Economic predictions for 2025
Never has it been harder to make some form of forecast for the coming year.
They say that as you get older, time passes faster. That would be true for it seems as though it were only yesterday that I sat down to write my forecast for 2024. The annual review of my best and worst calls for the past year and my outlook for the coming one have bookended my columns for at least a quarter of a century and, as we slide into the last full trading week of the year, I suppose it’s incumbent on me to enter the confessional. My best call is easy to identify for I was convinced that most of the money market’s gleeful predictions for Federal Reserve rate cuts must have been made by folks high on something for which you and I would have been arrested. My second best was gold which I have held for some time, and which having sat in my portfolio at an average entry price of around US $1,400 has finally come good. As far as my worst calls are concerned, look anywhere else you like. I got tech wrong, I got cryptos wrong, I am still perplexed as to why the US yield curve remains stubbornly flat.
My overall performance has been sort of okay but, after 45 years in the industry, experience tells me that “sort of okay” isn’t bad for it reflects a sensible balance of risk and return. Sure, there are always those who pop up and enthusiastically report that they have in their investments made 35% this year or more. Are they sure? Is that on all of their investments including their long term investment portfolios and their self-invested pension plans – that’s the UK equivalent of a US 401K – or are they talking of the pocket which they reserve for speculative trading and punt around online? How much leverage do they carry in their trading account and what is their net risk adjusted return? This is not the time and the place to ask too many questions, for 2024 has been a good year to be long of financial assets and non-financial or real ones have, as rates have fallen, also not done badly. Overall, we can be pleased if only thanks to all boats having risen with the tide. That’s markets and they have certainly been boosted by the dual stimulus of falling rates and a US economy which has been humming along. So far, so good.
And now for the forecast for 2025. I suppose it is by default that I spend more time talking to other old market dogs than I do to the younger generation – I am looking forward to going into London tomorrow to have dinner with three people who are still in it up to their necks – and they are all loath to commit to what they expect for the next twelve months. Since 6 November, risk asset markets have gone mental and there can be little doubt that they are riding a wave of momentum which has yet to find fundamental validation. There has been much speculation as to what the Trump presidency will actually bring with it. We know that the Donald loves to shock but we also know that he can change his mind on a whim. Much of his power is vested in his unpredictability so we will be spending the next four years standing on something of a political and fiscal wobble board.
Despite declaring party political neutrality on this front, I cannot but conclude that the Obama and the Biden presidencies can compete with one another to have been the worst of the past 50 years. Trump may bring mayhem but think of Joseph Schumpeter and the concepts of creative destruction. Funnily enough, it was Karl Marx from whom Schumpeter took the basic idea but over time it has become a rallying cry of capitalism over socialism. Schumpeter’s guiding light was Henry Ford who by inventing the industrial production line swept away past processes and reset the compass. In some respects Elon Musk is a new Henry Ford and Trump appears to have decided that he is the one who has the vision and the ability to break the ossified mould of America’s government machinery and to implement a radical reset. On the opposite side to Schumpeter sits the German sociologist Max Weber with his observation that a strong and apolitical civil service offers the stability upon which parliamentary democracy relies. Weber went so far as to create his own political party, the Democratic party, but he failed to get himself elected to the Reichstag.
If all goes to plan, then 2025 will in the US see an epic meeting of an irresistible force and an immovable object. That said, the Milei chainsaw massacre of Argentinean state institutions cannot be dismissed; it had been decried as utterly illusory yet to date seems not only to have taken root but also to have garnered within the population wider support than expected. We are still four and a half weeks away from the inauguration of President Trump and even after that it will take time for the pedal to hit the metal – signing presidential decrees is one thing, getting them implemented and to work is another – so making valid predictions for what the US will look like in 2025 cannot but be a mug's game.
There is a remarkable divergence between the regional Fed business sentiment surveys and the mood on Wall Street where the former are brimming with optimism and the latter is teetering between cautiously positive and sceptical when it comes to the impact of the promised tariff impositions. Clearly, businesses with exposure to either an overseas supply chain or to export dependency will have a mountain to climb but there are swathes of the US economy which can happily live with the domestic market, and they should in theory at least benefit from the frictional impact which tariffs will cause to foreign competitors. Thus it is that the big bet for 2025 is supposed to be in the US small- and mid-caps. I am of course not an investment advisor, and all of my many registrations which once permitted me to have a valid opinion have long expired, so in the real world my thoughts on investing are no more significant than those of your gardener or the postman. That said, in a great year for US stocks the Russell 2000 has underperformed the Dow, the S&P500 and the Nasdaq, the latter by a factor of 2:1, so there might conceivably be some room there.
Back on my home turf, the bond markets, the call for 2025 is a little harder than it at first appears. The front end of the US Treasury market looks cheap with the 2 year – the canary in the interest rate coal mine – at 4.26%. The Fed is surely set to cut rates by 25 bps come Friday from 4.75% to 4.50%. As Trump, aided by Elon Musk and Vivek Ramaswamy, prepares to slash and burn the civil service, and with the potential for significant public service disruptions, there is a possible land mine buried waiting for the unwary to tread upon. On vera.
Europe remains a conundrum. The social market model which has determined European social politics for over half a century is also looking tired and progressively more unaffordable. The fall of Michel Barnier, party political machinations aside, was brought on by his perceived need to bring a little more equilibrium into France’s budget which is running at an unsustainable deficit of 6%, well above the eurozone limit of 3%. His appointed replacement François Bayrou will be faced with the same issue and given that both Marine Le Pen’s Rassemblement National and the Jean-Luc Mélenchon-led Nouveau Front Populaire oppose cuts to public services, the hurdles he will have to negotiate remain the same ones that tripped up Barnier. Young Macron will surely not let him draw in Le Pen, his sworn enemy, but the price of securing support from anybody on the Left will be high. As of the weekend, he also has to contend with Moody’s downgrade of France’s credit rating from Aa2 to Aa3 which now matches that of the UK.
The EU economy has for years been able to lean on Germany as the engine of growth and prosperity. I am so reminded of Japan in the 1980s when it was hailed as the Land of the Rising Yen and when its industrial practices were held up as the magic model which we all would have to emulate. Oops! Now it is Germany that is falling victim to its own success and its postponing of innovation. On one hand, one is told never to change a winning team until it goes wrong, and the cry goes up that the coach has for too long stuck with his ageing stars. I struggle to see 2025 being the year when Europe’s institutions, both in Brussels and in national capitals, begin to plot a new path.
Through the last three decades of the last century in Germany, “social reform” had always meant more for less. Higher benefits and earlier retirement. It was around the beginning of this century that for the first time social reform began to refer to less for more and the introduction of the legendary “black zero”, the constitutional ban on government running a structural deficit, enshrined it in law. That was fine and dandy when the economy was running in overdrive and when fiscal revenues poured with gay abandon into the Berlin government’s coffers. It is unlikely that the early elections which the collapse of the Scholtz coalition will bring about will help to resolve the issues any more than constant changes in the French administration have either. Young Macron has had four Prime Ministers in one year and where did that get the country? Europe is weak and indecisive and facing a Washington brimming with confidence and a sense of purpose.
Finally, the UK is not a happy place either. The formerly bright eyed and bushy tailed Labour Chancellor, Rachel Reeves, that famous ex-Bank of England economist, is finding none of her plans coming to fruition and of a sudden, having spent years accusing the Tories of having crashed the economy, she is the one facing a collapse in business confidence and the growth in the economy which she had inherited turning negative. Although she has hailed France’s Vivendi’s decision to list Canal+ on the London exchange as proof of concept, the announcement that Ashtead Group is to delist and head for New York sort of spoils the party. As at Friday’s close, Ashtead’s market cap was £22.8 billion which had it ranked at #15 in the FTSE100. Once it has moved and changed its name to Sunbelt Rentals it will be ranking in the bottom half of the S&P500. A good idea?
Gilts don’t look too compelling with Reeves’s fiscal revenue forecasts looking shaky as at the time of writing a recession, or at best no growth, is looking more likely than the bounce in GDP she has expected and the PSNCR might find itself ballooning beyond what the gilts market has already discounted. There must be a large rack of rose-tinted spectacles at the Treasury from which Chancellors of the Exchequer can help themselves.
I have never found it harder to make some form of forecast for the coming year. Were I a professional portfolio manager, I know I could lean on Peters’ Second Law that holds that nobody has ever been fired for being long of a falling market but that being short of a rising one is a career threatening error. That has held good in 2024 when long has proven to be the new neutral. I shall go into the New Year long equity risk and long gold as well as short duration. Do I think it to be right? Probably not. But do I at this moment in time have any better ideas?
So, off we trot into a new week, the last proper one of 2024. We still have the Fed and the Bank of England monetary policy meetings to look forward to, both of which are deemed to be a foregone conclusion. That said, the dismal news from the UK economy will put some pressure on the Old Lady’s MPC. Interesting times indeed.