2025 H1: What investors should expect

Dated: 3rd December 2024

Donald Trump’s return to the presidency, alongside the Republican Party’s sweep of Congress, has set the stage for a potentially transformative year in global trade and economics. With the 20 January inauguration fast approaching, all eyes are on Trump’s next moves as he reshapes US policies on tariffs, corporate taxes and immigration.  

The broad strokes of his agenda are clear, but the finer details remain to be seen. We expect Trump will move quickly to deliver on campaign promises, but tread cautiously to avoid alienating voters or jeopardizing Republican control of Congress ahead of the midterm elections.  

Additional tariffs seem inevitable – our baseline expectation is a 10% universal tariff – but they may also be used as a bargaining chip to win concessions from trading partners.

This strategy, a hallmark of Trump’s first term, is already yielding results. The threat of a 25% tariff on Canada and Mexico has brought Prime Minister Trudeau and President Sheinbaum to the negotiating table.  

As the chart shows, these two nations are among the most vulnerable to US trade policy, with a significant share of their exports destined for the US and a substantial portion of their GDP tied to this trade.

While the willingness of trading partners to negotiate reduces the likelihood of a full-blown trade war, we don’t rule out an escalation. Should Trump adopt a more aggressive stance and other countries retaliate, the resulting disruption would weigh heavily on global economic growth. The broader themes of protectionism and the use of trade policy for non-economic objectives look set to dominate the global stage as we head into 2025.

Expectations for the US economy are too pessimistic in our view, but there is greater uncertainty around forecasts than usual given the return of Donald Trump to the White House. 

Slim Congressional majorities should temper his more extreme legislative proposals. Even so, they will be sufficient to extend his expiring tax cuts and support his deregulatory efforts. And while we expect him to implement protectionist policies, we doubt they will include a universal baseline tariff, nor excessive barriers to Chinese imports. Likewise, we suspect his promise to expel up to 20 million illegal immigrants will go unfulfilled. 

We believe Trump’s pro-growth policies, along with relatively mild supply-side measures, will boost growth to around 2.5% in 2025 with a further acceleration to 2.7% in 2026. Stronger growth necessitates upgrades to our inflation forecasts on top of the impact from higher tariffs, which we assume are applied in a targeted, measured manner. 

Immigration restrictions could be a bigger inflationary factor. Even limited action here could have a material impact given the US economy’s reliance on foreign labour in recent years. We look for CPI inflation to average 2.4% next year before rising to 2.7% in 2026. 

Such a reflationary environment would not only limit the scope for further easing for the Fed, it would also put rate hikes back on the table. We now expect the Fed to cut rates by only another 50 basis points (bps), split between its December and March meetings, and then raise rates by 50 bps in 2026. 

Admittedly, its function might be distorted if its independence were to be undermined by the incoming administration. But our view is that the guardrails are sufficient to ward off any risk of this. A fear of reprisals from the market may have the same deterrent effect.

The UK labour market is facing a chilling reality. Despite a minor recession in 2023, unemployment has remained surprisingly low at around 4%. This stability might seem reassuring, but a closer look reveals cracks beneath the surface. Hiring has plummeted, job transitions have slowed, and new pressures from government policy are adding strain.

Hiring activity, as measured by total hires throughout Q3, has fallen below pre-pandemic levels. This is a sharp reversal from the hiring boom seen in 2021 and 2022. One driver is the significant drop in job-to-job transitions – a key source of labour market churn, accounting for over 40% of hires. These transitions have now plunged to fewer than 600,000 workers, a level that underscores just how weak the labour market has become.

The Autumn Budget introduced by Labour has added to employers’ anxieties. Key policy changes, including a steep increase in the minimum wage and higher employers’ national insurance contributions, will significantly inflate costs starting April 2025. Low-margin sectors like retail and hospitality are expected to feel the hardest pinch. Unsurprisingly, major employers have already warned that these measures could further dampen recruitment.

A leading indicator of hiring momentum is demand for human resources roles, as companies tend to ramp up HR hiring when recruitment plans pick up. As this chart shows, online job postings for HR positions have sharply declined after peaking in 2022.

The UK faces a tough road ahead as rising labour costs and subdued economic growth weigh on hiring activity. Addressing the challenges of a stagnating labour market will be essential to reviving momentum and restoring confidence. Without timely intervention, the current freeze in hiring could harden further, leaving both employers and job seekers out in the cold in 2025.

Long-dated gilt yields have climbed back to ranges last seen before the global financial crisis, levels that first emerged after the Bank of England (BoE) gained operational independence in 1997, which allowed it to set interest rates independently and stabilize inflation expectations. 

As the first chart below shows, these yields historically hovered within a 4% to 6% range. The reversion to these levels signals a normalization in bond markets, sparking renewed buying interest from domestic investors seeking reliable returns. 

Valuations matter 

Notably, long dated gilt yields have now risen sharply above equity yields, as shown in the second chart. This development shifts the valuation balance, favouring gilts in the bond-equity yield gap – a long-standing metric guiding asset allocation decisions. This should encourage further buying from investors looking to hold a diversified portfolio. 

With inflation receding and monetary policy expected to ease gradually, short-dated bonds stand to gain from lower rates, offering tactical opportunities for investors seeking near-term stability.  

Meanwhile, the steep yield curve, illustrated in the third chart, underscores the benefits of holding long-dated bonds, as their higher yields provide a cushion against potential rate adjustments. 

However, not all segments of the curve offer the same appeal. The intermediate maturities, heavily targeted by new issuance, present rich valuations and may lack the risk-reward appeal found elsewhere. Investors should weigh these dynamics carefully, balancing exposure across the curve to optimize returns while managing risk.

As investors look ahead to 2025, many of our recent discussions with clients have focused on how the incoming Trump administration’s policies might shape the US and global economic landscape. Will the agenda lean towards traditional Republican causes such as deregulation and cutting taxes, or pivot to more unorthodox measures, such as raising tariffs, stricter immigration policies, and attempts to gain influence over the Fed’s monetary policy.  

While many are drawing lessons from Trump’s first term to predict what lies ahead, there are important differences between then and now. Eight years ago, the US economy arguably required some kind of inflationary jolt. Today, the context is different. The economy has far less slack, as shown in the first chart, where both the unemployment gap and output gap are estimated to have closed. 

The lingering effects of the 2021-22 inflation shock, ongoing large federal government deficits, higher levels of government debt, and a narrower gap between inflation-linked Treasury yields and potential GDP growth – highlighted in the second chart – further complicate the policy environment. All this suggests that policies that worsen the trade-off between growth and inflation or persistently widen the deficit will have a larger effect on the future trajectory of government debt. Financial markets may be less forgiving of policies that push in those directions.

We at Absolute Strategy Research believe these constraints could serve as a moderating force. Bouts of market volatility might act as a periodic reminder of these challenges, and steer policy toward those that support growth. Ultimately, this leaves us optimistic about the broader outlook for the US and global economies. 

As 2024 unfolded, the narrative of US exceptionalism held firm, buoyed by a resilient labor market, strong consumer spending and high productivity growth. These factors drove upward revisions to US productivity and GDP growth forecasts, reinforcing higher yields and fueling the dollar’s stellar performance. 

Looking ahead, it’s hard to bet against these gains extending into 2025 – unless the US economy stumbles, or its peers improve. The productivity gap between the US and key global economies – as seen in the first chart below – highlights this divergence. While US productivity has climbed steadily to a 76% gain since 1990, the combined average of the UK, Germany and Japan remains subdued at 36%. This disparity highlights the structural advantages underpinning US economic resilience.

We expect consumer spending will remain a key driver for US economic growth, supported by falling inflation, lower interest rates, and wealth effects from a rising stock market. The dollar’s cyclical strength got an extra boost with Donald Trump’s return to the Presidency, reviving the so-called “Trump trade.”

Expectations of fiscal expansion have driven US yields higher, widening the 2-year swap rate differential with the Eurozone. As the chart below shows, these dynamics are reflected in the parallel declines of the EUR/USD exchange rate and the swap rate differential since September 2024. 

Meanwhile, the euro, already down nearly 7% in just two months, faces additional headwinds.  Speculative net short positions in the currency could grow further, especially given rising risk premiums tied to political uncertainty in France and Germany. This leaves little standing in the way of EUR/USD slipping toward parity by 2025.

But not all paths point to a stronger dollar. A cyclical recovery in the Eurozone, buoyed by surprise fiscal stimulus from Chinese or European policymakers, could shift the narrative. Similarly, fears of substantial tariff-related economic disruptions – baked into the current market outlook – may prove overblown. Finally, there’s the contrarian angle: the consensus firmly backs continued dollar strength, but markets often have other ideas. 

As we approach 2025, one thing is certain: volatility, which has been notably subdued, is primed for a resurgence. Whether it’s the push toward parity or a surprising reversal, we’re keeping a close eye on all signals – including the “Tariff man” and his next move.

The UK is emerging as a rare bright spot in Western Europe as we head into 2025, with growth outpacing much of the region. We can thank the recent Autumn Budget for much of the anticipated 1.4% growth in the coming year. It combines significant tax hikes – set to raise the equivalent of 1.5% of GDP in additional revenue – with even larger increases in spending. 

Government departments, particularly the health service, are set to benefit most from this spending spree. A considerable portion will flow into wages, which should boost consumer demand. The fiscal multiplier is likely to be relatively high, underpinning growth. Still, we are less optimistic than the government’s independent forecaster, the Office for Budget Responsibility (OBR), which forecasts 2% growth for 2025. 

Looming challenges include Donald Trump’s recent victory in the US presidential election, which brings the spectre of protectionism back to the forefront. While the UK is less exposed than export-driven economies like Germany, the US remains Britain’s largest trading partner. Around 70% of UK exports to America are services and thus largely immune to the threat of tariffs. But uncertainty in trade policy could still weigh on business confidence and planning.

The labour market presents another layer of complexity. Payrolled employee data reveals a cooling jobs market when government-heavy sectors are excluded. While public sector hiring has driven an impressive recovery, employment in other sectors has dipped, with vacancies below pre-pandemic levels. Recent tax hikes, such as the National Insurance (social security) increase that raises employer contributions by 20% for an average-income worker, are likely to dampen hiring further. 

If UK growth does fall short of the OBR’s forecasts, there’s a strong likelihood that more tax increases could follow in the autumn. For now, the outlook reflects a mix of resilience and risk, with recovery resting heavily on public sector strength and fiscal policy.

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The UK retail industry heads into 2025 with cautious optimism, buoyed by resilient consumer demand but shadowed by significant business challenges. Retailers are operating in a landscape shaped by competing forces: steady sales growth and looming tax increases. 

Inflationary pressures, which rose to 2.3% in October 2024, are expected to persist following announcements in the Autumn Budget. While these pressures weigh on household budgets and real incomes, retail sales volumes are still higher than they were a year ago, thanks to strategic discounting and consumer spending on essentials. However, discretionary spending remains at risk, constrained by rising savings rates and broader economic uncertainties. 

Economic growth is forecast to reach 1.5% in 2025, yet the broader picture remains challenging. Businesses face persistent cost pressures, including higher employer taxes, wages and energy costs, and supply chain disruptions. Many retailers are expected to lean on innovative pricing and value-focused strategies to strengthen consumer sentiment.

Structural shifts are also evident in the jobs market. Retail vacancies remain 38,000 below pre-pandemic levels. Rising labour costs, paired with proliferating automation – such as self-checkouts now extending beyond supermarkets to fashion retail – are likely to accelerate the decade-long decline in retail jobs. Businesses will need to balance operational efficiency with competitive compensation to attract talent. 

Encouragingly, interest rates are likely to ease further in 2025, offering some respite for credit-reliant businesses and mortgage-burdened households. While insolvencies in retail trade remain high, their recent decline suggests a tentative sign of stabilisation in the industry. 

For the year ahead, adaptability will be key. Retailers embracing digital transformation, refining customer engagement, and leveraging data-driven insights will find opportunities to thrive in a cost-sensitive market. Despite the headwinds, 2025 holds promise for those ready to innovate and stay ahead in a cost-sensitive market.

After a turbulent few years, optimism is making a comeback in Global real estate markets. The cyclical pressures weighing on property values and investment activity are beginning to unwind, paving the way for a recovery in real estate capital markets. While still nascent, this recovery should gather momentum in the year ahead. 

Though headline transactional data has yet to reflect a rebound, other indicators show more promise. Sentiment has improved significantly from last year’s lows, broadly following the path of interest rates. As shown in the chart, the Sentix Real Estate Sentiment Index has risen as interest rates have fallen, reflecting how improving financial conditions are bolstering investor confidence. 

Elsewhere, pricing appears close to bottoming out, with prime properties starting to face competitive pressure as investors seek to time their re-entry into the market. 

Investors tend to follow the trends set by occupiers in real estate. But this cycle has been anything but typical. Occupational markets have generally mirrored the resilience of the global economy, while liquidity in capital markets has fallen back to levels last seen during the global financial crisis. 

In 2025, we expect fundamentals to anchor the market once again. Falling interest rates and a stable economic outlook should create a more favourable investment environment. But as interest rates settle at a higher base, risk premiums will likely remain squeezed, making rental growth a critical factor for returns in the next property cycle.

On January 20, Donald Trump will begin his second term as President of the United States. However, the economic landscape he inherits this time will be vastly different from the one he faced in 2016. While uncertainties persist about the policies his administration will implement, one thing is clear: the US economy is far more fragile now than it was eight years ago.

Let’s start with the labor market. In 2016, it was improving, with falling unemployment and solid job creation in the private sector. Today, the picture is markedly differently. Unemployment has been rising steadily for the past 18 months, and private sector job creation – excluding the resilient health and education services sector – has dwindled to an average of just 32,000 jobs per month over the last six months. Compare that with the 150,000 monthly average in the same period in 2016.

Secondly, the industrial sector, which was experiencing a cyclical recovery in 2016/20, now shows signs of stagnation. Back then, corporate tax cuts implemented at the start of Trump's first term helped accelerate an already positive trend in industrial activity. But by 2025, the fiscal impetus is expected to be much more modest, likely insufficient to revitalize the sector amid sluggish industrial production and declining capacity utilization.

And finally, in late 2016, core Consumer Price Index (CPI) inflation stood at just 1.4% year-over-year, with economic debates often centered on fears of deflation. At the time, the reflationary effects of Trump's policies were welcomed. Today, the situation has flipped. After a period of high inflation, consumers are now acutely sensitive to price rises. Any renewed pressure on inflation could have a major impact on household consumption, adding another layer of vulnerability to the economy.

Compared to 2016, the US economy in 2025 resembles a china shop – with Donald Trump playing the role of the bull. The strength of recent growth belies deeper structural challenges, requiring a degree of caution ahead. Yet, market valuations appear to reflect an overly optimistic scenario.

The BoJ raised its policy rate to 0.25% in July. Since the policy rate is highly accommodating, as suggested by various policy rules, the BoJ will likely continue adjusting its degree of easing towards a neutral rate of interest.

Japanese companies have changed their price and wage-setting behavior by passing on cost increases to their sales prices since 2023 and by raising wages significantly in 2024 amid severe labor shortages. Wage increases have also begun to be reflected in sales prices. Since the labor share hasn’t increased this year, there is room for further wage hikes, especially in large companies, and base-wage rises from spring wage negotiations in FY2025 will likely match or be slightly above this year's result. This would be passed on to prices, so even if rising import prices fade, the CPI is expected to remain at around 2%. 

The BoJ is expected to raise the policy rate to 0.5% in January 2025 if it becomes more confident that the wave of wage increase in FY2025 will spread to SMEs, and if it's reasonable to believe that a negative economic shock from US President Trump’s tariff policy is unlikely to disrupt the economic recovery, as Japan can partially replace Chinese exports to the US.

More importantly, however, will be the extent to which the BoJ raises interest rates. The level of the neutral rate of interest and natural rate of interest behind it, are crucial here. The BoJ has published natural rate estimates based on various models as a starting point for discussions on where the natural rate stands, which vary between -1.0 and +0.5% as of 2023. Japan’s potential growth rate, which defines the major trends of the natural rate, is recovering after having sunk due to the pandemic. Furthermore, in terms of the savings/investment balance, the continued expansion of fiscal expenditure since the pandemic will act as a factor absorbing savings, while the increased issuance of government bonds and reduced purchases of government bonds by the BoJ will reduce the scarcity premium of government bonds as safe assets, which will also raise the natural rate. Thus, it is appropriate to see the natural rate at around 0% as of now, slightly above the average of the estimation results, with range of error. Adding the long-term trend of the inflation rate, the neutral rate is estimated between 1.5 and 2.0%. Market participants would then be useful in adjusting the terminal rate that the BoJ will reach, while adjusting the view of the neutral rate based on the response of the economy whenever the BoJ raises the policy rate. We expect the BoJ to raise the policy rate to 1% during FY2025, beyond which the BoJ policymakers will continue to explore the terminal rate by discussing the level of the neutral rate.

While it is important for the BoJ to carefully assess the outcome of any rate hike, there is also risk of distortions to the economy if the process of reaching the neutral rate is too slow. This could involve higher-than-expected inflation which might be reinforced if the yen depreciates rapidly, or exuberant asset prices as evidenced partially by rising Tokyo condominium prices.

In the first half of 2025, we expect to gain greater insight into the policy proposals the Trump administration plans to implement. Until then, forecasting the impact on the economy and inflation will remain challenging. However, examining underlying economic trends can provide perspective in early 2025 and their potential impact on monetary policy and global financial markets.

The labor market is cooling, with the labor supply-demand imbalance of the post-pandemic era easing. Aggregate labor demand, measured by the sum of filled and unfilled jobs, has remained flat over the past three years, allowing labor supply to catch up. Although demand still exceeds supply by 761,000, levels are returning to those seen in 2019. This normalization should help alleviate wage pressures, bringing wage growth closer to the Federal Reserve’s 2% inflation target.

Core inflation, as measured by the Consumer Price Index (CPI), excluding food and energy, is currently at 3.3% year-over-year, higher than many forecasts. This inflation is largely driven by persistent shelter inflation. However, there are signs that shelter inflation could normalize to pre-pandemic growth rates. Alternative measures of rent inflation, which tend to lead the official CPI owners’ equivalent rent data, have decelerated to or below pre-pandemic levels. Given that shelter inflation constitutes over 40% of the core CPI basket, its deceleration could help bring overall inflation rates back toward the Fed’s 2% target in the coming quarters.

A benign inflation environment could allow the Fed to continue its rate-cutting cycle, steepening the U.S. Treasury yield curve. With over $7 trillion in money markets earning front-end yields, a steeper yield curve could attract these assets further out into higher-yielding credit. 

The dollar appreciated again during 2024 against the main developed and emerging currencies. Thus, the dollar rose by 5% against the euro, by 7% against the Japanese yen and remained stable against British sterling. Against the emerging countries, the dollar appreciated significantly against Latin American currencies (20% against the MXN and 25% against the BRL) but also against the yuan (2%). In addition, the currency market also recorded strong volatility, with changes in the Fed's monetary policy expectations and the election of Trump.

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Since the 2010s, the dollar has appreciated significantly in nominal and real terms and ended the year at its highest level since 1994. While the currency market is likely to show high volatility in line with the volatility of rates and the many uncertainties, we estimate that the dollar should remain at high levels in 2025.

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One of the main market movements following the US elections was the sharp appreciation of the dollar. While this appreciation reflects expectations of a widening interest rate gap between the United States and the rest of the world, it also reflects fears of greater trade tensions and therefore, an increase in risk aversion. This increase is concentrated on economies dependent on exports or that have bilateral trade surpluses with the United States. This can translate into less capital inflows and/or outflows, weakening their currencies. Furthermore, in the event of a more pronounced slowdown, the central banks of these countries could lower interest rates further, thereby strengthening the dollar. Thus, given that customs policy is expected to be an important focus of the new US government, the dollar should remain at high levels.

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One of the factors explaining the widespread appreciation of the dollar is the good performance of the US economy relative to other developed economies, with a growing productivity gap. Indeed, while productivity gains in Europe averaged 0.7% during the 2010s and 0% in Japan, these gains amounted to 1.2% in the United States. This differential has increased further after the Covid crisis. The main reasons for this productivity differential are the favourable energy price differential in the United States, more dynamic non-residential investment and specialization in high value-added sectors such as new technologies. These structural elements should keep the dollar high.

Current account balances of major economies
In billions of dollars, 4 rolling quarters

As 2025 begins, the global economy faces a complex landscape shaped by the interplay of trade tensions, diverging central bank policies and China’s evolving growth model. We highlight the key themes shaping the first half of 2025 in three charts:

1. Tariff turmoil: The return of trade wars

Renewed trade tensions are expected to escalate in 2025, with potential tariff increases on Chinese goods and other trade partners posing significant risks to global supply chains. These disruptions could exacerbate inflationary pressures, depending on the scope and timing of policy changes.

In response, businesses are diversifying supply chains with “China+1” and “China+2” strategies, shifting production to alternative hubs like Malaysia, Vietnam, India and Mexico. This trend is driving growth in high-tech manufacturing, particularly for AI-related hardware and semiconductors, and reshaping global trade patterns.

Meanwhile, China faces mounting external pressures from protectionist policies alongside persistent domestic challenges, including property-sector stress. While Beijing’s fiscal stimulus could provide a buffer, the global trade landscape remains volatile. Any unexpected policy shifts – such as stronger than expected Chinese stimulus or delays in new tariffs – could alter the economic outlook. 

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2. Fed vs. ECB: A policy tug-of-war

Global central banks are moving into a new phase of monetary policy, with the Federal Reserve and the European Central Bank diverging significantly. After synchronized tightening, both are easing, but at different paces: 

• The Fed is expected to cut rates cautiously by 50bps to 4.25% by March
• The ECB is likely to pursue aggressive easing, cutting by 125bps to 1.75% by September. 

This divergence will likely create one of the largest Fed-ECB policy gaps in decades, strengthening the US dollar and pressuring emerging markets reliant on dollar funding. Businesses should closely monitor currency volatility and its impact on trade and financing.

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3. China’s 2025 balancing act

China’s growth is forecast to slow to 4.6% in 2025, down from 4.8% in 2024. Ongoing property-sector challenges and weak external demand are key drags on recovery. Export activity remains subdued. Beijing’s fiscal stimulus – equivalent to about 2.6% of GDP – and investments in innovation and technology sectors such as AI and data centers, should provide some resilience. 

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Key takeaways

Markets face a turbulent start to 2025, with trade policies disrupting global supply chains, central bank divergence driving FX volatility, and China contending with structural pressures. Amid these challenges, pockets of growth in AI, green technologies, and industrial infrastructure offer resilience. Businesses must remain agile, monitor geopolitical developments, and adapt supply chains to navigate these dynamics.

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Since the 2008 crisis, investors have adopted an unexpected reasoning: economic bad news is often perceived as favorable. Why? Because it pushes central banks to act to support the economy, notably by lowering interest rates. One way to illustrate this mantra is through the term structure of interest rates. We can decompose the 10-year German rates between a term premium and a short-term rate expectation. The graph below shows that long-term rate decreases occur particularly through the decline in short-term rate expectations. 

The latest example of this "bad news is good news" mantra is the result of the American election, which was also welcomed by a decrease in short-term rate expectations in the eurozone. The issue is that in the past, lowering borrowing costs has not always played out as expected: it has supported unprofitable projects, which in turn undermined growth and productivity.

What happens next?

Rate hikes are generally unfavorable to the economic cycle because they penalize investment, but they still benefit two economic agents: banks (through the net interest margin) and savers (through the remuneration of deposit accounts). However, an increase in financial savings is not enough to boost consumption, as the multiplier of financial savings is low. Indeed, financial gains on household deposit accounts are automatically reinvested in the absence of household decisions. Conversely, an increase in income from wages is more easily consumed. This partly explains why the much-anticipated consumption rebound this year has not yet occurred despite the large cushion of savings.

To stimulate consumption, households need to feel more confident about the future, and interest rates need to fall sufficiently to make current account deposits less attractive. Lowering borrowing costs further in 2025 could drive the return of household consumption at the eurozone level.

The price of Brent crude has been on a steady downward trend since May 2024. This decline is due to a combination of factors: normalizing or weakening Chinese demand, a subdued global economic environment, rising non-OPEC+ oil supply, and the prospect of a gradual reintroduction of barrels previously withdrawn from the market by OPEC+ countries. 

To counter falling oil prices, OPEC+ nations, led by Saudi Arabia and Russia, have twice delayed their planned supply increases this year. Initially scheduled for October 2024, the gradual reintroduction of withheld barrels was first delayed to January 2025 and then to April following the organization's December 5 meeting. 

Market fundamentals point to further price declines

While geopolitical uncertainties – such as the one-off production freeze in Libya last summer or potential tightening of US sanctions on Iran and Venezuela under the Trump administration – could cause temporary price surges, the fundamentals of the oil market suggest further declines in Brent crude prices on an annual average in 2025. 

On the demand side, global oil demand is expected to grow at a similar pace to 2024, adding around 1 million barrels per day (bpd), according to the International Energy Agency (IEA). This is only half the exceptional rise seen in 2023, which was driven by a post-pandemic rebound in Chinese consumption. Moreover, the slowdown in China's oil demand is increasingly structural, driven by the rise of electric mobility and broader economic shifts. 

On the supply side, non-OPEC production, particularly from the US, Canada, Brazil and Guyana, has risen sharply since 2023, challenging OPEC+ efforts to maintain their self-imposed production quotas to support prices. These voluntary cuts imply market share losses, creating pressure to eventually implement their postponed production increases, particularly in countries where foreign oil companies have heavily invested, such as the United Arab Emirates and Iraq. 

With non-OPEC+ supply rising and demand growth slowing, the global oil market is expected to return to a comfortable surplus in 2025. The IEA forecasts this to reach up to 1.2 million bpd for the year, fostering further price moderation. 

A floor for Brent prices

That said, the pace of price declines is unlikely to match recent months. Xerfi analysts estimate a floor for Brent crude prices at around US$70 per barrel over the medium term. While investment in new extraction capacity has resumed following the sharp contraction in 2020, it is still well below pre-Covid levels, limiting potential supply growth over the next two to three years.

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We project U.S. inflation to stabilize between 2–3% through 2025, shaped by the interplay of import inflation, expectations, and economic slack. These ingredients, together, form the foundation of our inflation outlook.

Real interest rate differentials between the U.S. and its trading partners are a critical driver of import costs. The strong dollar, buoyed by higher U.S. rates, has eased the cost of imports like metals from China. However, tariffs could disrupt this balance by effectively raising China’s real rates, strengthening the yuan, and increasing U.S. import costs. Trade policy and real rate dynamics will remain key to evaluating inflation risks, especially under a Trump presidency.

Exchange rates reflect inflation expectations, translating future price trends into currency movements. Negative real rates typically weaken currencies, raising import costs and fueling inflation. The Texas Manufacturing Outlook Survey highlights how negative real rates amplify expected increases in raw material costs, reinforcing the link between market expectations, inflation, and exchange rates.

Declining labor turnover points to tighter labor market conditions, while slower wage growth suggests cooling labor-driven inflation. Yet structural pressures, like labor shortages from potential deportations, could reduce slack further, pushing wages higher. This dynamic complicates the relationship between slack and inflation, requiring careful monitoring of evolving labor market pressures.

With the return of Donald Trump to the White House, economic policy uncertainty is set to become a defining feature of 2025. The first Trump administration was characterised by high levels of economic policy uncertainty, as measured by the Baker-Bloom-Davis index, even before the pandemic disrupted global markets in March 2020. Trump’s trade policies were a major driver of this volatility.

Economic policy uncertainty has a profound effect on business investment. As argued by former Federal Reserve Chairman Ben Bernanke in one of his early papers,  investment decisions are like option contracts, where uncertainty raises the value of waiting. In other words, heightened uncertainty discourages firms from committing to new investments. 

The Baker-Bloom-Davis newspaper-based index of economic policy uncertainty has shown considerable explanatory power for this dynamic, offering insights into how policy uncertainty shapes the business cycle.

The index, which is updated monthly, has already begun to surge following Trump’s  election victory. Notably, the trade policy uncertainty component for November has surpassed the levels seen during Trump’s first term.

The rise in trade-related uncertainty is likely to spill over into global economic policy uncertainty, though the global index has yet to reflect the post-election environment. 

Global economic policy uncertainty, in turn, contributes to US dollar strength through demand for safe assets. This risks creating a vicious protectionist spiral: tariffs and tariff threats raise uncertainty, driving up the dollar and eroding US competitiveness, which in turn leads to calls for more tariffs. This spiral could also spark political pressure for looser US monetary policy, potentially threatening the independence of the Federal Reserve.

China’s real GDP growth remained around 5% in 2024, but ongoing real estate issues have dampened both investment and consumption. Domestic consumer sentiment is at an all-time low, and the 70-city residential price index continues to decline. External pressures, including political uncertainties and increased tariffs from global leaders, have further strained the economy. Chinese exports fell by 4.7% in 2023, with a notable 13% drop in exports to the US.

In response, the Chinese government launched robust policy measures towards the end of 2024. The manufacturing sector's share of GDP has declined from 47% to 38%, while the services sector has risen from 44% to 55%. Anticipating further challenges from the new US administration, China is focusing on bolstering domestic consumption. Monetary support measures are transparent, and a potential fiscal push of 10 trillion Chinese yuan is expected in 2025. This policy shift aims to stabilize the economy, restore consumer confidence, and prepare industries for ongoing trade tensions. Optimistically, the 2025 GDP forecast has been upgraded to 4.7%, with 2026 projected at 4.5%.

Emerging markets, particularly ASEAN, are poised to benefit from China's economic strategies. The escalating US-China trade conflict and COVID-19 disruptions have accelerated “nearshoring,” prompting companies to restructure supply chains closer to home. ASEAN countries, with favorable demographics and policy reforms, are emerging as key beneficiaries. From 2018 to 2021, ASEAN's exports to the US increased by over 65%, and the region saw record foreign direct investment inflows in 2023.

Major companies are shifting production to ASEAN, enhancing its role in global supply chains. For example, Samsung and Nike have expanded operations in Vietnam and Indonesia, respectively. Apple and Intel are increasing investments in India, Vietnam, and Malaysia. Market-friendly reforms, such as Thailand’s State Investment Fund and Malaysia’s tax incentives, are expected to boost stock performance.

ASEAN's demographic dividend, rising education levels, robust labor force participation, and improved income equality underpin long-term consumption growth. Countries in the region are adapting to the new normal of trade tensions by restructuring supply chains and pursuing new trade partnerships, positioning themselves for sustained growth and resilience. The future of ASEAN in the “China Plus One” strategy looks promising.

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In 2024, the semiconductor market was characterized by a remarkable polarization, with strong demand for generative AI but sluggish demand for other applications such as automotive and industrial machinery.

Although there were significant differences between favorable and unfavorable market conditions in various sectors, the YoY growth rate of global semiconductor billings, released by WSTS(an industry organization), remains in the double-digit range. However, the chart below shows that Taiwan PMI (Purchasing Managers' Index), which has been closely linked to global semiconductor billings, is currently below 50 percent, indicating a slowdown in activity. The benefits of the generative AI boom appear to be limited to a few companies and have not spread widely across the semiconductor industry.

In 2025, the focus will be on whether the gap between favorable and unfavorable conditions for semiconductors and production equipment widens.

In 2024, global semiconductor billings (reported by WSTS) are expected to grow by around 20% YoY, while semiconductor manufacturing equipment sales (announced by SEMI) will increase by 7% YoY. In 2025, semiconductor billings are expected to continue growing in the double digits (WSTS forecast). On the other hand, sales of semiconductor production equipment are predicted to stay in the single digits (SEMI forecast). In my opinion, it could be close to 0%.

This is because demand for semiconductors in smartphone and the automotive sector is not growing, and there is little expectation that new investment in semiconductor manufacturing equipment will increase significantly to expand semiconductor production capacity.

In addition, to produce semiconductors for generative AI, the Post-process (the process of cutting wafers into individual chips and packaging them) is more important than the cutting-edge Pre-process (the process of forming electric circuits on wafers), which is important for smartphone production. Therefore, the generative AI boom has raised expectations that demand for the Post-process manufacturing equipment will increase. However, the market share of the Post-process manufacturing equipment is small, accounting for just about 10%.

Furthermore, the tightening of restrictions on exports to China by the US government should not be overlooked. As shown in the chart below, manufacturing equipment imports to China surged before the stricter restrictions but have slowed since then. In the near term, Chinese demand for semiconductor manufacturing equipment is expected to be restrained.

The outlook for 2025 appears promising for commercial property capital markets. A combination of cyclical and structural recovery in occupier markets, stabilizing asset values, and the prospect of RBA interest rate cuts has set the stage for renewed momentum. This optimism is reflected in REITs share prices, with the S&P/ASX 200 REITs index climbing more than 40% since October 2023, recovering all the losses sustained during the rate-tightening cycle that began in 2022.

Amid this positive backdrop, here’s what we expect for 2025:  

• A return to capital growth: Commercial property markets are nearing a cyclical bottom. Stabilizing asset values are expected to revive investment market activity, driving capital growth throughout the year.

• Improving liquidity: Global deal activity is turning a corner, with 2024 volumes expected to surpass 2023 levels and further gains anticipated in 2025 and beyond. This improvement is supported by about US$750 billion in dry powder among global closed-ended funds targeting real estate, according to RealfinX.

• Increased focus on value-add strategies: Investors are shifting toward value-add strategies, as indicated by an 18% increase in fundraising over the nine months to September 2024, even as overall fundraising declined by 25%. 

• Super-sized funds to reshape capital markets: Superannuation funds are set to play an increasing role in commercial property capital markets, underpinned by rapid growth in assets under management and portfolio repositioning towards structurally advantaged assets, such as data centres, industrial and logistics properties, and residential projects.

Conclusion

As REIT indices signal recovery, the stage is set for a stronger 2025 in Australian commercial property markets. Investors should remain vigilant for opportunities in value-add strategies and sectors poised for long-term structural growth. The combination of stabilizing asset values, improving liquidity, and evolving capital market dynamics marks a turning point for the sector, giving investors cause for confidence for the year ahead.

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Alpine Macro holds the view that the current macroeconomic environment mirrors the second half of the 1990s in striking ways: Back then, the Federal Reserve eased monetary policy into a growing economy in 1995; today, it is taking a similar approach. The parallels extend beyond monetary policy. 

In the 1990s, the spread of the internet revolution dramatically boosted labor productivity and helped bring down inflation. Today, the AI revolution holds the potential to replicate this effect, driving up labor productivity and corporate profitability. Meanwhile, the global economy is once again divided: a strong US economy contrasts with a weaker rest of the world (ROW), echoing the dichotomy of the late 1990s. 

Most importantly, the second half of the 1990s saw the rapid inflation of an equity bubble. Looking ahead to 2025, we see a similarly frothy environment for US equity prices. The S&P 500 is likely to hit new highs, led by the “Mag7” (the seven largest tech stocks.) A strong dollar and US stock market outperformance relative to the ROW are also on the horizon.

In other markets, we project that German bunds will outperform other G7 bond markets over the next 12 months. Gold may grab headlines, but oil is expected to slump to US$50 per barrel. Meanwhile, the Fed is forecast to hold rates above 4%.

One of the lessons from the Biden Administration is how much consumers hate inflation even when their wages keep up. 

Since the pandemic, consumer sentiment has closely followed trends in affordability. When government programs boosted affordability early in the pandemic, sentiment increased. As inflation eroded purchasing power, sentiment declined. The trough in sentiment coincides with the trough in affordability in June 2022. For the average consumer, affordability is now up 9.4% versus 2019 because employment and income growth has more than made up for the erosion of purchasing power due to inflation.

When we look at what consumers are buying in stores and online using Numerator data, consumers from all income groups are buying more today than they were in 2018, even after adjusting for inflation. By this measure, consumers should be better-off.

In University of Michigan surveys, whenever inflation is high, consumers say they are more likely to be doing worse because of high prices, despite also saying they are less likely to be doing worse because the labor market is strong. What dominates during inflationary episodes are concerns about inflation, not concerns about the labor market. Policymakers should be aware of this trade-off: given the choice between high inflation but a stronger labor market or low inflation but a weaker labor market, consumers seem to prefer the low inflation and weaker labor market option. A strong labor market does not seem to compensate for high inflation.

Will the policies of the Trump Administration reignite inflation? We examine three scenarios:

• High Case: In the high inflation case, the Federal Reserve loses independence. Threats to replace the Fed Chair with an accommodating political appointee or political pressure on the Fed’s rate decisions can be enough to de-anchor inflation expectations. We have seen the dangers of politicizing monetary policy in US history and in emerging market economies; doing so would be destabilizing to the US economy. The high case also features across-the-board tariffs, retaliation from other countries, mass deportations, an extension of the Tax Cuts and Jobs Act (TCJA), additional tax cuts, and higher fiscal deficits. Tariffs and mass deportations constrain supply and raise prices in critical sectors. Additional tax cuts boost demand. The result is another burst of inflation.

• Mid Case: In the mid inflation case, the Fed retains its independence and credibility, which allows it to keep inflation expectations well-anchored. Moderate tariffs and some deportations lead to supply constraints and higher prices but less than in the high case. The extension of the TCJA does not lead to any changes in consumer demand. The result is a slight pick-up in inflation due to one-off supply constraints and to a lessening of import competition.

• Base Case: In the base inflation case, we see limited pick-up in inflation due to targeted tariffs. Reforms to immigration maintain a sufficient inflow of workers to prevent labor shortages in key sectors. Some components of the TCJA are extended but fiscal deficits are lower than in the mid and high case.

While some of the stated objectives of tariffs and deportations are to bring back jobs for American workers, the labor market is already strong. To the extent these policies reignite inflation, consumers have signaled they hate inflation – even when the labor market is strong – and they vote accordingly.

Price stability is a cornerstone of a nation’s economic well-being and growth. In Switzerland, the Federal Constitution entrusts the Swiss National Bank (SNB) with the mandate to manage monetary policy in the country's best interest. The SNB defines price stability as an annual increase in the national consumer price index (CPI) within a range of 0% to 2%.

After several years of elevated inflation—consistent with global trends—Switzerland now faces a familiar challenge: avoiding a prolonged fall below the lower bound of its target range. With the latest inflation forecast revised to a mere +0.3% for 2025, the SNB’s decision to implement a 0.5% rate cut at its final meeting of 2024 comes as no surprise.

In my view, the prospect of negative rates reappearing in Switzerland during 2025 is increasingly plausible. This outlook is supported by two key factors: (i) Weakening price pressures amid broader macroeconomic challenges, particularly in Germany, Switzerland's primary trading partner, (ii) the SNB’s reluctance to intervene in foreign exchange markets to manage price dynamics. This shift likely reflects two considerations: avoiding potential conflicts with U.S. authorities regarding currency manipulation, recognizing the long-term risks of such a strategy, especially in today’s context of elevated equity market valuations. Logical consequence: continue, if necessary, by reducing the cost of money. Given its past (positive) experience with negative rates, the SNB Board may not hesitate to reintroduce them, despite the likely reluctance to do so. Market participants, however, appear once again to be underestimating this possibility showing difficulty in properly pricing this scenario, potentially paving the way for some volatility and corresponding opportunities—particularly in the middle part of 2025.

Sascha Kever, CIO, PKB Private Bank

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Trump tariffs

Before Trump 1.0, US tariffs were the lowest on record, among the lowest in the world. Yet his threats may prove less extreme than past tariff episodes.

On the view that “personnel is policy”, naming trade law specialist Jamieson Greer as USTR and outspoken China hawk Peter Navarro, as White House “trade czar” may well signal a harder line on China than others. In contrast, ex-USTR Robert Lighthizer focused on the trade deficit, and aimed tariffs at autos, steel etc. and Japan, the EU, India, China. Trump may be hinting at deals with many countries, even as his higher tariffs on China may induce others to raise their own tariffs, lest its exports flood their markets. Others may negotiate; China may retaliate.

We suspect the goal is to reshape world trade, not just reduce US trade deficits, foreshadowing further divergence across countries, as global economic activity and financial flows continue to respond to the evolving world order.

Fed dot plot

The FOMC rate views have evolved significantly, with the Dots moving slightly higher since the election, despite the range remaining unusually wide. We believe tighter policy is necessary for several reasons: the current challenge is containing inflation rather than raising it to target. While Trump's deregulation may stimulate growth through investment and productivity gains, trade and immigration restrictions could drive up prices and inflation. Consequently, the neutral policy rate may settle in the low to mid-single digits or slightly higher, well above 0%, for years to come, barring a major financial crisis.

NATO spending

Trump and his team are expected to link national security, geopolitics, geoeconomics, and cross-border economic issues to promote an "America First" agenda. Unlike previous US policymakers who separated these issues, Trump's approach integrates them, leading to increased global defense spending, particularly in Europe, India, and China, with the US also modernizing its defense. This benefits national defense industries and tech sectors but adds fiscal pressure due to other demands like demographic needs, climate change, and infrastructure.

Trump's personnel nominations signal a hardening of his negotiating stance, using threats like tariffs on USMCA partners and demands for increased NATO defense spending. While this approach has caused resentment and plans for retaliation, some allies like Canada, Mexico, and parts of Europe are willing to re-engage and negotiate more directly than during Trump's first term. However, China and other powers not reliant on US security may prefer retaliation over negotiation, especially if high tariffs are imposed.

Trump's demands for higher defense spending from NATO and Asian allies are likely to see some success, with expectations rising from 3% to 5% of GDP. VP-Elect J.D. Vance highlighted a significant shortfall in NATO partner contributions, framing it as an implicit tax on US voters, who indirectly fund European welfare states. This issue has been a longstanding complaint from US presidents, but Trump has capitalized on it politically.

The hope is that increased defense contributions from wealthy countries like Western Europe, South Korea, and Japan will maintain open trade relations with the US and support its extensive military network, promoting global peace and economic stability despite Trump's unilateral policies.