23 December 2024
2025 promises to be an eventful year for politics, geopolitics, economics and policy. Since the US election in November, a still-robust US economy, expectations of corporate tax cuts, a broad deregulatory agenda and, seemingly, a view that the worst outcomes for global trade will be avoided, have pushed up US stocks. China has also suggested looser monetary and fiscal policy to support growth.
While there is a great deal of uncertainty ahead, we have taken a view on the likely sequencing of US government policy. We expect talks of tax cuts and quick action on trade tariffs and immigration soon after the US presidential inauguration on 20 Jan but investors may hope the new administration treads a little more cautiously than feared on fiscal, immigration and trade-related measures that could reignite inflation.
Source: Macrobond
Source: Macrobond
Consumer spending is likely to remain the major growth engine next year. We think consumers in Europe and mainland China may finally open their pockets a little wider, on the back of improving real wages and falling interest rates in the former and government-led stimulus in the latter. Improving job prospects and property prices will be needed to sustain any consumer spending uplift in China.
Any meaningful improvement in investment in much of the world seemingly hinges either on the public sector directly – for infrastructure and defence spending – and/or indirectly through more active industrial policy. Could 2025 finally be the year that the enormous IRA and CHIPS act-fuelled manufacturing investment boom in the US sees a positive payback in a revival in industrial production and productivity?
The global industrial cycle, even for areas of electronics, looks to be softening. Our trade forecasts are the main areas that we have trimmed given the prospect of an escalation in tariffs. We recently lowered our world export volume forecast for 2025 from 3.5% to 1.9%, although trade may not soften immediately as shipments are frontloaded ahead of new tariffs.
It is clear that Trump intends to use tariffs as a means of addressing not just trade imbalances but a range of other policy priorities, from drugs to immigration control. So while we cannot know the precise timing or magnitude, tariffs on some economies and products appear inevitable, impacting on profits and inflation in the US (and in trading partners if there is retaliation) and weighing on global trade flows and sentiment.
Major trading economies are, therefore, looking to strengthen relationships elsewhere. In the past, big stimulus in China offered opportunities for European manufacturing exporters. But this time it appears China’s policy support will target consumption and many firms are fearful that higher US tariffs on China could result in more trade-diversion towards Europe, Asia and elsewhere, triggering further trade restrictions between third countries and an additional hit to world trade growth.
The revisions to our global growth forecasts are small at this point and the biggest country revisions are upwards to Spain and downwards to Poland. In some regions like mainland China, the reduction in our export growth forecast should be offset by the impact of forthcoming fiscal stimulus.
Note: *India data is calendar year forecast here for comparability. Previous forecasts are shown in parenthesis and are from the Macro Monthly dated 11 July 2024.
Green indicates an upward revision, red indicates a downward revision.
Source: Bloomberg, HSBC Economics
Changes to our global inflation forecasts are also modest but they are higher. Our 2025 projection rose from 3.3% to 3.4%, all explained by the developed world which increased from 2.3% to 2.5% with a notable rise in Japan. The lack of an upward revision to the emerging market aggregate of 4% is only because of a reduction in our forecast for China from 1.1% to 0.6% which more than offsets an increase in our Brazil inflation forecast.
In 2025 the impact of potential US tariffs and retaliation risks adding to inflation (and hurting growth) while in some countries the bigger threat to inflation comes from the rise in food prices, which can also hit growth and raise inflation perceptions. Surging coffee and cocoa prices are grabbing the headlines, but domestic harvests played the major role in lifting prices in India, where food makes up nearly half of the CPI basket.
Despite those uncertainties on inflation, which in some countries will be exacerbated by currency depreciation, we still see scope for rate cuts in many economies in 2025, with the key exceptions of Brazil, set to deliver further hefty rate rises in the early months of the year, and the Bank of Japan on track for more gradual modest ones. In Asia, we forecast short and/or shallow easing cycles, that would likely be even shallower if the Federal Reserve cuts by less than we forecast.
We see the US slowing the pace of easing in 2025, lowering the Fed funds rate to 3.5-3.75% by end-2025, then staying on hold. We expect the European Central Bank to cut policy rates to a trough of 2.25%, which means an earlier halt to the easing cycle than current market pricing implies, while the Bank of England looks set to lag other G10 central banks which have been cutting more rapidly.
Source: Bloomberg, HSBC
⬆Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➡ Actual is in line with consensus
Source: Refinitiv Eikon, HSBC
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