Executive Summary
The wicked witch of the west is (almost) dead! We're talking about inflation, of course. But will 2025 be the year we can finally stop paying attention to the men and women behind the curtain? After a super electoral year, 2025 will all be about effective policy making. As markets reached a new high this year, one question is on everyone’s mind: will risky assets continue to be “popular” (you’re gonna be popular)? In keeping with our tradition, we couldn't resist taking some musical inspiration for our last economic outlook of the year. We hope you find it Wicked!
Global economic growth: Not quite "dancing through life". Global real GDP growth is expected to remain moderate but steady at +2.8% in 2025-26. We expect developed economies to experience a slight slowdown, with growth tapering from +1.8% in 2025 to +1.7% in 2026. In contrast, emerging economies are likely to sustain robust growth at +4.1% across both years. The US economy is forecasted to grow at +2.3% in 2025, slowing to +1.8% in 2026. The Eurozone is projected to grow by +1.2% in 2025 and +1.5% in 2026, with countries like Spain and Ireland leading with higher growth rates. Germany, however, is set to record modest growth after two years of recession. China's growth is projected to moderate from +4.6% in 2025 to +4.2% in 2026 as the country continues to transition towards a more consumption-driven economy while managing external trade pressures.
Is “Something bad” on the way? After the super electoral year, “the Wizards (and not us)” of policy design will be very influential for both the economy and capital markets. Political changes, such as the US elections, could reshape economic landscapes and introduce uncertainties. Geopolitical risks, including tensions between major powers, continue to be a significant concern for global stability. A potential trade war by Q2 2025, with US tariffs rising to 60% for China and 10% for others, could increase US inflation and weaken global growth. Significant US immigration cuts might strain labor markets in key sectors and add to inflationary pressures. Challenges to the Federal Reserve's independence, including possible currency interventions, could dramatically increase financial risks. Fiscal policy changes, such as major spending cuts or extensive tax cuts, could impact market confidence. In the Middle East, a tougher US stance on Iran could slow growth and raise oil prices. Similarly, reduced US support for Taiwan might lead to tariffs and negatively impact semiconductor equities. The climate and energy transition faces challenges, with the potential repeal of the Inflation Reduction Act, which could maintain neutral growth and reduce inflation while boosting fossil equities.
“No one mourns the wicked”: Inflation should finally retreat to 2% in 2025, allowing for monetary policy easing to continue until end-2025. “Thank goodness” central bank policy will shift from taming inflation to supporting growth (but do not hold your breath). However, upside risks remain from potential tariff implementation in the US and unfolding retaliation measures. Further supply-chain constraints, from the rise in protectionist measures and ongoing conflicts triggering higher transportation costs, could temporarily increase inflation. The Fed, the BoE and the ECB are expected to lower rates to 3.5%, 3.25% and 2% by end-2026, respectively. Emerging markets are also likely to see cautious monetary easing, except for countries like Brazil, which may face rate hikes due to economic overheating.
“No good deed” goes unpunished: Government bond yields are expected to remain broadly stable over the next two years, with markets already pricing in significant central bank easing. The effects of large US fiscal deficits and accelerated quantitative tightening in Europe will offset the downward pressure from falling policy rates. French bond spreads are likely to remain wider than those of Spain, reflecting comparatively weaker fundamentals for France, while swap spreads in Europe should remain close to zero.
But the outlook is not entirely “wonderful” for risky assets. Recovering earnings and strong fundamentals should support risky assets, with equities projected to deliver an average total return of 8-10% and credit spreads likely to remain steady through 2025 and 2026. However, high valuations, economic uncertainty and concentration risks could cap gains and leave risky assets exposed to unexpected political or economic shocks.
“What is this feeling?”: Uncertainty continues for companies. While policy shifts and geopolitical risks present challenges, sectors like AI and technology are expected to see growth. Investment in infrastructure and sustainable sectors is also projected to increase. Business insolvencies are expected to increase by +2% in 2025 and to stabilize at high levels in 2026.