Introduction
As 2025 begins, key political and economic shifts are on the horizon. In the US, President Trump starts his second term with economic momentum, while in the UK, Keir Starmer’s Labour government faces challenges like stagnating growth and strained public services. Both leaders have pledged to focus on growth, though their strategies differ. Investors are reminded of the importance of diversification to navigate these uncertain times.
United Kingdom
Economists predict the UK economy will grow by 1.7% in 2025, driven by expected interest rate cuts and increased government spending, though at a slower pace than earlier forecasts.
Inflation stayed above the Bank of England’s 2% target in December, following October’s budget which added pressure and delayed rate cuts. The Bank kept borrowing costs at 4.75%, citing concerns over rising wages and sustained inflation.
Business confidence hit a two-year low, according to the British Chambers of Commerce. Only 49% of firms expect turnover to grow in the next 12 months, down from 56% before the budget. Tax concerns, particularly around National Insurance, were cited by 63%, with rising costs also discouraging investment. Over half of businesses plan to raise prices to offset higher staff costs.
Key indicators point to weak growth. The S&P Composite PMI for December was 50.4, indicating marginal growth and the lowest level since October 2023. The PMI’s employment index fell to 45.8, showing a sharp slowdown in hiring.
On the bright side, the FTSE 100 rose 0.6% on the last day of 2024, marking its fourth year of gains and the best performance since 2021.
Europe
Europe’s economies remain fragile after a difficult 2024.
The eurozone’s economy contracted for the second straight month in December. The HCOB Composite Purchasing Managers’ Index (PMI) rose slightly to 49.6 from 48.3 in November but stayed below the 50 threshold, signalling continued contraction. This was largely due to a sharper decline in manufacturing, though the services sector showed modest recovery with a PMI of 51.6.
On a brighter note, service businesses are performing better and should be shielded from potential trade tariffs imposed by Trump.
“December PMI data doesn’t exactly set the stage for a service sector boom in 2025, but at least business has stopped declining, and the drop in order backlogs has eased,” said Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank.
The European Central Bank cut interest rates for the fourth time in December and signalled more reductions could come. A Reuters poll of 75 economists predicts cuts totalling 100 basis points in 2025.
Predicting Europe’s performance in 2025 is challenging. While the worst of 2024’s turmoil may be over, recovery remains uncertain amid risks of political instability and trade wars. European stock prices continue to be influenced by US policy.
United States
Donald Trump takes office on January 20th, and the President Elect has been vocal during the transition, including some criticism of the Fed.
Inflation stayed above the 2% target in December. Prices rose 2.7% in November compared to a year earlier, according to CPI data. Core inflation, excluding food and energy, held at 3.3%. In response, the Federal Reserve cut its key interest rate by 25 basis points in December, lowering the target range to 4.25%-4.50%. Some speculate the Fed acted ahead of Trump’s second term to allow more time for future cuts in 2025. Senior Fed official Tom Barkin warned of higher inflation risks in 2025, noting wage and product cost pressures could lead to price increases.
While US manufacturing activity slowed ahead of possible trade tariffs, the economy is expected to grow in 2025, with a resilient labour market remaining a key focus for the Fed.
Despite positive economic data, public sentiment stayed cautious. An AP-NORC poll found 70% of adults rated the economy as poor at the end of 2024, up from 60% in October, reflecting a gap between economic performance and public perception—a significant challenge for Democrats in the election.
Far East
China met its 5% growth target for 2024, supported by $1.4 trillion in central bank credit since September. While manufacturing slowed slightly, with the PMI dropping to 50.1 in December, the services sector saw growth, hitting a seven-month high at 52.2 due to strong domestic demand. However, concerns over U.S. trade policies tempered business optimism.
Chinese equities ended 2024 strong, with the Shanghai Composite Index gaining 13% for the year, its best performance since 2020, though heavily reliant on government stimulus. The economy continues to struggle with weak consumption, low investment, and a deep property crisis. Potential U.S. tariffs under a second Trump administration could further strain exports. It remains uncertain if China’s fiscal intervention will drive lasting economic recovery or simply provided a short-term boost.
The Bank of Japan kept its loose monetary policy, with Governor Kazuo Ueda cautiously optimistic about achieving the 2% inflation target by 2025. Japanese equities surged, with the Nikkei 225 rising 19% in 2024, nearing record highs, driven by strong earnings, shareholder activism, and a weaker yen.
Emerging Markets
Emerging markets experienced a divergence in economic performance in December, as in 2024. While economies like India and South Africa maintained strong growth, others such as Brazil faced challenges.
Equity markets performed well as 2024 closed, mainly driven by the Asian tech rally. Trump’s trade protectionism is a threat and an opportunity. Some emerging market currencies may be well placed to weather high U.S. Treasury yields and a strong dollar, but some economies, such as Mexico could be badly hit. A strong dollar could see capital outflows from emerging markets.
Fluctuating oil prices, trade tariffs and geopolitical tensions, such as the ongoing Russia-Ukraine conflict, have all contributed to market volatility and uncertainty in emerging markets in 2024 and will continue to do so into 2025 until resolved.
Conclusion
Despite media negativity, most portfolios performed well in 2024, reflecting a strong economy, though only 30% of Americans feel the benefits. Looking ahead to 2025, there is optimism for slowing inflation, lower interest rates, and global business growth.
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