Navigating the Global Economic Landscape in 2025

As we embark on a new year, it’s common practice to make predictions about the economic and investment landscape. The exercise of forecasting the economic and investment landscape comes with both challenges and opportunities.

I’m reminded of a quote often attributed to British statistician George E. P. Box, “All models are wrong, but some are useful.” This serves as a valuable reminder that while forecasts are inherently imperfect, they can still offer meaningful insights to guide decision-making in an uncertain world. With this in mind, we’ve identified key themes likely to shape the global economy and markets in 2025, providing a framework to navigate both the risks and opportunities that lie ahead.

Challenges facing the global economy

We anticipate that the global economy in 2025 will face numerous challenges, including shifting U.S. trade policies, structural issues in China and slow growth in the eurozone. Despite these obstacles, we expect global gross domestic product (“GDP”) to grow by approximately 3%. This is a modest pace compared to historical standards but enough to support “risky” assets, such as non-government non-investment grade bonds, equities or commodities.

In our view, in the U.S., higher inflation and interest rates than what market participants previously expected, along with slower GDP growth, will characterize the year. However, strong household and business balance sheets should help cushion the impact. In China, fiscal and monetary support could spur short-term growth, but structural constraints such as elevated debt levels and supply/demand imbalances will likely reemerge. Meanwhile, Canada may see early gains from lower interest rates, but slowing immigration and U.S. tariffs could cap growth at around 1.5% by 2026. In our view, emerging markets will generally experience gradual slowdowns, with India continuing as a standout performer.

In our view, in the U.S., higher inflation and interest rates than what market participants previously expected, along with slower GDP growth, will characterize the year.

We expect interest rates to fall further in 2025, but central banks will likely approach monetary easing cautiously. In the U.S., inflation driven by tariffs may peak at 3% before moderating in 2026, prompting the U.S. Federal Reserve Board (“Fed”) to adopt a measured stance, with rates likely ending the year between 3.50% and 3.75%. While we predict China and Australia to tread carefully, the European Central Bank may implement more aggressive cuts due to persistently weak growth, likely weakening the euro.

The Bank of Japan stands out as a potential exception, which may raise rates amidst unique domestic conditions.

While geopolitical events will dominate headlines, their direct economic consequences may remain limited. The return of Donald Trump to the U.S. presidency could shape global dynamics, from trade relations to conflict risks. Tensions between the U.S. and China will likely deepen, but the economic fallout will likely play out over years rather than months. Of note, a potential conflict over Taiwan remains a low-probability, but high-impact risk.

We also believe concerns over a global trade war may be overblown. While tariffs and protectionist measures from the U.S. will likely disrupt trade flows, global trade volumes are unlikely to collapse. Adjustments in exchange rates and selective retaliation from other nations may limit the broader impact. We expect U.S. imports to shrink, but global trade could still post modest gains if the world economy remains resilient.

High debt levels and widening budget deficits will likely constrain fiscal policy across many advanced economies. Countries like France, Italy and the U.S. face increasing scrutiny from bond markets, which could force governments to prioritize fiscal discipline over stimulus spending. While emerging markets in Asia appear better positioned, vulnerabilities in economies like Brazil remain a concern. These fiscal pressures are likely to temper expectations for bold policy moves in 2025.

Navigating the AI boom

U.S. equities are poised to outperform in 2025, driven by the continued expansion of the artificial intelligence (“AI”) bubble. Investment bubbles are often viewed negatively, but they can have significant benefits, such as accelerating innovation and infrastructure development. Historical examples include the railroad boom of the 19th century and the internet bubble of the late 1990s. They illustrate how speculative enthusiasm can channel vast amounts of capital into transformative technologies. However, these periods of exuberance are not without their downsides. While society often reaps long-term rewards, many investors suffer substantial losses when bubbles inevitably burst, as overinflated valuations collapse and speculative ventures fail. This the importance of careful portfolio management during periods of speculative fervour.

U.S. equities are poised to outperform in 2025, driven by the continued expansion of the artificial intelligence (“AI”) bubble.

While valuations remain elevated, historical metrics suggest room for stocks to run further. However, non-U.S. equities may underperform, particularly in Europe and Canada, due to weaker economic conditions. Commodity markets are likely to face headwinds from slowing global demand, while corporate bonds may struggle to deliver attractive returns, given narrow yield spreads.

Potential for a brighter 2025?

Despite notable risks, 2025 could surprise to the upside. A stronger-than-expected recovery in global productivity, driven by technological advancements and structural reforms, could push GDP growth closer to 4%. Alleviating inflation pressures in major economies and sustained fiscal and monetary support could further bolster economic momentum. While this optimistic scenario requires several factors to align perfectly, it serves as a reminder of the potential for resilience and recovery in the global economy.

Wishing you and your loved ones a happy, healthy, and prosperous 2025 and for the economic stars align in 2025!

 

Sincerely,
Corrado Tiralongo
Chief Investment Officer
IPC Portfolio Services