Many of the world’s central banks, having largely succeeded in curbing inflation, are now easing monetary policies with the aim of stimulating growth. In 2025, we anticipate signs of economic deceleration to be counteracted by the supportive impact of the global rate-cutting cycle. In other words, we think we are seeing a soft landing. We expect a near-term growth slowdown followed by a reacceleration through 2025. This should create a favorable environment for global risk assets.
Latest market outlook
Our base case is that global growth reaches near potential rates through 2025, supported by policy easing and real wage growth in many major developed economies. But the path ahead could shift under different assumptions.
Base Case
Trend growth then reacceleration
We expect the Federal Reserve to cut its policy rate to neutral (around 3.5%) by year-end 2025, and US growth to decelerate to trend but then reaccelerate and outperform most developed markets. We expect growth in Europe and the UK to improve from their current relative weakness. Chinese growth remains below trend, but recent stimulus has raised the probability of an upside surprise.
Upside/downside scenarios
Upside scenario: Growth Goldilocks
There’s a possibility that falling inflation and rate cuts could help accomplish a “Goldilocks” environment (not too hot, not too cold) across most economies. This could foster greater regional participation versus our base case and lead to a period of growth at potential across most major economies while inflation remains near target rates. China could also experience an upward surprise that helps lift emerging markets.
Downside scenario: Growth undershoots
There’s a possibility that weak patches in recent data could presage a sustained growth deceleration in key economies, including the US. In this scenario, as activity falters, central banks would enact more rate cuts to counteract the growth slowdown, resulting in below-trend performance in the first half of the year, followed by a pick-up towards trend in the latter half of the year.
Swing factors
- Trump may disrupt global trade
With President-Elect Trump set to enter office early in 2025, policy uncertainty on trade and immigration have pushed higher. Even before taking office, Trump may rattle markets and politics both through expectation-setting. This is because US presidents have more authority on foreign policy than domestic policies, which need Congressional approval. - China stimulus could reinvigorate growth
Domestic growth in China has been challenged in 2024 as households and corporations appear reluctant to spend and invest in China. Beginning in September, a raft of stimulus measures has helped reinvigorate Chinese financial markets and stoked expectations for a pick-up in growth, which could have positive spillovers to the global economy and equities. - Inflation could return
Markets and policymakers in many regions have turned their attention to growth and its downside risks. While not our base case, we believe a return of inflation could spark a sea-change in the current outlook and recalibrate expectations around policy easing and the resulting boost to the economy. - Fiscal pressures could impact spending
Despite elevated inflation and tight labor markets, governments have been spending substantially since the COVID-19 pandemic. Now, investors are increasingly concerned with the state of government balance sheets. If spending retrenches, growth may be impacted.
