Paul Gruenwald: Growth requires addressing uncertainties | SFC Markets and Finance

SFC Chief Correspondent Shi Shi in Tianjin

"We’re talking about tariffs, the future of globalization, and people are worried about the situation in the Middle East—so all of the big macro issues." Paul Gruenwald, Global Chief Economist at S&P Global Ratings, stated in a recent exclusive interview with Southern Finance.

Gruenwald noted that in the first half of this year, the global economy has shown some resilience despite increasing uncertainties. However, structural divergence has become more pronounced. He pointed out that the impact of tariff policies on the global economy is not only reflected in the tariffs themselves but also in the high degree of uncertainty they bring.

Looking ahead to the second half of the year, Gruenwald identified the easing of policy uncertainty as one of the key variables determining the direction of the economy. He forecasted that the U.S. economy will achieve a "soft landing" this year; the Eurozone economy is expected to gradually warm up; and China's economy "looks quite robust". Regarding emerging markets, Gruenwald also maintained a relatively optimistic attitude, stating that as long as oil prices remain low and the U.S. dollar is relatively stable, these markets are expected to perform well. However, he also acknowledged that global growth will be "unbalanced" — different economies, constrained by different economic cycles and policy environments, will be in different situations.

Speaking of artificial intelligence, Gruenwald expressed that the widespread application of new technologies such as artificial intelligence is expected to be an important driver of global growth over the next five to ten years.

Raise the growth forecast for China

SFC Markets and Finance: How are you feeling for this forum?

Paul Gruenwald: It’s very busy. We’re talking about, obviously, tariffs, the future of globalization, and people are worried about the situation in the Middle East—so all of the big macro issues.

SFC Markets and Finance: You talked about the tariffs. How will the tariff influence global economy in the second half of this year?

Paul Gruenwald: Tariffs are negative for us economists—it’s essentially a tax on yourself. So we’ve been putting the tariffs into our forecast, and the forecasts are a bit lower. It’s partially due to the tariffs themselves, but actually more because of the uncertainty around tariff policies.

When there’s a lot of uncertainty, firms stop investing, consumers hold back on spending, and the M&A market grinds to a halt. So the longer this uncertainty around tariffs persists, the greater the downward pressure on growth. We’ve tried to build that into our forecast, but my team believes that the uncertainty surrounding tariff policy actually has a larger effect than the tariffs themselves.

SFC Markets and Finance: But S&P upgraded many regions with GDP growth. What's the logic for that?

Paul Gruenwald: Well, we didn’t change the advanced economies. We changed China, because in our previous round, we had higher tariffs, so we’re assuming lower tariffs after the six-month pause.

We raised some of the other emerging markets as well. So we have a little bit higher growth—we’re at 2.9% globally right now. And again, a lot of that is just tariffs weighing down on growth.

The U.S. labor market remains strong

SFC Markets and Finance: We are halfway through the whole year. How do you think about the first half of 2025?

Paul Gruenwald: The first half was obviously all about these tariff shocks. We have tariffs at rates we haven’t seen since the 19th century out of the U.S. Those are paused now, so we’ll have to see what happens in the second half of the year.

But a lot of the data were distorted in the first quarter. For example, in the U.S., we saw a surge in imports as companies tried to beat the April tariffs, which dragged down growth since imports are a negative in GDP accounting.

In China and other countries like Ireland, exports were front-loaded to get ahead of the tariffs, which made their first-quarter growth look stronger. So we’re actually looking at the first two quarters together—we’re not focusing on just Q1 or Q2, but taking them as a whole.

Just as an example, in the U.S., it looks like Q2 is going to be about 4% growth, so for the first half of the year as a whole, it may come out to around 2%—but it’s definitely slowing.

SFC Markets and Finance: Anything surprised you?

Paul Gruenwald: Other than the tariffs, the surprise—just like in the past two years—has been the strength of labor markets. Despite all the volatility and uncertainty, the U.S. labor market remains strong, and so does the European labor market.

In advanced economies, that’s really what’s keeping growth from slipping into a recession. So the one variable we’re telling everyone to watch is the U.S. labor market. If that starts to crack and the unemployment rate goes up, that’s a signal we’re heading into recession. But right now, it’s just a slowdown—not a recession.

The Fed may cut rates once or twice later this year

SFC Markets and Finance: The Fed has paused rate cuts, but the ECB and Japan’s central bank have other interest rates policies. How do you think about the global monetary policy?

Paul Gruenwald: Well, it depends. In the Eurozone, they had a borderline recession last year, so growth was slowing and inflation pressures were easing—giving them room to cut rates.

The U.S., on the other hand, didn’t really experience a recession. In fact, the economy was running a bit hot last year, so the Fed kept interest rates relatively high. Tariffs are complicating the picture right now, so Chairman Powell has been pretty clear: they need to see evidence that the economy is slowing, and that tariffs won’t have a lasting impact on inflation.

We know tariffs may push up inflation in a one-off way—maybe to around 3.5%—but the Fed wants to look through that to focus on the underlying trend. So the Fed is on a wait-and-see path, and it’ll probably be a few more months before they start to lower rates.

SFC Markets and Finance: So will the Fed cut rates this year?

Paul Gruenwald: We think they’ll cut maybe once or twice later in the year. The news says some governors are ready to go in July, but we think that’s too early. We believe the cuts will come later in the year.

Chairman Powell has been pretty clear that he wants to see more data on tariffs and how much they’re passing through to consumer prices. So far, the pass-through has actually been smaller than expected.

SFC Markets and Finance: We also see the US dollar’s depreciation. How do you think about this trend, and what's the impact of this trend on global economy?

Paul Gruenwald: The weak dollar is something that the U.S. administration wants—they’ve been talking about having a weaker dollar. It’s actually helping some of the other economies with inflation, because if your currency is strong, your import prices are lower, which keeps inflation down. That, plus lower oil prices—at least until last week—those two together were putting downward pressure on inflation.

So we saw a lot of emerging markets’ central banks have a little more room to cut rates. Having a strong currency holds your import prices down, which gives you some room to lower rates. So it’s not a bad thing for the rest of the world, as long as U.S. growth kind of holds up.

SFC Markets and Finance: Do you think the emerging markets will perform better in the second half of year?

Paul Gruenwald: It depends on what kind of emerging markets we’re talking about. For example, India has been a growth star. China used to be the fastest-growing major country in the world, and now India is the fastest-growing major country.

For countries tied closely to the U.S., if the U.S. does relatively well, they tend to outperform. Countries tied to Europe had a weak last year because Europe was in recession. And China looks pretty strong too.

If you’re a domestic economy like India, which is mainly domestic, and the same goes for Indonesia, you might do relatively well. But if you’re dependent on trade, and we know global trade is weak, those countries are probably going to underperform.

So it really depends on what kind of economy we’re talking about.

Some optimism exists in the stock market

SFC Markets and Finance: How about the asset prices?

Paul Gruenwald: Housing is very elevated in the U.S. right now. So one of the things the Fed wanted to do, I think, is moderate housing prices. But the other thing is the market—equity prices are very sensitive, apparently, to tariffs.

We’ve seen this very clearly: when tariffs go up, the market goes down; when tariffs are paused, markets go up. So there’s this kind of interaction between the financial markets and U.S. policymakers. It’s kind of interesting to watch.

It’s pretty clear the markets don’t like tariffs, and when tariffs go up, the market goes down. So I think the market’s expecting some kind of stabilization of tariffs, and the markets are not that far off all-time highs. So there’s some optimism baked into those equity markets.

SFC Markets and Finance: The gold price is another story. How do you think about gold?

Paul Gruenwald: Gold tends to go up and down a lot. What we do know now is that because of uncertainty around U.S. policy, the reserve accumulation of dollars has gone down a bit, and reserve holders are switching into gold and also into euros.

People buy gold for many reasons, but one of the things supporting gold is actually a move away from the dollar. It’s not a huge move, so the dollar is still the number one reserve currency, but we’ve seen some rotation away from the dollar toward gold and the euro.

Gold is always seen as a stable store of value, and when markets or policy are volatile, gold tends to be supported. That’s part of the story behind the strength in gold prices.

SFC Markets and Finance: Actually, some financial institutions said the gold price will reach $4,000/ounce.

Paul Gruenwald: We don't forecast the gold price. I leave that to the brave people.

The U.S. economy might achieve a "soft landing" this year

SFC Markets and Finance: Let's talk about the second half of this year, what's the risk of global economy?

Paul Gruenwald: Let’s start with the U.S. The U.S. is expected to have a “soft landing” this year. At the beginning of the year, growth was about 3%, which is a bit too fast, so the Fed has been keeping interest rates relatively high. The sustainable growth rate for the U.S. is about 2%.

What we’re worried about now is that the U.S. doesn’t slow from 3% to 2%, but instead drops from 3% to 1%, entering a growth recession, and then bounces back. So we’re expecting the U.S. to slow down.

Europe has already made adjustments after the Ukraine war, with oil prices playing a role. The euro and the euro area should strengthen. China looks pretty stable, so overall growth seems relatively steady.

Emerging markets should do okay, as long as oil prices stay low and the dollar behaves well. So the U.S. needs to slow down a bit, but the rest of the world remains fairly stable.

It's going to be uneven growth story. The major economies are in different positions, in terms of the cycle and exposure to oil prices and other things.

SFC Markets and Finance: We are in a world full of uncertainties and challenges. How can we sustain global growth?

Paul Gruenwald: Get rid of the uncertainties. I think the good scenario has some resolution for tariff policy. In the U.S., we have two schools of thought about the Trump administration.

The first view is that tariffs are a temporary negotiating move, and we’ll eventually settle on permanent tariff rates. Once the uncertainty is eliminated, the economy can start growing again.

The other view is that this will be a kind of ongoing negotiation—like a reality show—that just keeps going. In that world, uncertainty remains high, and that’s going to dampen consumption and investment.

So we’ll have to see in the second half of the year: can we reach some resolution on tariffs and eliminate the uncertainty? Or will we remain in a world where U.S. policy is highly unpredictable? And if it’s unpredictable, that means slower growth.

SFC Markets and Finance: So should the investors be cautious?

Paul Gruenwald: I'm not supposed to give investment advice, but you know, investors are watching very closely what's going on in the White House. Markets don’t like uncertainty—when they see it, they tend to pull back.

If we get certainty around tariffs, and if we get some stability in the Middle East—particularly between Iran and Israel—both of those developments would be positive for the markets.

Artificial intelligence has a positive impact on the economy

SFC Markets and Finance:  This year, the AI in China attracted a lot of attention. How do you think about the AI industry in China?

Paul Gruenwald: AI for us is kind of a medium-term story. It’s hard to identify directly what’s happening with AI on a quarter-to-quarter basis.

But what’s pretty clear is that business opportunities are everywhere—in China, the U.S., and Europe. Companies are trying to figure out how to apply AI to transform their operations, and there’s a lot of potential for productivity gains.

What we expect is that over the next 5 or 10 years, we’ll see AI-generated productivity improvements that will help boost economic growth. That impact will likely be shared between firms and workers, though opinions differ.

Still, the economics profession is largely aligned that AI will be positive—it’s just a question of how much. Some economists think the effects will be modest, while some investment banks estimate we could see an extra percentage point of growth each year for 5 to 10 years, which would be great.

I think it’s still early days, and we’ll have to see how AI is actually applied. But it’s certainly an exciting new technology, and you can easily imagine the potential to deliver at least a temporary boost in growth—which would be a good thing.

SFC Markets and Finance: So will the AI be our main driver for economy in the future?

Paul Gruenwald: I think over the medium term, it will.

When it comes to how innovations impact the economy, electricity is a good example—it took decades for electricity to fully work its way through the U.S. economy.

AI might progress faster, but it will still take years for it to fully permeate the broader economic system.

Some sectors will adopt AI more quickly, while others will move more slowly. But overall, I believe AI will act as a long-term tailwind—a sustained boost to growth over many years. 

And that’s going to be very helpful.

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