Ushering in 2025
Hamilton Court Foreign Exchange
Intelligent foreign exchange solutions
As we usher in a New Year, we thought we would take the opportunity to outline some considerations for 2025.
Markets will continue to pay considerable attention to forward guidance from central banks, as participants consider the extent to which policy makers will ease monetary conditions this year. Such considerations come against a backdrop of inflationary pressures pertaining across a number of economies including the UK and US, with service price inflation remaining particularly sticky in places including the UK and US. Here, labour markets will continue to be monitored, particularly the degree to which wage growth (which has remained robust in the US, Eurozone and UK) will feed into inflation. With tensions remaining high across the Middle East and the Russia-Ukraine war entering its fourth year, the extent to which energy and food price fluctuations could alter monetary policy pathways is also worth keeping a close eye on, in addition to supply chain disruptions.
Sticking with monetary policy, it’s also worth noting that going into 2024, markets were pricing in around 1.5 percentage points worth of cuts from the Fed over the course of last year, the same from the ECB and 1.75 from the BoE. In actuality, persistent inflationary pressures fed into an environment where policy makers were more cautious to cut, with the Fed cutting just 1 percentage point, while the BoE cut just 0.5 percentage points. With growth concerns more prevalent across the currency union and inflationary pressures less severe, the ECB delivered 1.25 percentage points worth of cuts, similarly missing expectations though to a lesser extent.
In a year which the IMF is expecting the rate of international growth to rise just marginally from 3.2% in 2024 to 3.3% in 2025, concerns around growth will remain sharply in focus. Perhaps the greatest question mark here is China. The world’s second largest economy continues to face a string of economic headwinds, not least given its fragile property sector, high levels of municipal debt and soft demand which has exacerbated deflation. Such headwinds have put into question whether Beijing will be able to achieve their growth target this year. Given such concerns, at the back end of last year Beijing signalled that they would seek “A more proactive fiscal policy and an appropriately loose monetary policy…enhancing and refining the policy toolkit, strengthening extraordinary counter-cyclical adjustments”. This has bolstered the market’s view that Beijing will continue to enact stimulus measures, continue in their course of monetary loosening, and set a higher deficit target (somewhere in the region of 3.5-4% of GDP).
Outside of China, growth in the Eurozone will also be closely watched, not least in the powerhouses of Germany and France which together account for some 50% of the currency union’s economic output. Indeed, the latest figures out from Berlin suggest that German economy grew just 0.1% over the third quarter, on the back end of a 0.3% contraction in Q2.
Outside of monetary policy, one major consideration on growth will be the extent to which geo-political uncertainty in the Middle East, the conflict in Ukraine and Trump could have an impact on international trade.
President-Elect Trump has already indicated that a string of tariffs will be pushed through on day one of his presidency. Trump’s threat of applying 25% tariffs on Mexico and Canada follows rhetoric during the election campaign which involved him suggesting a 10% import tariff on all products entering the US, in addition to a 60% tariff on goods from China. With China representing the US’ second largest trading partner in terms of imports, the implications of a bilateral trade war between the two powerhouses are hard to understate. Of course, a bilateral trade war between Beijing and Washington will be tantamount to a multilateral trade war, with international growth likely being hindered because of it.
The international geopolitical environment will of course feed into domestic politics, impacting policy and elections alike. While 2024 may have been characterized by political uncertainty in both the run up to and fall out from elections, votes taking place this year are also set to throw up considerable uncertainty. This includes elections in Germany, Argentina, Japan, Australia and Canada (more of this during next week’s report).
Sticking with politics, across the Atlantic, this Friday will see the US House of Representatives vote on a Speaker ahead of Trump being sworn in as President later in the month. Closer to home, households and businesses will be monitoring the impact of Reeves’ Budget, as a string of policies come into effect.
Looking further ahead, some interesting points to note include:
We’ll be keeping a close eye on all of that and more.
In the meantime though, a very Happy New Year.