Three weeks in, global economic conditions for 2025 are rather mixed: modest growth projections have been formulated against a backdrop of inconsistent inflation trends and significant developments in the Middle East.
The International Monetary Fund has forecast global growth of 3.3% for both 2025 and 2026 – a tad below its historical average over the last quarter of a century. This latest figure is in line with earlier updates: the US is set to enjoy robust growth of 2.7%, while the Eurozone is expected to see 1% growth.
As for global inflation, the IMF expects the headline number to fall back to 4.2% this year and then 3.5% next year. The world’s more developed economies are expected to return to target levels sooner than those of the emerging markets, and this fallback can be attributed to easing monetary policies and improving economic conditions.
But we still have some serious geopolitical tensions to contend with around the world, not to mention sanctions. These pressures could influence supply chains and negatively impact dynamics. As a result, the overall economic outlook remains limited, and potential risks stem from policy uncertainties and varying recovery rates across different regional economies.
And then of course there is the Trump factor – his second act on the world stage began at the start of this week, and will doubtless be marked by the kinds of aggressive policy implementations that we associated with his first term. But the second one will introduce a number of new challenges that will impact both the domestic scene in the US and the international community. The consequences of these policies will be far-reaching, and will not just be limited to his next four years in the White House. Indeed, they are likely to colour the political backdrop for years to come.
The stock markets, on the other hand, have almost universally welcomed Trump’s return to Washington. While analysts and investors across the globe are still trying to weigh up the potential impact that his policies might have on the broader economy, the big risks remain unchanged: inflation, interest rates, tariffs and trade policies.
As for the Federal Reserve Bank and its independence, Trump 2.0 aspires to having more influence over monetary policy, which could have a detrimental effect on the US’s economic stability. The interplay between Trump's fiscal policies and the Fed's mandate will therefore be key in shaping the economic landscape of the US in the coming years.
Good news on both sides of the Atlantic have catalysed hopes of interest rate cuts being implemented by the Federal Reserve Bank and the Bank of England in the coming months.
A favourable inflation print helped the markets to erase some of their earlier losses for this year. In the US, core consumer prices increased less than the market was expecting in December. Month-on-month, the measure that excludes volatile food and energy prices increased by 0.02%, bringing the year-over-year figure to 3.2%.
The fourth quarter corporate earnings season saw many companies in the financial sector report rock-solid results – another positive influence on Wall Street and its traders. In general, revenues have been higher, and there has been a measure of discipline regarding expenses. Admittedly, it is still early days. A number of tech companies have yet to publish their earnings and they will doubtless have the biggest influence on the market when their quarterly figures are revealed over the coming weeks.
In the UK, consumers went about their Christmas shopping slightly more cautiously, and so retail sales shrank in December. They fell 0.3% month on month – just below the 0.4% that had been forecast by the Office for National Statistics.
In Europe, news that Germany's economy had shrunk two years in a row was a blow. As for the European Central Bank, central bank officials are set to meet at the end of January, and another quarter-point reduction in the deposit rate to 2.75% is expected.
In Asia, China’s GDP was up by 5.4% year-on-year in the fourth quarter – better than what analysts were predicting. Other Chinese data showed that its economy was displaying some signs of recovery following a series of stimulus measures announced by Beijing. This news pushed both the Chinese and Hong Kong indices higher.
As for commodities, the price of crude oil rallied further, increasing for the fourth week in a row due to rising demand caused by a colder than expected winter. The price of gold bullion, meanwhile, drifted higher (on central bank buying), recording its best weekly streak since September.
In the Middle East, Israel and Hamas have begun their long-awaited ceasefire in the Gaza. Although at the time of writing the ceasefire appears to be holding, the situation remains fluid, and further developments are anticipated as both sides navigate their way through this fragile peace agreement.
While the ceasefire presents an opportunity to scale down hostilities and defuse tension in the region – as well as initiate a potential economic recovery in Gaza – its overall impact on global markets will really depend on several factors. These include the effectiveness of humanitarian aid distribution, regional stability following the ceasefire, and broader geopolitical shifts in US foreign policy. Investors will therefore likely remain vigilant as the situation unfolds, assessing both immediate market reactions and long-term implications for economic conditions globally.
Overall, last week’s December inflationary data had an immediate effect on the global equity markets: prices nudged upwards, while bond yields moved lower. Currency market performance in recent weeks has been characterised by a strengthening US dollar amid ongoing global uncertainty and shifting monetary policies in key economies.
Global equities in 2025 are poised for a complex year. We may see a transition over to international markets with less reliance on the US, but Wall Street is expected to deliver a third year of positive returns. As for the bond markets, a mix of opportunities and challenges lie ahead.
While economic growth appears robust in certain regions, persistent inflation concerns, and geopolitical uncertainties could influence market dynamics significantly. For both asset classes, investors are advised to stay informed about central bank policies and global economic indicators as they navigate this evolving landscape.
