Chartbook 383 World Economy Now. May 2025. Putting Trump's trade tantrum in its place.

Where is the world economy now? What are the main economic stories to watch? Amidst all the daily hubbub of political commentary - to which I have myself enthusiastically contributed - I feel the need to locate the moment in a more basic way.

This May 2025 issue of “World Economy Now”, is the first in what I hope will be a regular series, which will try to take bearings on the basic drivers of world economic and geoeconomic development. The idea is to combine a general overview with more focused attention on one or two particular questions that seem urgent.

What I am after is orientation. So the emphasis will not be on conclusiveness or highly technical argument, but on basic proportions, weights and modes of thinking. The usual Chartbook stuff.

In May 2025 my aim is to get a general overview of global growth trends, to weigh up Trump’s trade war and to assess the likelihood of a US recession, which, right now, seems to be the main factor of uncertainty in the world economy.

I. General overview

The dynamic of world economic growth before the Trump disruption can be characterized in terms of five distinct regional patterns:

• The US economy - 15 percent of the global total on purchasing-power parity (PPP) basis, more like 25 percent if you measure in current exchange rates - slingshotted out of COVID onto an above-trend growth-path. This was mainly due to the historic size of the stimulus delivered in 2020 and 2021. But this policy impulse melded with the “American exceptionalism” narrative that focused on AI and the Mag7 growth stock. Whether the new tech boom is significant enough to push the overall growth rate into a higher gear in the long-term remains uncertain. From the trough in 2020 through 2024 the US growth rate was impressive. In 2024 growth settled down to a more normal rate. The overall size of the US economy by that point was almost 4 percent larger than one would have expected in 2019. Using US GDP measured in 2023 dollars as our base, 4 percent of the US economy is $ 1 trillion, so this American growth spurt is a big deal.

• The contrast to China was stark. In PPP terms, with a 19.5 percent share, China is the world’s largest national economy. Using current exchange rates China is still second to the US. China’s growth rate has been decelerating and since 2021 has been surpassed by that of India. China’s frantic growth was slowing down over the 2010s, but was knocked back hard by the severe slowdown in real estate development triggered by deliberate policy measures in 2020 and by the second-wave COVID lockdowns of 2022. The Chinese economy today is almost one third larger than it was in 2019. But on pre-2020 trends we would have expected it to have been 40 percent larger. So this is a historic slowdown, a loss of output measured in relation to GDP at current exchange rates of perhaps $1 trillion.

Source: IMF

• In 2021, the Euro Area, which accounts for 11 percent of the world economy in PPP terms, was making a slower recovery from COVID than the US. It was then shocked off that recovery path by the impact of Russia’s invasion of Ukraine. Since 2022 the worrying thing is that Europe’s growth has drifted further away from the path predicted by pre-2020 trends, which was itself the slowest growth trajectory of any major part of the world economy. Using GDP in 2023 dollars as our base, the European economy in 2024 was $400 billion smaller than one might have expected on the pre 2020-trends.

• Other advanced economies (Japan, UK, Australia etc) and Brazil, which together account for about 9 percent of the world economy in PPP terms, have managed to return to their pre-COVID trends.

• The group of Emerging-market and Developing Economies other than China and Brazil account for 38.2 percent of the world economy in PPP terms. In population terms, this group, which includes all of Africa and South Asia, accounts for 65 percent of the world’s population. One might reasonably take this group as representative of what is sometimes called “the Global South”. It contains within it a hugely diverse group of countries and regions including India with 8.3 percent of global GDP (PPP) and 18.2 percent of population and Sub-Saharan Africa with 3.2 percent of global GDP in PPP terms and 14.7 percent of population.

  

  Source: IMF WEO

  The economic experience of the “Emerging-market and Developing Economies other than China and Brazil” has been distinctive. They were shocked off their pre-2020 growth trend by COVID and have not returned to that growth trend. But despite this shock, their pre-COVID growth trend has not dramatically slowed, certainly not to the degree seen in Europe and China. This means that though their growth is relatively rapid, the gap between GDP in 2024 and the pre-COVID trajectory has remained at 6 percent. If we take global GDP to have been around $110 trillion in 2024 the loss amounts to c. $2.5 trillion, a unit roughly the size of the economy of Italy.

Numbers like this can be debated. Large regional aggregations bury the differences between dynamism of Spain and the sluggishness of Germany, for instance. I expect there are many folks out there who would like to see India broken out separately. But these data give us a plausible general picture of the world economy at the start of 2025.

And then came the Trump shock which we have been dealing with since the spring.

II. The trade shock

President Trump has dominated headlines with his capricious announcements about tariffs. There has been ceaseless talk about “trade wars” and the “end of globalization”. But so far there is a lot of smoke but little fire. In the US we are waiting for the containers to stop and for shelves to empty. For individual firms and some exporters this is clearly going to be a big deal. But how big might the shock be?

To get a handle on this, why not start with the number that agitates Trump, namely the US trade deficit, the excess of imports over exports.

The US trade deficit is big. It is the biggest in the world. Not only that, when placed in relation to the overall flow of global trade, it becomes clear why the US trade account commands the attention that it does. Aside from the deficits of the UK and India, the deficit of the US (the blue area in Brad Setser’s graph above) is the one big deficit that corresponds to the surpluses of all the major exporting nations.

Source: CFR

NO shade on Brad Setser who put this graph together. It is extremely useful in highlighting a particular type of US-centric worldview. But it is charts like this which fuel Trump’s animus.

Seen in these terms, the imbalance of the world economy are spectacularly one-sided. You can see how Trump gets the impression that the US is “paying the world” and that the whole world lives off America’s money. Furthermore the imbalances are large. The numbers on the left hand side of this graph are thousands of billions.

But there are two distorting things about this mapping of world trade. The first relates to size and the second towards the way of thinking about trade suggested by the “global imbalances” chart.

With regard to size, the imbalances are clearly large. But how large? Since we are talking about the world economy the obvious metric is global gdp. It is huge - around $110 trillion in 2024.

The statistics for global imbalances in the figure below are the same as those in the graph above, also prepared by the Council of Foreign Relations (CFR) in New York, but now scaled to global GDP.

The Trump trade war kerfuffle is over an American trade deficit that amounts, give or take, to one percent of global gdp. “Wipe out” the US trade deficit as Trump demands - don’t sweat the details right now. Just imagine you have somehow “wiped out” this deficit - and the net impact on the world economy is in the order of one percent.

To size that up, look back at the graphs for global growth in section 1 above, a Trump trade shock is relatively minor compared to the impact of COVID, which disrupted the entire world economy by several percentage points and has lasting effects over a five-year time horizon.

Ok, so the US trade deficit is small relative to the entire world economy. But most of the world economy is not traded across borders. So what about the US trade shock in relation to world trade?

That poses the question: how do we characterize world trade?

If you start with the graphs of “global imbalances” above, you would imagine that world trade consists of the entire world bringing goods to market in the USA. It is all one way and all centered on America’s deficit. This is very much how Trump imagines reality.

But this is an artifact of taking what in economics jargon is called a “net view”. In this approach we map the world in terms of exports surpluses and deficits, subtracting imports from exports to get the net flow across borders. A country which imports more than it exports appears below the line. A country which exports more than it imports appears above the line.

This is what puts the US at the center of the picture. It has such a vast imbalance between its imports and exports. (This is also incidentally how the UK gets a walk on part as a chronic deficit economy).

But the weird thing about this kind of representation of trade, is that a country for which trade is in balance, however large the size of those trade flows, will not appear in this graphic at all. We should take seriously the title of such graphs. They are mappings of global imbalances not of trade as a whole.

There are good reasons for viewing the world economy in this way. Imbalances - large deficits and surpluses - may be sources of instability and risk. In terms of macroeconomics it is net aggregate demand that matters, which is why we count not just exports, but exports minus imports. Since the 1970s at the latest, “world economy” policy discourse has mapped the world economy in terms of “locomotives” whose growth and aggregate demand drag the rest of the world economy along. This is also why we talk about chronic export-surplus countries like Germany “free-riding’ on other people’s demand. The net surpluses and deficits are the “push and pull” of the world economy.

As an optic through which to view macroeconomic imbalances, the “net” approach may be useful. But, as a lens on total world trade it is highly distorting. Because it is relatively balanced, ninety percent of world trade or more does not appear in the picture, at all.

Total global trade, according to UNCTAD, amounts to $ 33 trillion in 2024. The US share of global trade, as measured by its share of imports, was roughly 13 percent. The US deficit, the number that obsesses the Trump trade warriors, is between 3 and 4 percent of global trade.

If you change the optic and focus on the overall flow of goods, whether through mapping imports or exports, world trade appears not as a one-way flow to America, but as a multipolar network of which the US is a significant but by no means dominant part. Here, for instance is an impressive graphic from MGI, with overall flows in grey and exports of “critical goods” quantified in the bubbles.

Source: MGI

So, once again, if you imagine that the Trump administration somehow succeeded in closing the US trade deficit, this would inflict a nasty shock to this multipolar trading system. Producers in Europe and Asia would lose a rich customer. China and Europe with their large trade surpluses with the US would be hard hit. But imposing a balance of US trade will not bring world trade to a halt. Nor will it end globalization. If successful, it would bring about an adjustment equivalent to 3-4 percent of total world exports. Quite likely, as Alan Beattie has recently argued, unless the Trump administration continually raises tariffs or causes other mayhem, trade flows will adjust to whatever tariffs are eventually set and then resume growth.

These numbers help us understand why the estimates by the IMF and other forecasters of the likely impact of a full-blown trade war are as modest as they are. The figures below are percentage point deviations from a baseline scenario with no Trump craziness.

Source: IMF World Economic Outlook

Don’t sweat the details here. GIMF, CP and CFRT are three different economic models. The important thing is that they all agree that the likely ten-year impact of a Trumpian trade tantrum will be negative. The worst hit countries will be the USA itself, China, Mexico and Canada. But compared to the COVID shock of 2020 and its aftermath, it will be a relatively minor disruption to the world economy.

III. US Recession

The biggest uncertainty in the world economy right now would seem to be the outlook for the US economy itself. How much harm will Trump’s erratic and dysfunctional policies do at home? This spring, it was America’s own economic outlook that suffered the most serious downward revision in the IMF’s forecasts. The prediction for US growth in the coming year was revised down by one third. American exceptionalism is over, at least as far as the IMF is concerned.

Compared to the assessment of many US economic analysts, the IMF’s forecasts look quite optimistic. The talk in the US is of something closer to a “sudden stop” with painful shocks to supply chains spiraling into a loss of confidence and a much sharper slowdown.

Ultimately, the crucial variable in the US is domestic demand. How will consumption and investment hold up? Since the start of the year, forecasts for investment growth in the US have been slashed by more than half.

And the outlook for consumption does not look much better. Goldman Sachs expects final sales to pancake.

Consumers make up 70 percent of US GDP and consumer confidence has nose-dived, plunging below European levels.

Again, we should guard against exaggeration. The US economy, like world trade, is huge and complex. It is unlikely that it will be thrown dramatically off course even by the craziness coming out of the White House. The least one can say, however, is that we are in uncharted territory. The Trump administration has managed to spread more uncertainty than any predecessors and the greatest uncertainty is focused, ironically, on the United States itself.

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