2025 Global Market Outlook - Investing during transition

Part I: Macroeconomic outlook for 2025

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This podcast is for general information purposes only and is not advice. Outside the United States, this episode is intended for investment professional use only. Please listen to the end for complete information.

Blerina Uruçi

I think the Fed has put itself in a fairly tight corner here, having started the easing cycle with a bang with a 50-basis-point cut and then being surprised to the upside by the data. So, I think even before we had the uncertainty about the new administration and what that means for inflation going forward, I did think that the market was pricing too much certainty …

Ritu Vohora

Welcome to The Angle from T. Rowe Price, a podcast for curious investors. Sharper insights on the forces shaping financial markets begin here.

I’m Ritu Vohora, a Global Capital Markets Investment Specialist, here at T. Rowe Price Associates. In this special edition of “The Angle”, we focus on our 2025 Global Market Outlook. I recently discussed the challenges and opportunities for the global economy and markets in the year ahead with some of our senior investment team. They included CIOs:

• Justin Thomson - Head of International Equity.
• Arif Husain - Head of Global Fixed Income, and
• Sebastien Page – Head of Multi-Asset.
• We also had Steph Jackson - Head of T. Rowe Price Investment Management.
• and Blerina Uruçi – our Chief U.S. Economist, and a regular on our Angle podcast.

In this first episode, our experts discuss the macroeconomic outlook for 2025. They examine global fiscal and monetary policy, what impact the Trump presidency could have on the global economy, and potential developments in China. We hope you enjoy listening.

Ritu Vohora

So Blerina, maybe I could start with you. The U.S. economy has continued to outperform the rest of the world for a number of years now. And they’ve now delivered nine consecutive quarters of growth. And we also just had the dust settle on the U.S. election with a decisive victory for Trump and the Republicans, and they’re actually inheriting a very strong economy, so do you believe the U.S. exceptionalism can continue?

Blerina Uruçi

It’s a great question, Ritu, and I would say that I remain optimistic about the U.S. economy. I think the ingredients are there for the economy to expand by about 2.5% in 2025, continuing the strong track record we’ve seen in the last couple of years.

And before I dig into the ingredients that I think are going to drive the economy and growth next year, let’s for a moment pause and think about what do we mean by U.S. exceptionalism, and here we’re talking about growth. So in the U.S., the economy expanded by about 3% over the last couple of years annually. And then when you compare that to other developed markets, such as in the Eurozone, UK, or Canada, it’s been about twice or three times as fast.

And so what have been the key ingredients for the growth in the U.S., and looking forward to 2025 I think the key is with the U.S. consumer. I think the U.S. consumer is about 70% of the economy, which means in the U.S. we have a large and closed economy. And why is that important? I think it matters because it means most of the demand that we need to generate growth comes from domestic markets. It makes the economy less exposed to a slowdown, say, in economies like China or the euro area.

And what drives the U.S. consumer is really the labor market. We have a strong labor market. The pace of job creation has slowed, but companies continue to hire, and we’re not seeing signs of mass layoffs. Couple this, let’s call it job security for the consumer, with the fact that the balance sheets are healthy, and we don’t have any deleveraging ahead of us.

And on top of that, the fact that the wealth side of the consumer balance sheet is doing well both in terms of housing wealth as well as the stock market, I think the ingredients are there to have the consumer continue to drive the economy in 2025. And then the other pillar that has made a difference for growth in the U.S. versus the rest of the world has been fiscal policy.

We have deficits of about 6% to 7% of GDP with the unemployment rate at a record low. You compare this with the fiscal impulse in Europe or in Canada, it’s much larger in the U.S., and then projections are that it’s going to continue to be at these levels for the next couple of years. So even though fiscal is not an incremental increased impulse, it’s still supportive of growth, and I think, yes, we do expect the economy will remain resilient next year.

Ritu Vohora

OK, so a strong economy doesn’t look like it’s running out of steam anytime, and you mentioned, Blerina, fiscal policy. So, with President Trump in the White House in January, how are you thinking about the key policy priorities for him, and I think, importantly, what’s the timeline around implementation?

Blerina Uruçi

So, I will say I would divide the policy priorities of the new administration into three areas: trade ,immigration, and fiscal policy. And everything that I’m going to say here I think has a large degree of uncertainty because what I’m running my thoughts and projections on is on campaign promises. The administration has not had an opportunity to announce the details of its policies, but I think the way it’s going to play out is that we have a lot that the administration wants to do in its first year in power. I don’t think it will want to use political capital in Congress to address all of these areas.

So I think trade and immigration are more likely to be addressed pretty quickly through executive order and then using Congress to pass tax extensions, the tax cuts in the TCJA. So with tariffs, I think in particular if we wanted 10% tariffs across the board, we need congressional approval for that. But the administration and the president can write Section 301 executive orders to impose specific tariffs on specific countries and goods, and I think this is how it’s going to play out, at least initially.

Similarly for immigration, I don’t think we’re likely to see comprehensive immigration reform early on in the administration, but we’re likely to see executive orders that slow down the flow, the net flow of migrants into the labor force.

And then for fiscal, I think Congress, especially with the Republican sweep, Congress, is going to be ambitious and try to extend the TCJA in the first half of the year, but certainly by the end of 2025 we should see an extension of tax cuts.

Ritu Vohora

OK. Thank you for that, Blerina. That’s a great summary.

And so Blerina,

…we saw the Fed cut rates for the second consecutive time in November, and Powell’s been quite clear that there was no preset path for the pace of rate cuts, and actually the election wouldn’t impact monetary policy.

Is there a risk we see that reacceleration, and does that then impact the path of policy going forward in 2025?

Blerina Uruçi

Ritu, I think the Fed has put itself in a fairly tight corner here, having started the easing cycle with a bang with a 50-basis-point cut and then being surprised to the upside by the data. So, I think even before we had the uncertainty about the new administration and what that means for inflation going forward, I did think that the market was pricing too much certainty with too much certainty that inflation would come down to 2% in a very well-behaved fashion. And so we have this fundamentally resilient economy that we just spoke about. And markets are optimistic about the outlook under new administration, and then we add to that another layer of uncertainty.

So, we discussed already the three policy pillars that will be the priority of this new administration. Now let’s think about how can they affect inflation. In my view, the net effect is going to be towards higher inflation, and the market is already trading that way. We look at break evens. They’re higher. The long end of the curve has been increasing as well, even though the front end is more anchored because of the Fed being in a cutting cycle. So, then I think when I’m looking at tariffs, and we have experience with tariff increases from 2017 and 2018, they serve as a one-off shock to the price level. So, there is a period where prices increase, but it’s not sustained higher inflation. Now what we need to take into account here is, is the economy going to behave exactly like it did in 2017 this time round? And I look at what’s different now versus then. Back then, we had inflation being below target for a number of years. Consumers had pricing power, not companies, and then the fiscal situation was such that that the deficit was much lower than it is right now.

Right now, we’re coming out of three years of above-target inflation. Firms have pricing power and have been able to pass on larger increases to the consumers, and so this would point in the other direction. Now directionally, I would say, and also the fiscal situation, we have a higher deficit. So directionally I’m looking at higher inflation and the risk is whether this shock will de-anchor inflation expectations. That’s key for central bank policy. If it doesn’t, I think the Fed can stay the course, not deliver as many cuts as promised in its recent forecast, but not necessarily need to hike interest rates.

For tariffs, I’m looking at a relatively short leash in terms of the effect. I think it happens, the effect on inflation happens next year. Immigration is a bit more complex. It depends on how it’s implemented, but certainly we should think about what does higher net migrant flows mean for the U.S. economy. Over the last two years, they have really helped to loosen the labor market. We have vacancies that firms couldn’t fill for about a year or so with increased labor supply. Those vacancies came down, which pressures came down. So I think if we really restrict the flow of net migrant flows in a situation where the U.S. economy remains resilient, in a year or two we could be looking at another tighter, hotter labor market.

Ritu Vohora

Great, so we heard from Blerina there. Blerina also talked about tariffs being a priority for Trump in his first 100 days. Bringing you into the conversation Justin. Who are the biggest losers out of Trump tariffs? What about Europe?

Justin Thomson

Well, let’s not forget that tariffs are a tax. And to the extent they’re a tax, they create demand shock. So potentially we’re all losers here. In pecking order will be China; would be the EU, particularly Germany; and would be Mexico, where the biggest deficits with the U.S.

Ritu Vohora

And I guess in Europe we’re already seeing slower growth on the back of that uncertainty. You know companies are not investing. Businesses are not spending.

Justin Thomson

That’s right. There are a number of structural issues rather than cyclical issues around Europe. Energy supply, which they navigated so far, so well, transition to EVs, which is having a big structural effect on the German auto market, so, yeah, there are significant structural headwinds there. And to the extent Europe is, European demand is a function of demand coming out of China, the second-order effect from tariffs could be weakening of demand in in Europe as well. So yes, Europe is potentially at the nexus of tariffs being imposed.

Ritu Vohora

And what do we think about EM more broadly? Obviously, we’ve talked about China sort of diversifying the supply chains. Where are the potential winners, potentially in frontier markets?

Justin Thomson

Well, I mean, on the face of it, rising rate, stronger dollar, imposition of tariffs is a pretty heavy cocktail, negative cocktail for emerging markets, but emerging markets have been here before, and emerging market policymakers know how to navigate such volatility.

And a lot will depend on the response. The response. Now, if it is a 60% tariff hike on Chinese-originated goods, you would need a 20% devaluation to offset that. But the losers on the face of it are going to be around the Pacific Rim, those that supply around China. Vietnam’s been a big beneficiary of Chinese tariffs so far. I think there is headline risk there as well.

But remember, that’s on the face of it, emerging markets compared to where we’ve been in history, foreign exchange reserves are very healthy, external balances are much better positioned than we’ve been before, so I think that what the implications are from emerging markets are less obvious than might seem from a headline level.

Ritu Vohora

Yeah, and from the data I’ve seen, the U.S. consumer actually faces the bulk of the tariff in terms of higher inflation.

So coming to you now, Arif, Blerina talked there about one of the key risks is around fiscal policy. The U.S. deficit is on track to be 7% of GDP at the end of the year. I think the interest expense alone is going to be higher than the defense budget, which is mind-boggling.

When should we start worrying about the debt burden? I feel like we talk about it, but when do we actually start worrying?

Arif Husain

You should be worried right now. I think certainly the initial reaction in the bond market post the election was to go after some of the fiscal laggards. So, the European peripheral market got hit, the UK bond market got hit, and so did the U.S. Now there’s been plenty of volatility, so I think you got to be worried about the bond market. I’m on record of saying I think the U.S. 10 year will get to 5%. I said that before the election.

There’s only more evidence, new information to , think, believe that, and frankly, I said 5% because you need to go through 5% to get to 6%. So for me, what will create fiscal austerity, what will create a little bit more discipline around the deficit? Can’t see it. I really can’t see it. And really I think the real thing that most people miss when they’re just looking at the U.S. fiscal deficit is a really simple point, which is the U.S. are not the only people who need to sell a lot of debt. A huge, huge amount of debt. You know, Justin was talking about Chinese stimulus a moment ago. Guess what that is? Debt issuance. And every country with the exception of Germany, actually—the German debt break is one of the structural issues holding them back a little bit—but from a bondholder’s perspective, it’s a positive, right? But other than that, everyone is selling lots and lots and lots of debt in a time when central banks are no longer buying it.

And so from a global perspective, I think we really need to worry about deficits and the lack of plan to address them. And the U.S. is at the front of the queue there. You know, every week, every second week, they come with massive bond issuance and really, to my mind, bond yields need to be a lot higher to be competitive. And you’ve got to see a much steeper yield curve to make that longer- duration debt a lot more attractive.

Ritu Vohora

The year 2025 is shaping up to be one of transition, marked by a clear broadening of investment opportunities. In this evolving world, curiosity is vital. Asking smart questions about new opportunities—within asset classes, or major themes such as health care innovation, energy transition, or artificial intelligence—is the best way to source the insights on which smart investment decisions can be made.

We look forward to your company on future episodes. You can find more information about our 2025 Global Market Outlook and other topics on our website. Please rate and subscribe wherever you get your podcasts.

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Disclaimer

This podcast episode was recorded in November 2024 and is for general information and educational purposes only. Outside the United States, it is for investment professional use only. It is not intended for use by persons in jurisdictions which prohibit or restrict distribution of the material herein.

The podcast does not give advice or recommendations of any nature; or constitute an offer or solicitation to sell or buy any security in any jurisdiction. Prospective investors should seek independent legal, financial, and tax advice before making any investment decision. Past performance is not a reliable indicator of future performance. All investments are subject to risk, including the possible loss of principal.

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Please visit https://www.troweprice.com/en/us/insights/macroeconomic-outlook-for-2025.html for full global issuer disclosures. This podcast is copyright by T. Rowe Price, 2024.

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