economic impact to come from tariffs or the mere possibility of them? Jari Stehn: The takeaway from the first Trump term was you didn\’t actually see many tariffs implemented on Europe, but you saw a lot of discussions around tariffs that created a lot of uncertainty, a lot of trade tension. In the end, those had big effects on investment, on confidence, and on growth in Germany. We have set out two scenarios. One, which is our base case, is that you get a sharp increase in trade tensions, but ultimately the actual tariffs that you see are relatively limited and targeted on the auto sector. The auto sector is obviously big in Germany, so you still see a significant hit. Our estimate is a 0.6% hit to the level of GDP. The downside scenario involves an across-the-board tariff on all European imports into the US. In that scenario, we think the negative effects would be significantly bigger — about twice as large. Either way, we think there is going to be a pronounced period of uncertainty, and that uncertainty will weigh on confidence and investment. What are the market implications, particularly for Bunds, of the February election in Germany? Friedrich Schaper: The market is focused on the potential for a looser fiscal stance in Europe and for Germany in particular, and the elections could be a catalyst for such loosening. However, we argue that even at the upper end of our range of expectations about higher fiscal spending, the increase in duration supply of German Bunds is relatively modest compared to the notable increase in safe asset supply that we are already observing. That’s mainly because of a structural shift in the fiscal stance in Europe and the European Central Bank, which is reducing its balance sheet. That has made an impact already, and it’s showing up in higher Bund yields and higher interest rates for euro assets. So the additional impulse of higher spending after the elections is already well reflected in pricing, in our view. Coupled with the outlook for slowing economic growth, which we expect will lead to a sustained cycle of interest rate cuts from the ECB, Bunds remain our favorite long position among G-10 bonds. Going back to the energy situation in Germany, are you expecting any relief on the cost front next year? Jari Stehn: Energy prices have come down significantly from the peak days of the

    UK government bond yields have risen amid investor concern about the government’s fiscal outlook and sticky inflation. Even so, Goldman Sachs Research projects the country’s borrowing costs will decline by the end of the year as the Bank of England cuts its policy rate. “We still think the UK data will justify more cuts than the market is pricing,” says George Cole, head of European rates strategy in Goldman Sachs Research. Our strategists project 100 basis points of cuts in 2025, compared with the 41 basis points of cuts that’s priced into the bond market. The team forecasts 10-year gilt yields will fall to about 4% by the end of 2025 from 4.9% (as of January 13), the highest since 2008. British bond yields, along with those of many governments, have been climbing since September. Cole says one simple reason for the broad increase in borrowings costs is that there’s a lot of government borrowing. The US ran a $1.8 trillion budget deficit last year, which was about 6% of GDP. The budget deficit in France was around 6%, and in the UK it was about 4.5%. “There are a lot of bonds to buy everywhere,” Cole says. Will central banks cut interest rates in 2025? While there are idiosyncratic reasons why gilt yields have increased in the past week, the US has been an important engine behind the rise in global interest rates. The Federal Reserve cut rates by 50 basis points in September, more than some investors had anticipated. But since then, the country’s economic data has been running hot — the US added 256,000 jobs in December, which was substantially more than economists had forecast. Goldman Sachs Research pushed back its forecast for Fed rate cuts from three cuts this year to two, with one in 2026, after the December payroll report. Investors have also questioned whether Trump administration policies such as tariffs will be inflationary. “We may be starting to learn that cutting cycles are not going to be quite as deep as we thought, because of the near-term stickiness in inflation,” Cole says. “We don\’t think that that’s something you should overstate. There are still going to be interest rate cuts to come. But at the more global level, we’re experiencing a slight difficulty in digestion because those expectations for rate cuts are being pared back.” Why gilt yields have risen UK government bond yields, with some exceptions, roughly tracked those of the US until last week. That’s when the pound depreciated against a trade-weighted basket of currencies and the stock market showed signs of softening. Those fluctuations show that investors are demanding more compensation, or a higher risk premium, to buy UK assets. “All UK assets need to get cheaper if that risk premium is going up,” Cole says. The increase in risk premium can reflect concern that enough isn’t being done to contain inflation, as well as worries about the outlook for deficits. In the UK, rising bond yields are pushing up government spending on interest expense, which could put the government’s budget plans at risk. A weaker currency could also drive up inflation. In addition, Cole points out that investors are mindful that there have been other examples of the gilt yields rising alongside a decline in sterling. That’s what happened in 2016 after Britons voted to leave the EU, sparking a bout of higher uncertainty in financial markets. There was a similar episode in 2022 after the government, among other things, unveiled a budget plan with unfunded tax cuts (the event was amplified by vulnerabilities in the pension sector). Those episodes had an impact on policy making and interest rates. So far, the British pound’s depreciation on a trade-weighted basis is small compared to previous periods of gilt market stress that sparked policy changes for interest rates, according to Goldman Sachs Research. At the same time, the government has taken steps to make UK pensions less sensitive to fluctuations in gilt yields, and expectations for economic growth, inflation, and the deficit are more positive than in 2022. Those factors make it less likely that there will be a sharp move higher in interest rates that causes financial stability concerns, Cole says. The outlook for gilt yields in 2025 Goldman Sachs Research forecasts a decline in 10-year yields of almost a percentage point, and our analysts expect inflation to cool enough for the Bank of England to cut rates next month. “We\’re fully aware that there is now slightly more fragility in that path toward the 4% mark,” Cole says. He points out that it all comes down to the data, and whether it allows the BoE to make a series of cuts below market pricing that will help the market absorb elevated bond supply. “What could go wrong, of course, is that inflation proves to be more persistent, or there is excessive currency weakness,” Cole says. “That’s important to note in the context of the strong recent US jobs report, and another bout of weakness in the pound. If that were to start to lead to more inflationary pressure, it could make it more difficult to get those interest rate cuts. But as it stands, we still think that the UK data will justify more cuts than the market is pricing.”

    Even as tariffs and other shocks are expected to rattle the global economy in 2025, India will likely remain insulated. Thanks to a strong push in manufacturing and infrastructure, the Indian economy is “buzzing with energy and optimism,” says James Reynolds of Goldman Sachs Asset Management. “With domestic consumption accounting for 70% of its GDP, India has historically been viewed as more vulnerable to high inflation,” says Reynolds , global head of direct lending. “However, India has in recent years performed better than various developed and emerging economies in relation to its inflation targets, largely a result of a stronger government, central bank, and improving financial system.” To get the pulse of the Indian economy, Reynolds, Stephanie Hui, head of private and growth equity in Asia Pacific for Goldman Sachs Asset Management, and Hiren Dasani, co-head of emerging markets equity for Goldman Sachs Asset Management, led a tour of clients and investors through three cities. The four-day tour included discussions with top corporate executives, up-and-coming start-up founders, and policymakers. We spoke with Hui, Dasani, and Reynolds about the prospects for India’s economy, the thrust in infrastructure and manufacturing, and the private equity sector’s view of India. Tell us a little more about the investor tour, and the overall mood you encountered. Hiren Dasani: It was 22 investors representing $4 trillion in assets under management as of November 2024 . The clients had come all over from all over the world: about 50% from the Americas, I would say, and about 25% from the EMEA region, and the remaining from the Asia-Pacific region. A very large proportion of the clients were public pension funds from the US and some of the largest family offices as well. I think the mood was very optimistic from a medium-term perspective, and that was evident from the meetings we did with corporate leaders. There’s a sense that India may be becoming more competitive on manufacturing. Historically, services was the main driver of consumption, but now manufacturing competitiveness has been more pronounced, especially in a world where many large corporations are looking to diversify their supply chain. “China plus one” is a theme that a lot of corporates like. What has led to this boost in manufacturing competitiveness? Hiren Dasani: Some of this is related to production-linked incentive schemes, which India has rolled out over the years. There are tax incentives if a company sets up new production capacity in India, with certain production targets: up to 5-6% of the value of the output for a certain number of initial years. Over and above that, I’d say there are more structural reforms like investments in renewable energy, which makes energy costs more competitive, and in logistics infrastructure. Stephanie Hui: The diversification of supply chains has been a key driver of India’s growth prospect. Prior to Covid, people were happy basically sourcing primarily from China for manufactured goods. However, with the disruptions from Covid and geopolitics, business leaders have increasingly sought diversification. Historically, India was more costly, but people are now saying that, if you need diversification, there’s more tolerance for higher costs and more patience for India to get up the learning curve. Unlike some smaller manufacturing markets, India has a large home base. So that the procurement power is such that, when you get to scale, it will likely become price competitive. I believe that\’s the reason why there\’s optimism that, if they can do dial up manufacturing, it may benefit India but may also benefit other international companies trying to risk manage. They had already, long ago, started sourcing IT services, so this is a continuation on that spectrum. How is the Indian government’s strong capex focus on infrastructure contributing to this story? James Reynolds: The government has significantly ramped up its capital expenditure on infrastructure, allocating a record 11 trillion rupees ($134 billion) on infrastructure spend for the fiscal year ending March 2025. In recent years, it has launched several large-scale projects in areas such as energy, urban development, transportation, digital infrastructure which includes expansion of highways, development of new airports, creation of smart cities, and investment in renewable energy. Hiren Dasani: We met one of the largest infrastructure companies in India, which has been involved in railway electrification, bullet train projects, airport buildouts, and so forth. And in all of them, they were highlighting that the pace of execution has picked up quite a bit. So just to give you some numbers: Data center capacity is likely to grow by a factor of six or seven in the next five years, we believe. And while India has built metro rail systems in 17 cities in the last 50 years, more than 20 cities at present are developing metro rail networks. Why are many Indian companies today focusing on vertical integration? Hiren Dasani: This is more true of startups, really. In developed countries, a startup founder gets many things on a platter, because the physical infrastructure and the overall ecosystem (including supply chain networks and pools of talented human resources) are typically better developed. So the founder can just focus on one thing and doing that extremely well. But in an emerging market like India, where the broader ecosystem is not that well developed, you might spend more time and resources in developing that ecosystem. Which leads you to be a little more vertically integrated. Stephanie Hui: I’d also add that there’s support from the government to move upstream. I’ll use an anecdote here. Historically, Indian manufacturing companies have imported major parts, primarily from China, and assembled locally. The software may have been Indian, but the hardware was primarily sourced from outside. But what we’re seeing right now is, for some products, a cap on the percentage of components coming from outside the country, versus being manufactured domestically. The government uses tax and other incentives to drive this change. The example that was quoted on our trip was HVAC systems: heating, ventilation, and air conditioning systems that people use. Historically you

   Download Video Transcriptdownload What could tariffs mean for the US dollar? Karen Fishman, senior economist with Goldman Sachs Research, separates the signal from the noise. 

    Immigration to the US is expected to fall from the elevated levels of the past three years, declining to a pace slightly below the pre-pandemic average, according to Goldman Sachs Research. If that occurs, the impact on the economy is likely to be limited, though more significant restrictions on immigration by the Trump administration could have larger repercussions.  Net immigration is expected to slow to 750,000 per year, well below the pace of the last three years but only moderately below the normal pre-pandemic pace, Goldman Sachs Research economists Elsie Peng, David Mericle, and Alec Phillips write in the team’s report. In their baseline estimate, the GDP impact from changes in immigration is likely to be limited: The slower pace of immigration would contribute 30-40 basis points less to potential US GDP growth than the 2023-2024 pace, but it would be just 5 basis points less than the pre-pandemic pace. The team’s baseline outlook for reduced immigration is based on an expected increase in border security and other immigration control measures as well as a moderate increase in deportations. More significant measures by the Trump administration could reduce net immigration further and increase the impact on labor and the economy.  What does reduced US immigration mean for the job market? The impact from reduced immigration on wage growth and inflation should be modest now that the US labor market is back in balance, according to Goldman Sachs Research. At its peak, the boost to labor force growth from immigration was 100,000 per month above the normal pre-pandemic pace. It has since fallen to 40,000 above the typical level and is predicted to return to normal by early 2026. Goldman Sachs Research has argued that the US unemployment rate would stop rising and start falling because labor demand has been healthy all along: The layoff rate remains historically low and job openings are high, and the pace of labor force growth will be more manageable now that immigration is slowing. While our economists think the natural path for the unemployment rate is a little lower — the unemployment rate has fallen slightly over the last two months to 4% — they note that the crackdown on unauthorized immigrant workers could cause more of them to end up unemployed. These dynamics might not show up in official statistics, as immigrants who are concerned about going to work might also be unwilling to respond to employment surveys.  Reduced immigration will have the largest impact on agriculture and construction The US government’s changes in immigration enforcement target asylum seekers, parolees, people receiving Temporary Protected Status, and those crossing the border illegally. Reductions in numbers for this group, rather than visa recipients or green card holders, made up the sharp decline in net immigration that was evident by the end of last year. Immigrants other than visa and green card holders account for 4%-5% of the total US workforce, and they make up 15%-20% in some industries, such as crop production, food processing, and construction. “Abruptly losing a significant share of these workers could be very disruptive for many of these industries,” the team writes. There could be temporary production bottlenecks, shortages, and price increases. In the team’s baseline forecast, the 750,000 of net immigration per year represents mostly visa and green card holders. Some 500,000 deportations are expected to largely offset roughly 500,000 people entering the country as asylum seekers and people entering illegally, which is the low end of the pre-pandemic range. The administration’s immigration policies may run up against constraints, including the number of enforcement agents available and space in detention facilities. Congress is expected to allocate at least $100 billion in additional resources for law enforcement later this year, much of which will likely be used to hire more agents. 

    The US has had the world’s largest economy for more than a century — a title it’s expected to relinquish in the coming decades. But even as US GDP is forecast to be surpassed in the years ahead, the country is projected to remain world leading when it comes to wealth and the size of its stock market, according to Goldman Sachs Research’s report “The Path to 2075.” Demographic projections and long-term drivers of productivity can help us glimpse how the global economy may look 50 years in the future. In fact, these longer-term forecasts are, in some ways, easier than shorter estimates over a year or two, which can be derailed by booms, recessions, and other surprises. That’s because some of the key variables underpinning long-term GDP growth are slower to change, while the shorter-term volatility of the business cycle tends to average out over time,  say Kevin Daly, co-head of Central & Eastern Europe, Middle East, and Africa Economics in Global Macro Research, and economist Tadas Gedminas. “Over the very long term, the things that tend to drive the size of economies are things like population growth and long-term productivity growth, which tend to be slower-moving and less variable,” Daly says.   The relative importance of capital markets in emerging economies is nevertheless projected to grow, from around one-quarter of total global market cap today to more than half by 2075. The research demonstrates that while rich, developed countries will remain critical in the decades that come, it won’t be possible to capture long-term, worldwide growth trends without exposure to emerging economies and their financial markets.

March 6, 2025Shareshare   Defense spending by European Union member states is set to increase significantly in the next two years. The shift will have a positive — but limited — impact on GDP growth, Goldman Sachs Research economists Niklas Garnadt and Filippo Taddei write in a report. The team’s baseline assumption is that the EU will gradually increase its annual defense spending by around €80 billion ($84 billion) by 2027 — equivalent to roughly 0.5% of GDP, according to the report dated February 27. Defense expenditures in the euro area accounted for 1.8% of GDP in 2024 and Goldman Sachs Research expects them to rise to 2.4% by 2027.  The incoming German government recently said it intends to exempt defense spending from budget control measures and to allot €500 billion to an infrastructure fund. If implemented, the policies could result in faster-than-expected GDP growth from Europe’s largest economy. The economic impact of defense spending depends on the type of expenditure and whether it is imported or produced locally. Goldman Sachs Research estimates that additional spending on defense will have a fiscal multiplier of 0.5 over two years. That means every €100 spent on defense would boost GDP by around €50. The forecast is based on the assumption that imports of military supplies gradually decrease (and are substituted with domestic products) and that the higher spending initially focuses on equipment and infrastructure. What is the outlook for European defense spending? Spending on equipment has recently increased more than other areas of defense, reaching 33% of spending by European members of NATO last year, up from 15% in 2014. Europe bought a substantial amount of military equipment from non-EU suppliers immediately after Ukraine was invaded by Russia. However, a large portion of European defense supplies has historically been purchased from domestic companies, particularly in larger EU member states. The average domestic share of sourcing was around 90% in France, 80% in Germany, and 70% in Italy between 2005 and 2022. Europe’s share of global arms production declined between 2008-2016, although it has since started to pick up again. EU manufacturers have joined the global surge in arms production and are now poised to expand at a faster rate than their US counterparts, according to market pricing. As defense spending increases, there will be growing opportunity for equipment to be harmonized (made interoperable across the continent), for research and development to scale up, and for efficiency to improve. Such changes would increase the economic impact of military spending, and it would probably result in a higher fiscal multiplier after three years. How Europe could fund higher defense spending To meet a defense-spending target of 2.5% of GDP, the euro area needs to increase expenditures by an additional 0.6% of GDP annually, Taddei writes in a separate research report dated March 2. European leaders are discussing a common strategy for increasing defense spending, which could involve issuing more debt at the national or EU level, or setting up new lending facilities from European institutions. Issuing more national debt could be challenging given the new European fiscal framework, which requires countries to contain their ratio of debt to GDP. European rules allow a temporary exception in the case of “major shocks to the EU,” Taddei writes, known as the “escape clause.” EU President Ursula Von der Leyen proposed this option at the Munich Security Conference in February. Making this exception permanent for future defense spending needs (known as a “golden rule”) would require the approval of the EU Council and the EU Parliament. Taddei writes that the EU president’s proposal has the advantage of being relatively quick. But he adds that “introducing a ‘golden rule’ would leave national defense spending exposed to sovereign market stress and reduce the likelihood of coordinated and harmonized military spending within the EU.” How Europe could leverage supranational debt Alternatively, the EU could turn to existing lending programs that are available for European governments — either the European Stability Mechanism (ESM) or the European Investment Bank (EIB). “The EIB has struggled to identify projects worth funding in line with the European priorities, and the industrial reconversion needed to scale up defence spending in Europe would likely provide an ideal target,” Taddei writes. These options have limitations however. Only euro area members would be eligible for ESM lending, for example, and the ESM would only temporarily shift issuance from domestic to supranational debt. EU debt, meanwhile, would provide stable funding. This could come in the form of repurposing an existing Covid pandemic borrowing program (called NGEU), or as a separate program that is dedicated to defense borrowing. The latter is the only option to secure low rates for long-run funding. “However, it is also the option with the most cumbersome approval process,” Taddei writes. The team expects that setting up a new funding facility would take about a year from design to implementation. “We continue to expect the EU to use national debt, NGEU, and a new funding facility, but in that sequence,” Taddei writes. He adds that national debt, combined with the repurposing of spare NGEU financial capacity, could fund military spending until 2026.

   The US economy may expand more slowly than previously forecast as tariffs on imports rise and the Trump administration signals that it may tolerate slower growth in order to implement its trade policies, according to Goldman Sachs Research. Our economists reduced their prediction for US GDP expansion to 1.7% in the fourth quarter of 2025 (year over year) from their earlier estimate of 2.2%. Goldman Sachs Research’s forecast for the world’s largest economy is, for the first time in more than two years, lower than the consensus estimate of economists surveyed by Bloomberg.  “Our trade policy assumptions have become considerably more adverse and the administration is managing expectations towards tariff-induced near-term economic weakness,” Goldman Sachs Research Chief Economist Jan Hatzius writes in the team\’s report. The average US tariff rate is expected to rise by 10 percentage points this year. That’s twice Goldman Sachs Research’s previous forecast and about five times the increase seen in the first Trump administration. While some import taxes have been softened, our economists expect levies in the coming months on critical goods, global autos, and a “reciprocal” tariff. Reciprocal tariffs and the administration’s view of Europe’s 20% value added tax (VAT) are particularly important because the US considers the tax a tariff (even though Europe imposes it equally on imported and domestically produced goods). If applied mechanically, a reciprocal tariff that includes the effect of VAT could raise the average US tariff rate by 10 percentage points or more. Tariff carveouts will probably lower this number, but if the exemptions are less widespread than Goldman Sachs Research expects, the average tariff rate could rise as much as 15 percentage points. What are the economic effects of tariffs? Tariffs are likely to weigh on US economic growth via three main channels, according to Goldman Sachs Research. They raise consumer prices — and thereby cut real income — by an estimated 0.1% per 1 percentage point increase in the average US tariff rate. (In theory, the drag could diminish if the tariff revenue is recycled into additional tax cuts, but this revenue will not be scored in the ongoing budget negotiations if it results from executive as opposed to congressional action.) Tariffs tend to tighten financial conditions, although the impact in this cycle looks smaller than in the 2018-2019 trade war when scaled by the size of the tariff hikes. Trade policy uncertainty leads businesses to delay investment. All told, the team’s new baseline implies that tariffs will subtract an estimated 0.8 percentage point from GDP growth over the next year, with only 0.1-0.2 percentage point of this drag offset by the (relatively slow-moving) boost from tax cuts and regulatory easing. Will tariffs lead to higher inflation? Goldman Sachs Research now expects core PCE inflation to reaccelerate to 3% later this year, up nearly half a percentage point from their prior forecast. In theory, a tariff hike raises the price level permanently but only raises the inflation rate temporarily. In practice, this hinges on the assumption that inflation expectations remain well-anchored, which looks a bit more tenuous following the pickup in inflation-expectations measures from the University of Michigan and the Conference Board. Given their downgrade to the forecast for US GDP growth, our economists still expect the Federal Reserve to make two 25-basis-point cuts to the fed funds rate this year (June and December). Goldman Sachs Research’s near-term view is that the Federal Open Market Committee will want to stay on the sidelines and make as little news as possible until the policy outlook has become clearer.