Outlook on the economy
Will the US economy continue to grow faster than Europe?
Global economic growth of around 3% is expected for 2025, similar to previous years. Economists are once again anticipating higher growth in the US than in Europe, albeit with a smaller difference. US expected growth is mainly driven by government policies, such as Trump's plans to cut the tax on corporate profits to 15% and maintain previous tax cuts. These policies will lead to an expected budget deficit of 6.5% of GDP in 2025, significantly higher than the 3% projected in the eurozone. In Europe, monetary policy, with several interest rate cuts by the ECB, plays a greater role. Emerging markets, particularly in Asia, remain vulnerable due to geopolitical tensions and potential increases in US import tariffs.
Will there be a trade war?
With Donald Trump taking over the presidency on 20 January 2025, uncertainty about a potential trade war is also rising. Trump has announced steep import tariffs: 60% on China, 25% on Mexico and Canada and 10% on the rest of the world, to protect the US economy. Whether these measures will be fully implemented remains unclear, but the risk of higher inflation is considerable. Imported goods, such as smartphones (47% of which come from China), clothing and electronics, could become significantly more expensive. Intermediate products such as steel will also cause price increases, which will feed through into end products such as cars. According to Oxford Economics, reciprocal tariffs of 20% between the US and the eurozone could lead to less or no growth in Europe by 2025. At the same time, higher tariffs in the US would slow growth and fuel inflation. This increases the likelihood of economic setbacks on both sides of the ocean.
China's economy under pressure
China appears to be narrowly hitting its 5% growth target in 2024, but the outlook for 2025 is more challenging. Although some bright spots were visible towards the end of last year, such as rising industrial production and growth in the services sector, the Chinese economy remains under pressure. House prices fell monthly throughout 2024, even accelerating the decline. In addition, the retail sector continues to struggle. Externally, import tariffs from the United States, and possibly also the eurozone (under pressure from US policy measures), threaten to harm exports. While only 8% of Chinese exports go to the US, joint measures by the two economies could have a more severe impact. The Chinese government is expected to reintroduce economic incentives, perhaps more vigorously than in 2024. This is confirmed by a recent wage increase for civil servants, indicating that the focus is shifting towards strengthening domestic consumption.
Are inflation and policy interest rates normalising?
The IMF predicts that inflation and core inflation in developed countries will reach around 2% by 2025. In the United States, inflation is expected to remain higher than in the eurozone, with a real chance of an increase. Monetary easing looks set to become the trend in the year ahead, with falling rather than rising interest rates. The eurozone expects four interest rate cuts of 0.25%, while for the United States only one or two interest rate cuts are predicted. However, should the above high import tariffs actually be introduced, the Fed could well be forced to raise interest rates. A further depreciation of the euro against the dollar could result in a competitive advantage for the eurozone.
Financial markets
While economic growth and inflation seem stable for the time being, financial markets are facing significant risks. A potential trade war could dampen growth and push up inflation, while geopolitical tensions and rising policy uncertainty in the eurozone are creating additional pressure. US stocks have posted extraordinary returns of more than 20% over the past two years, a rare occurrence in the history of the US stock market. This type of performance has often been followed in the past by periods of corrections or lower returns, such as the dot com crisis in the 1990s. 2025 may therefore become a less favourable year for equities. Although corporate profits continue to surprise positively, equities are now expensively priced. Caution is called for, and a more defensive strategy with safe government bonds may be tempting. In the case of government bonds, investors are again taking a good look at the debts of governments, especially in the United States. So here, political uncertainties add to the risk. Government bond yields (capital market rates) are higher than before the COVID-19 crisis, but do not seem likely to rise much further without causing turmoil. The difference between short-term and long-term interest rates has widened slightly and this difference may increase further if central banks reduce their interest rates in 2025. The year ahead requires a proactive and flexible approach to tactical investment decisions.