ISQ - January 2025
Key Takeaways
The global economy will grow at a pace close to that achieved in 2024.
The direct impact of tariff implementation will be quite small but the indirect impact will be greater and more persistent.
Inflationary pressures will slowly subside to target allowing room for central bank policy loosening.
Beijing faces two challenges, to offset aggressive tariffs on exported goods to the US and address the growing solvency crisis in its real estate and financial sectors.
Tokyo’s efforts to reflate the Japanese economy will deliver a cyclical revival. The Bank of Japan will deliver limited rate hikes.
Goods trade with the UK is broadly in balance. The focus for the UK economy will be on Finance Minister Reeves’ ability to raise productivity and growth. Bank of England policy will be broadly supportive.
The macro backdrop is consistent with positive returns from financial market assets, but prospects will vary across differing geographic locations.
The global economy will grow in 2025—a high degree of conviction in a world mired in uncertainty following President-elect Donald Trump’s victory, but outcomes will vary and become more dispersed. Outside the US the biggest improvement to global real GDP prospects will be in Japan and to a lesser extent the UK. In contrast, persistent structural headwinds will hamper the euro zone and growth will be lacklustre at best. Of the emerging markets, the Chinese economy will grow again but the pace will slacken as Beijing adjusts its focus away from the export sector and towards stimulating domestic demand. India has enjoyed a strong start to the decade and will remain the fastest growing major economy next year. Inflationary pressure, the focus of central bank policy measures over the past few years, will slowly normalise but with variance across differing geographical locations. This variance will manifest in a divergent approach to monetary policy between systemic central banks, with the Bank of Japan cautiously raising interest rates while restrictive policy is loosened gradually elsewhere. For markets, the combination of moderate but still positive growth, subdued inflationary pressures, and supportive monetary policy is constructive for positive returns over the year ahead. Investors will, however, be mindful of the risks associated with a wide range of potential policy initiatives, market sensitivity driven by the substance, weight, and timing of measures which could deliver notably divergent investing outcomes.
Prospects for the global economy and markets outside the US are highly uncertain. Initially at least, President-elect Trump’s provocative rhetoric, particularly in relation to the imposition of trade tariffs on imported goods from ‘Day One’ following his inauguration, will garner most attention but the immediate impact could be fairly small. The global economy is expected to deliver real GDP growth of 2.7%, likely close to that achieved in 2024.
The combination of moderate but still positive growth, subdued inflationary pressures, and supportive monetary policy is constructive for positive returns over the year ahead.
The global economy is expected to deliver real GDP growth of 2.7%, likely close to that achieved in 2024.
The imposition of large tariffs on Chinese exports would damage the country’s export sector—but goods exports to the US amount to less than 3% of China’s GDP. Taking account of possible exchange rate weakness, some possible attempts at evasion (perhaps through re-routing exports via a third country subject to a lower tariff, such as Vietnam) and the redirection of manufacturing output to other destinations, the overall impact of even a 60% tariff could drop to less than 1% of GDP. The impact may likely be offset by lower interest rates and particularly fiscal policy expansion in part aimed at heading off the threat of insolvency in the Real Estate and Financial sectors.
The direct impact of the threatened 10% tariff on all US imports, although an additional cost for exporters, would only amount to a fraction of a percent of euro zone GDP. However, the impact would be greater on Germany as the US is one of its key export markets. The extent to which the region is impacted will depend on the extent to which tariff imposition might be diluted through negotiated concessions from the European Union as was the case in the automotive sector in 2018. Furthermore, exports to the United States account for only a small proportion of regional economic activity and the overall impact might be further diminished were the threatened 10% universal tariff applied to all countries, thus not placing the euro zone at a competitive disadvantage elsewhere.
That being said, indirect knock-on developments could impose a greater cost to the euro zone, notably a broader shift towards protectionism. Were Mr. Trump to press ahead with the threatened 60% tariff on China, European firms could experience even greater competition from Chinese manufacturers seeking to redirect exports away from the US. More generally, adjustments made in response to altered US trade policy come on top of structural challenges for Brussels including the need to spend more on defence at a time when national public finances are already stretched. The European Central Bank, already pivoting away from residual inflation concerns and towards propping up lacklustre growth will loosen monetary policy further. On top of that, President Christine Lagarde has revived the long-standing debate regarding the creation of a new Eurobond market which would, if it came to fruition, provide investors with a new, stable, and likely sizeable asset.
In the context of the uncertainty surrounding President-elect Trump’s trade policies, political turmoil in the euro area’s economic powerhouses, Germany and France, is the last thing an already embattled Brussels needs. Incumbent administrations have lost confidence votes, in no small measure associated with pre-existing domestic economic pressures and in the case of the latter a burgeoning fiscal deficit. Elections in Germany have been brought forward to February, while in France President M. Emmanuel Macron has been forced into appointing the country’s fourth Prime Minister in under a year. With no major grouping in the National Assembly holding a majority and politicians in no mood to compromise there is little chance that France will achieve the fiscal consolidation necessary to put a deficit/GDP ratio of 6% on a sustainable footing. The uncertain outlook has caused credit agency Standard & Poor’s to cut its rating, an additional worry for investors already perturbed by a widening spread between French and German bond yields.
The direct impact of the threatened 10% tariff on all US imports, although an additional cost for exporters, would only amount to a fraction of a percent of euro zone GDP.
Although the political situation in Germany is less fraught, the election will not turn the ailing economy’s fortunes around. Having broadly stagnated since the pandemic, a worse outcome than that experienced by its regional peers, the outlook remains poor. A weak labour market is depressing consumption, employment growth has stalled and will likely go into reverse in part the consequence of automotive giant VW’s plans to shutter three manufacturing plants for the first time in its long history. Meanwhile industrial output has slumped and with order books at depressed levels a near-term turnaround is unlikely. The export sector on which the German economy has come to rely is under pressure, producers are already reporting a loss of international competitiveness and that’s without the US tariff threat. A turnaround could be achieved through a loosening in the country’s strict fiscal rule , the so-called ‘debt brake’, but political parties are keeping their cards close to their chest as potential bargaining chips in likely post-election coalition talks.
Turning to emerging economies and potentially very divergent prospects for the two economies thought likely to bear the brunt of a more isolationist USA: the Mexican economy appears most vulnerable. Not only are the country’s public finances in poor shape already, but a stronger dollar would also likely limit the scope for policymakers to counter the impact of tariff implementation through fiscal or monetary policy support. In contrast, South Asia might prove a net beneficiary. Certainly, the imposition of a universal 10% tariff would not be consequence free but if accompanied by a 60% tariff on Chinese goods export it could allow regional producers to gain market share and encourage inward investment. Such a development would be beneficial to Vietnam. The Indian stock market has given up some ground after a stellar start to the decade. Despite a still favourable macro backdrop, equity valuation fully reflects this, and a Trump presidency (strong dollar) would tighten financial conditions imparting a headwind to upside progress in so doing.
In a world in which supply chains can be long, complex and where component parts often cross borders numerous times during their assembly, the impact of tariff imposition broadens potentially engulfing US manufacturing firms too. Businesses thought protected by the introduction of tariffs on competitive imports would still be forced to pay higher imported input costs. Additionally, any drop in US imports could trigger a drop in exports of US-produced parts used in the manufacture of goods overseas.
If China is no longer to be the United States’ ‘Most Favoured Nation,’ might that mantle shift to Japan? Whilst standing ready for tariff imposition, Japan’s free trade agreement with the US may mean its economy gets off lightly. Note that Japan sees itself as a good partner to the US, with total investment hitting $783 billion (15% of total cumulative foreign direct investment into the US in 2023). This may not be good enough for the Trump administration given Japan’s economic relationship with China. Facing long-term structural headwinds of its own, a contrite (and unstable) minority ruling coalition has agreed to a JPY 13.9 trillion ($92.4bn) supplementary budget containing stimulus measures aimed at reflating the economy through increased consumption. This would add 0.6% to real GDP growth in 2025 alone, through increased consumption and public works spending and further expansionary fiscal policy measures cannot be ruled out.
Other than pharmaceutical products and automotive exports, the UK economy is not generally exposed to the imposition of US import tariffs. Goods trade between the two economies is broadly in balance and although the UK runs a trade surplus with the US in services of £69bn (2.5% of UK GDP, 2023) Mr Trump’s desire to improve the fortunes of US manufacturing above all else implies that the UK should escape fairly lightly (+/- 0.1% GDP in 2025). More pertinently, Finance Minister Rachel Reeves’ budget focuses on investment to boost the UK economy’s longer term productive potential. The policy may work, but only over time and likely with the support of the Bank of England which, in common with the Federal Reserve, is expected to cut interest rates only very gradually over 2025.
Governments around the world are adjusting to prepare for a more isolationist US administration.
From Brussels to Tokyo and Taipei to Kyiv, governments around the world are adjusting to prepare for a more isolationist US administration led by a president who sees diplomacy in purely transactional terms. The challenges confronting the world are that much greater in an economic system being reshaped by the fracturing relationship between the US and China, a process Mr. Trump did so much to accelerate during his first term of office. Most of all, the return of President Trump and his newly forged cabinet will result in a more uncertain global policymaking environment. The shift in attitudes both towards Beijing and Washington will be the defining legacy of 2025, initiating a potentially profound adjustment in the global economic order.
Issued by Raymond James Investment Services Limited (Raymond James). The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance is not a reliable indicator of future results. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. The taxation associated with a security depends on the individual’s personal circumstances and may be subject to change.
The information contained in this article is for general consideration only and any opinion or forecast reflects the judgment of the Research Department of Raymond James & Associates, Inc. as at the date of issue and is subject to change without notice. You should not take, or refrain from taking, action based on its content and no part of this article should be relied upon or construed as any form of advice or personal recommendation. The research and analysis in this article have been procured, and may have been acted upon, by Raymond James and connected companies for their own purposes, and the results are being made available to you on this understanding. Neither Raymond James nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such research and analysis.
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Black MondayOn 19 October 1987, the stock markets experienced a dramatic plunge that prompted many firms to shut down their trading desks and turn off their phones to minimize internal losses. Raymond James refused to do the same. Our desks stayed open to help meet clients’ needs, resulting in our first and only unprofitable quarter since the firm went public in 1983. |
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Who was Raymond James?The Raymond in our name is actually from Edward Raymond, owner of a 15-employee mutual fund sales group, Raymond and Associates, along Florida’s west coast. He sold his company to Bob James on 15 July 1964, on condition that the surviving firm be called Raymond, James & Associates. Three days after the sale, Ed Raymond was involved in a near-fatal automobile accident and never joined the firm. Nonetheless, even after Raymond had passed away, Bob James insisted that his name remain on the door – ahead of James’ own. That was a promise he made to Ed Raymond three days before the accident, and Bob James was a man who kept his promises. |
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Taking Raymond James PublicWhen consideration was being given to taking Raymond James public, Tom James penned a letter to shareholders (largely employees at the time). ” … the public offering should be considered as a statement of our independence. While this is a psychological rather than an economic rationale, it is nonetheless very important. We have asserted for some time that we are not interested in becoming a small part of a very large corporation. That assertion results mainly from the inclinations of management rather than the economic benefits associated with either alternative. The public stock offering affords us the opportunity to enjoy a little bit of the best of both worlds. While shareholders will be given liquidity at fair market value, we will still have the ability to control our own destiny.” After 40+ years of Tom’s leadership, upon becoming CEO, Paul Reilly was often questioned about whether the company might ultimately surrender its cherished independence and be acquired by some larger entity. His response: “Not while I’m around.” It’s a theme that continues today. |
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