2025’s Global Power Shift

Geopolitical tensions, trade conflicts, and major policy shifts are reshaping the global economy as we enter 2025. From U.S.-led trade pressure in North America to Europe’s strategic pivot amid NATO’s decline and China’s continued technological ascent, significant changes are underway. Here, we examine these dynamics and their implications across three major demand centers—United States, Europe, and China—and well as the impact on Canada and Mexico.

United States

In the United States, leading indicators suggest the economy is slowing. However, this perceived deceleration may be overstated, as the Atlanta Federal Reserve’s GDPNow model, which forecasts weak growth this quarter, is distorted by unusually high imports, particularly of gold, which should not impact final gross domestic product (GDP). Real GDP growth in the first quarter of 2025 will likely be sequentially weaker than last quarter, although not as weak as Nowcasts suggest, and we expect economic growth to stabilize around 2% for the remainder of 2025.

While tariffs and immigration policies continue to pose economic challenges, recent actions—such as halting the military air fleet for immigrant deportations due to cost—indicate that while rhetoric remains strong, the scale and near-term economic impact of these policies may be easing.

Moving forward, we anticipate that the United States will pivot toward growth-supporting measures (including tax cuts, relaxed permitting, and environmental standards) to stabilize the economy in the second quarter and beyond. These cuts, and any deregulation, should provide a boost to corporate earnings and benefit the high-income cohorts that drive the bulk of U.S. consumer spending.

The administration has hinted that it is comfortable with a temporary recession, and while we continue to believe that a continued expansion in the United States is the most likely scenario, there is a non-negligible risk that the United States enters a technical recession in the next 12 months.

Europe

There has been much talk about the possibility of the United States exiting NATO, as geopolitical shifts, including rising tensions regarding defense spending and strategic alignment, have brought NATO’s relevance and future into question. Although the fall of any major institution tends to be disruptive, we believe NATO’s dissolution could actually have positive implications for European growth. Europe is responding with significant fiscal measures after more than a decade of restrained spending relative to the United States. Between 2010 and 2023, net U.S. fiscal spending was approximately $12.5 trillion; Europe’s was just $2.3 trillion, over five times less.

This spending gap is expected to narrow significantly. We believe the European Commission’s recent announcement of a €150 billion defense package, funded through a joint European budget, will likely stimulate private-sector investment and encourage the issuance of more euro-denominated debt. This is a critical step toward establishing deeper liquidity and maturity in euro-denominated financial markets.

Furthermore, the revitalization of Europe’s military-industrial complex—historically curtailed for political and social reasons—could serve as a key driver of technological innovation (as it has in the United States). This should lead to increased euro liquidity, which could create a structural tailwind for sustained European growth.

Overall, we expect the growth differential between Europe and the United States to narrow considerably.

Germany, in particular, recently announced substantial fiscal expansion plans for infrastructure and defense, significantly boosting its investment capacity over the next decade. Although these policies may push German yields higher, we believe they reflect stronger growth expectations rather than fiscal irresponsibility. Moreover, these initiatives are unlikely to be derailed by political opposition, including the Greens, who have long advocated for relaxing Germany’s strict debt brake to allow greater infrastructure investment.

All that said, Europe faces potential headwinds from the United States, which is expected to impose tariffs targeting the European Union (EU) next. U.S. tariffs will likely pose a challenge for Europe, especially for exporters, but this threat presents an opportunity for Europe to pivot toward domestic-driven growth.

Europe has significant internal potential to offset these external pressures. As Mario Draghi’s recent report emphasized, internal regulatory barriers within the EU are effectively equivalent to tariffs ranging between 50% and 150%. Removing these barriers could dramatically improve internal market efficiency and significantly boost intra-European trade and investment.

Overall, we expect the growth differential between Europe and the United States to narrow considerably, with European economic momentum accelerating just as U.S. growth stabilizes or potentially slows.

China

Beijing’s muted response to recent U.S. tariffs suggests a strategic confidence and possibly a stronger negotiating position than during President Trump’s first term, reflecting increased resilience and deeper integration into global supply chains. China continues to be a formidable economic competitor, rapidly industrializing and advancing up the technology value chain, positioning itself closer to direct competition with the United States across critical industries.

The U.S. administration’s stance on tariffs and broader trade relations with China is shaped by a desire to address long-standing competitive challenges, especially in technology and manufacturing sectors. While complete economic decoupling remains a goal of some members of the administration, the shift in supply chains would take a decade or longer to implement. One potential compromise—encouraging Chinese firms to shift some manufacturing to the United States—could act as a catalyst for reducing tariffs and stabilizing bilateral trade relations.

Mexico and Canada

While Canada and Mexico are important, they typically function as economic partners closely tied to U.S. dynamics rather than standalone demand centers on the same scale.

Historically close economic integration, which has deepened significantly since the establishment of NAFTA and its successor, the USMCA, means that disruptions affecting one country inevitably spill over into its neighbors. These intertwined supply chains, particularly in agriculture, manufacturing, and automotive sectors, amplify the potential damage from prolonged trade conflicts.

With this as a backdrop, the Trump administration has intensified pressure on Mexico, urging swift progress on three critical fronts: controlling powerful drug cartels, curbing illegal immigration, and restricting the flow of Chinese-produced fentanyl ingredients that cross into the United States from Mexico.

Tariffs on Mexico could severely impact supply chains and consumer prices.

Failure to adequately address these issues risks the imposition of significant U.S. tariffs, which would be disruptive for both countries. Given that U.S. consumers rely heavily on Mexico for approximately 40% to 60% of imported fruits and vegetables, such tariffs could severely impact consumer prices. American farmers would likely face substantial difficulties in replacing that supply as quickly shifting agricultural production from crops such as soybeans to bananas or avocados is unrealistic.

Further complicating matters, numerous intermediate goods routinely cross the border multiple times before being finalized, making tariff enforcement administratively complex.

Canada, though not directly involved in these disputes, finds itself inadvertently drawn into the broader North American trade tensions. Against this backdrop, Canada is preparing for national elections, with the Liberal party now unexpectedly leading in polls. The anticipated election of Mark Carney as Canada’s next Prime Minister is viewed by many as a pragmatic and capable response to the shifting political and trade dynamics with the United States.

Key Takeaways

Trump administration policies, including new tariffs on key trading partners, are likely to drive sequentially weaker U.S. growth in the near term, but we believe the magnitude of decline is overstated in leading indicators. That said, the administration has signaled a willingness to take some pain in order to push its priorities forward and there is a non-negligible risk that the U.S. will enter a technical recession within the next 12 months.

Regardless, if the United States were to avoid a technical recession, the growth differential between the United States and the rest of world is still expected to narrow. Europe, bolstered by renewed fiscal investment in defense, infrastructure, and technology, appears poised for stronger growth, while China continues to advance rapidly in technology and manufacturing. Increased Chinese manufacturing in the United States may provide an off-ramp for trade tensions, while full economic decoupling remains unlikely.

Given this outlook, we are more pragmatic on the prospects of Europe relative to the United States, remain cautious about China, and will continue to closely monitor geopolitical developments.

Alexa Davis is a strategy analyst on William Blair’s global equity team.