We expect growth to continue to slow in the near term, followed by a reacceleration through 2025, which should foster a favourable environment for risk assets globally.
Inflation has cooled substantially and is now close to target in most developed markets. The market’s attention has shifted to growth and potential downside risks.
Rates are generally restrictive across major economies. However, European central banks are easing, and the Federal Reserve (Fed) is likely to achieve neutral policy by end-2025.
We expect US growth to slow before reaccelerating through 2025, and we anticipate improving European growth to slightly outperform consensus forecasts.
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 favourable environment for global risk assets.
Inflation has cooled substantially in most major economies, with no significant downturn for global growth. And it appears that the long-anticipated “soft landing” has arrived for the US. So what happens next?
Inflation has cooled substantially in most major economies with no significant downturn for global growth, and it appears that the long anticipated soft landing has arrived in the US.
So what happens next?
Our 2025 Annual investment Outlook focuses on what investors might expect to see after the landing.
In the US, we expect economic growth to decelerate to trend rates, but then reaccelerate and outperform most developed market economies in 2025.
In Europe and the UK, we anticipate economic improvement from their current relative weakness.
And in China, growth has remained below trend, but recent stimulus has raised the probability of an upside surprise in 2025.
Read on to explore our market views for equities, fixed income, currencies and alternatives, as well as potential events that could have a positive or negative effect on our base case.
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.
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.
JP Morgan Global Composite Purchasing Managers' Index
Sources: Invesco and Macrobond, as of September 30, 2024.
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.
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.
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.
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.
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.
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.
Overall, we expect a conducive environment for risk assets, particularly in non-US developed markets, small capitalisation stocks, and value sectors in the US, with European assets likely to outperform due to favourable valuations and cyclical sector weightings.
Asset performance during easing cycles is dependent on the state of the economy. In the past, when the Fed has eased and the economy has avoided a recession, risk assets have tended to perform well.
Average global asset total returns since 1989 over 12 months after the Fed first cuts rates
Sources: ICE, ICE BofA, MSCI, S&P GSCI, LSEG Datastream and Invesco Global Market Strategy Office
Notes: Past performance does not predict future returns. Data as of 31 October 2024. The chart shows the total return on global assets in the 12 months after the first Fed rate cut in easing cycles since 1989. Data does not exist for all assets for every easing cycle, with the global high yield and investment grade returns for the 1989 and 2005 easing cycles represented by US returns. We use the following benchmarks for each asset class (with date of first easing cycle for which data is available): equities = MSCI World (June 1989), government bonds = ICE BofA Global Government Index (June 1989), corporate investment grade = ICE BofA Global Corporate Index (January 2001 and replaced by the ICE BofA US Corporate Index for the June 1989 and July 1995 easing cycles), corporate high yield = ICE BofA Global High Yield Index (January 2001 and replaced by the ICE BofA US High Yield Index for the June 1989 and July 1995 easing cycles), USD index = DXY US Dollar Index (June 1989), commodities = S&P GSCI Commodity Total Return Index (June 1989).
We polled our experts across a wide variety of asset classes and market types to gauge their views for the year ahead. Here’s where they’re seeing risks and opportunities.
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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.
The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested.
All data as of 31 October 2024 unless otherwise indicated.
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