Making sense of prospects for a complex 2025

Global economy

The election of Donald Trump for a second term as US President with, importantly, majorities in both the House and the Senate, has opened the possibility of far-reaching US policy changes that have global ramifications.

Uncertainty abounds, but for now, we have incorporated the assumption that, through negotiations, the US’s trading partners will avoid extra tariffs of more than 10%, and that retaliation will be more symbolic than meaningful.

This, along with the extra impetus to already solid US activity recently from future tax cuts, has seen us downgrade our global GDP growth forecasts only slightly, to 3.1% for this year and next.

Due to the contrast of added inflationary impulses in the US but deflationary impulses elsewhere, the Fed looks set to cut policy rates by less next year but the ECB by more – lifting USD in the near term. These assumptions, and so our forecasts, are of course subject to change. 

United States

Our base case for the US economy under President Trump envisages a quick but ultimately moderate approach to policy changes. This, we think, would result in the Fed pausing its easing cycle earlier than we previously imagined, with just one cut next year and the USD gaining, sending EUR-USD to parity in early 2025.

For GDP growth, there are various push and pulls on the economy, which we think will result in slightly stronger GDP growth this year (2.8%) and weaker next (1.6%).

Meanwhile, we predict that a higher inflation and rate profile, as well as rising fiscal concerns, will send 10-year US Treasury yields higher, to c.5%. But were Mr Trump to adopt a more severe set of policies, such as harsher tariffs or opting to compromise the independence of the Fed, we could find ourselves with a completely different set of economic projections.

Eurozone

The EU20 finds itself in a difficult position with economic indicators continuing to point to a loss of momentum.

Manufacturing remains weak, whilst conditions are softening elsewhere too. Political problems in France and Germany look to cloud the outlook for 2025 further. This is before the implications of the new US administration are taken into account.

As above, we have assumed a modest tariff backdrop, which at this point has only a limited impact on the EU20 outlook. However, we are very cognisant of downside risks should President Trump impose more drastic measures.

Our GDP forecast for 2024 is unchanged whilst 2025 is downgraded to 1.2% from 1.5%, a reflection of both the recent data and a US tariff impact.

With regards to monetary policy, we judge that the balance of data argues for a more aggressive ECB policy approach and now see the deposit rate at 1.50% by the end of 2025.

United Kingdom

We are factoring in some impact on the UK from a US ‘universal tariff’, but this may be fairly muted as British goods exports to the US account for just 2.3% of GDP.

Inflation will probably rise close to 3.0% by mid-2025, partly on utility prices, but seems likely to fall close to 2.0% by end-year as services inflation continues to moderate. The MPC thus looks set to keep its strategy of gradual policy loosening intact and we still judge that the Bank rate will fall by a further 100bps to 3.75% by end-2025.

GDP growth has lost momentum recently, but firm household income growth should support spending further ahead. On politics, we note that Labour is now only 2% or so ahead of the Conservatives in the polls. After an uncertain start, the government needs to get back onto the front foot to regain the public’s trust and to facilitate the rise in business investment that will be integral in pushing up the UK’s economic capacity.

China

Despite increasing trade tensions, China has significantly increased its share of global exports in the past decade, whilst exporting deflation globally. Should President Trump opt for the extreme scenario and impose a 60% tariff on all US imports from China as proposed, Chinese export and overall GDP growth is likely to experience a sharp hit.

South Africa

Despite South Africa's economy being significantly integrated into the global market, with total trade accounting for over 60% of GDP, domestic growth has increasingly diverged in recent years due to the ongoing electricity and logistics crises.

The US is South Africa’s second largest trading partner, with 8.8% of exports destined to the States. Precious metal and vehicle exports account for 24.9% and 13.6%, respectively.

The economy is poised to enter a cyclical upswing, with GDP growth projected to increase from an estimated 1.1% to 1.9% in 2024 and 2025, more than double the ten-year average of 0.8%.

The MPC implemented its second 25 basis point rate cut during the November meeting, reaching a unanimous decision. The cautious stance was evident, as discussions of a 50 basis point cut were notably absent.

Our baseline forecast anticipates an additional 50 basis points reduction in the repo rate in Q1 2025, with a further 25 basis points cut contingent upon the dynamics discussed in the preceding section.