Listen: The Decisive | Season 3 Ep.1 - Top 10 Economic Insights for 2025

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Kristen Hallam  

Hello. My name is Kristen Hallam, and welcome to our discussion of the top 10 economic insights for 2025. The anchors around the global economy, low inflation, low interest rates, international cooperation, and frictionless trade have become unmoored. This adds uncertainty to the outlook for growth in 2025 and beyond. To provide you with insights into the economic forces at play in 2025, we have the following experts from S&P Global Market Intelligence: Ken Wattret, Vice President, Global Economics; Chris Williamson, Chief Business Economist; Ben Herzon, Executive Director and Co-Head of U.S. Economics; and Hanna Luchnikava-Schorsch, Associate Director and Head of Asia Pacific Economics. Ken, let's set the scene. One of our overarching themes for 2025 is economic angst. What do we mean by that? And how do we expect that theme to show up in 2025?

Ken Wattret  

I mean you've already highlighted yourself, Kristen, many of the favorable economic trends that we became accustomed to in the pre-pandemic years, be that low inflation, low interest rates, stable supply chains, the proliferation of global trade, they've become much more uncertain. At the same time, many economies face structural challenges, think about aging populations, low productivity growth, elevated debt burdens. And the economic angst reflects the potential drag many of these factors will have on growth prospects going forward and the potential for some of them to spiral into more pernicious trends. For 2025 specifically, we still expect the global economic expansion to continue, but we will be revising down our forecast later this month, and we'll need to keep a very close eye on various risks, which have the capacity to damage the expansion or potentially even to derail it.

Kristen Hallam  

Thank you, Ken. With that context in mind, let's get into our top 10. Our first 2 insights for 2025 involve the world's 2 biggest economies. First, we are still expecting the U.S. to achieve the elusive soft landing. What will that look like, Ben?

Ben Herzon  

Kristen, thanks. So I think what it will look like is we will see a continuation of what has been a transition of a period of above potential growth to a period of below potential growth. The slowdown will contribute to a continuation of a gradual rise in the unemployment rate. Now there are several factors that are behind this slowdown that we've highlighted in the past. One is the ongoing effects of past Fed tightening. We're seeing diminished tailwinds. Those factors that were boosting growth previously are not boosting growth now and will not boost growth next year. We are seeing the effects of a strong dollar. All else equal, a strong dollar will weigh on net exports going forward. But there are new factors that will contribute to the slowdown in 2025. And what I have in mind is a fallout from a new and large round of tariffs. Now the fallout that I think we expect to see is we will see a reemergence of inflation that -- due to the tariffs that the Fed will have to react to. In our view, what the Fed is likely to do is midway through next year, they're going to need to pause their easing cycle. This pause, once it's fully priced into markets, will give rise to tighter financial conditions than we thought before. The tariffs will also give rise to retaliatory tariffs on U.S. exports that will weigh on U.S. exports. So -- the combination of tighter financial conditions and weaker exports is a new source of slowdown that we expect to see next year. So all in, the soft landing that we expect to see, this is what it will look like, it will be a slowdown in growth, a gradually rising unemployment rate, a setback on inflation and a pause in the Fed's easing cycle.

Kristen Hallam  

And Ben, what would you say the main risks are to that soft landing that you described?

Ben Herzon  

Well, there are always risks. The risks that we're focused on now are risks surrounding certainly the tariffs. So in our forecast, we assume that imports that are key inputs into U.S. production processes remain available. They just become more expensive. But we're not really sure how the coming trade conflict will play out. I mean one possibility is that some key inputs into U.S. production processes will not only become expensive, but will become unavailable. And that would be much more disruptive to U.S. GDP. Furthermore, retaliatory tariffs may be more damaging for U.S. exports than we're anticipating. And finally, just uncertainty about trade policy itself can and has directly weighed on business investment plans. We identified this effect in the run-up to the previous round of tariffs. So there are several risks to the soft landing that I think are centered around tariffs.

Kristen Hallam  

Thanks for that, Ben. Chris, what signals would we look for in the Purchasing Managers Index data that would indicate whether a soft landing in the U.S. is on track or whether it's going off the rails?

Chris Williamson  

Kristen, yes, so here at S&P Global, we produce PMI surveys for both manufacturing and services in the U.S. So we can use these as real-time indicators of how the economy is performing. So we track output order books, purchasing and employment variables like that. And what's interesting, I guess, at the moment is that from the output perspective, there's little sign of a soft landing at the moment. It's still doing really quite well. In fact, November saw growth accelerate to the fastest for about 2.5 years. It's very skewed to the service sector, however, in particular, financial services, we've seen the stock market gains that's driving that expansion. So a key area we want to keep a track of is whether that service sector expansion might lose a bit of momentum as you see financial conditions start to tighten as markets maybe price in fewer Fed rate cuts in the foreseeable future. So watch the financial services side of that part of the economy. In terms of manufacturing, now yes, we do have a 2-tier economy. Manufacturing in the U.S. is struggling. Its decline continued into November, and also job losses there as well. So there is a sign of cracks appearing, if you like, that growth losing some momentum there as manufacturing is a drag. So we need to watch that sector as well. There was an element of inventory building by manufacturers as well. So post-election, we saw a big upturn in confidence about the future amongst U.S. manufacturers. That should spur faster growth. So some upside there. But much depends on how the rest of the world is going to react to any prospective tariffs on the U.S. So the U.S. manufacturers at the moment are buying goods. They're importing more materials, building safety stocks, that's adding to their costs at the moment. Very much preparing for good times to come, but it remains to be seen whether those expectations will really feed through to actual hikes in output.

Kristen Hallam  

Thanks, Chris. Lots to keep an eye on there. Moving on to the second biggest economy, Mainland China, which has been experiencing challenges in its property sector. We are predicting a marked slowdown in China's economy in 2025 due to factors, including higher tariffs and fragile private sector confidence. So what exactly would that look like, Hanna, compared to the current state of the economy?

Hanna Luchnikava-Schorsch  

Thanks, Kristen. You are right. China's economy has been held back by its protracted property sector weakness, sluggish consumer demand as well as excess supply in industry sector. And the combination of weak demand and oversupply has also created a protracted disinflationary environment. And the government has been trying to address the weaknesses by numerous channels, including fiscal stimulus announcements and some monetary measures and liquidity injections. But economy has been slowing. We have seen the real GDP slowing to 4.6% in the third quarter, which is well below the government's official target of around 5% growth. The stimulus measures have had some impact from about late September, we have seen that the latest data has shown improvements in industrial production and services, retail sales have shown some improvement. Importantly, housing sales have also rebounded in October, but housing and property market investment still remains in double-digit contraction. And then what is also important is despite of all of these weaknesses, one of the factors that has been supporting growth this year has been exports. Exports year-to-date grew about 5% through October. In fact, in October alone, we have seen merchandise exports growth in annual terms of over 12%. But this is something where we see obviously is the greatest area of risk going forward. The exports improvement we have seen just even in October and are likely to see through the end of the year might be attributed to some of the front-loading, which Chris already also mentioned. And that is likely to happen at the cost of future demand. And also clearly, disruptions to trade, which will come from potential U.S. tariffs, as well as the impact on global demand will lead to a sharp contraction in China's overall merchandise exports, which will also affect its manufacturing investment. And importantly, we will also have an impact on domestic consumption because exports still account for around 20% of China's GDP, which means that we will likely see job losses and lower income growth, which will exacerbate the weakness in private consumptions and consumer confidence. So we are likely to see a significant impact on China's growth in 2025.

Kristen Hallam  

And how is the government planning to address this, Hanna?

Hanna Luchnikava-Schorsch  

Thanks, Kristen. So we have already seen some of the fiscal measures, which the government has put through 2024, in particular, from the end of September of this year. We see it so far still as rather targeted. So far, the measures that have had the greatest impact were the reduction in Central Bank's interest rate and injection in the banking sector as well as relaxation of property market regulations. And on the government side, there have been some additional large programs announced for the local government debt support and the government bond issuance. We do expect that these programs will continue, but at a larger scale. In fact, our projection is that the fiscal deficit will probably widen from 3% of GDP to 4% of GDP in 2025. The government will continue to provide additional injections into the DPS programs to allow the local governments to expand their government deficits. We're also likely to see some additional programs to support consumer spending, including the trade-in programs, the equipment upgrading programs for manufacturers. More specifically to trade, it is very likely that the government and the Central Bank will allow the renminbi to depreciate to raise export competitiveness and make exports cheaper. So all of these measures will have an additional impact. But nonetheless, we still expect that they might be insufficient to prevent a sharp slowdown. And of course, it still will be dependent on the scale of the -- and timing of the exact tariffs that will be put in China.

Kristen Hallam  

Great. Thanks for that, Hanna. Chris, let's bring you back in. How would one use the PMI data to gauge the health of Mainland China's economy and the effectiveness of any of the stimulus measures that Hanna mentioned there? Where might we see tariff impact show up in the PMIs, for example?

Chris Williamson 

So again, we have both manufacturing and services PMI data for Mainland China. We can pile that on behalf of Caixin. And that's been very useful recently tracking the sustained weakness of the Chinese economy. As Hanna point out, there's very weak growth prospects come through, but we have seen more recently a little bit of a lift up in the business environment on the back of the stimulus announcements from the government. So that has encouraged firms a little bit more to make more expenditures, more investment and be more aggressive in their marketing and so forth. So we've seen the stimulus start to come through, but it has to be said, it's from a low base. We're only seeing a small impact from that. And that impact is also being clouded somewhat by what's happened with the second Trump presidency and the threat of tariffs. So I mentioned that we've seen U.S. manufacturers start to already start to increase their purchasing of imports, notably from China on the back of the threat of tariffs making these goods either difficult to get or increase in price. The corollary of that, of course, is that Chinese manufacturers exporters have seen a nice boost to their trade. So it's difficult to disentangle these 2 effects really. It will be interesting to see going forward, and we've got a number of data series that we can watch in particular, and we can go back to the first Trump presidency to see how these behave and what we might expect this time around. So in 2017, leading up to the start of 2018, we saw global exports through the PMI really start to enjoy a growth spurt, fastest growth for 7 years we saw globally at the start of 2018, amongst this front-loading ahead of the threat and tariffs. And when they came into play, we immediately saw the pullback in trade flows. In fact, by the end of 2018, you were in a situation of declining global trade. That fed through to a similar boom and slump in production. Supply chain similarly, you saw supply chain stretch driving those prices higher at the start of 2018. By the end of the year, production was stagnating, supply chains were getting easier and prices were falling. So we've kind of got all this to come potentially again in 2025, this front-loading followed by this payback from that, if you like, which could have quite a detrimental effect to global growth as we go through the year. So it's going to be interesting to watch, but there's a whole number of metrics there that we've got.

Kristen Hallam  

Thanks, Chris. Definitely will be interesting to watch for sure. Let's delve deeper into our inflation expectations for 2025. We're expecting greater divergence in national inflation dynamics. Ken, could you take us on a brief world tour highlighting this divergence?

Ken Wattret  

Sure, Kristen. I will do. But just before I do, I think it's important to state from the get-go that it's not unusual for consumer price inflation rates to diverge. I mean that's the normal state of affairs for various different reasons. It could be due to differences in demand and labor market conditions, variations in exchange rate trends, different sensitivities to economic shocks, differences in weights in the consumer basket and so on. However, that being said, what we saw due to the pandemic was a series of common shocks, including to supply chains. And that initially led to a surge in consumer price inflation rates across the globe and then subsequently, as supply and demand rebalanced, those inflation rates came down initially quite quickly because base effects were very favorable. And then as those effects started to wane, the declines in inflation became more gradual. Now what we're seeing is, as we head into 2025, an increased likelihood of much more divergence in national inflation rates with, we think, important implications for monetary policy. So for example, as you already heard from Ben, in the U.S., we think a combination of tariffs, still relatively solid consumer demand and possible labor shortages will combine to generate some renewed inflationary pressures. Now in contrast to that, in Western Europe, even though we're expecting some weakness in currencies, which we'll talk about a little later on, we think underlying demand weakness is consistent with persistent disinflation. Now broadly, the same conclusion applies to Mainland China, where, again, partly due to the impact of tariffs, we think we'll see a continuation of an ongoing imbalance between supply and demand. Now while we're not particularly worried about currency weakness and its inflationary effects in Western Europe, in some emerging economies, we are more concerned. And that's because inflation expectations in those economies are less well anchored. And so if we see persistent currency weakness there, there is likely to be more of a persistent inflationary effect. So as we progress through next year, we expect these dynamics to become increasingly divergent.

Kristen Hallam  

Thanks, Ken. Sustained declines in services inflation are necessary if we're going to see core inflation rates settle close to central bank targets. What challenges could keep services inflation sticky in 2025?

Ken Wattret  

Well, I think we need to get into the weeds really with inflation to better understand what's driving it, and that really informs our forecasts looking ahead. And a really important point to emphasize for core inflation rates is that while they've fallen markedly compared to their pandemic-driven peaks, that so far has been largely due to goods prices. And trends in goods inflation tend to be driven more by global factors like supply chain conditions, commodity price swings and so on. Now to monitor these differences in underlying inflation trends, we calculate a monthly consumer price inflation rate for core goods and services for the G5 group of economies. That's the U.S., Mainland China, the euro area, the U.K. and Japan. That gives us a good flavor of what's happening to inflation rates across advanced economies. Now what's been really noticeable this year is that since the spring, goods inflation in the G5 has been negative. Now bear in mind, back in early 2022, that inflation rate peaked at more than 8%. So it's really come down a lot. Now in terms of where it goes from here, various indicators, including our PMIs, are suggesting that in the very short term, the rate will remain quite low. Now having said that, it looks like it's already bottomed out around the summer of this year and tariffs are likely to be a source of upward pressure during 2025. Now as for services inflation rates, they've fallen from their pandemic-driven peaks, but not by very much. So again, using the G5 rate as an illustration, services inflation in October, the latest data we have, was running a little over 4%. And it peaked in early 2023 at about 6%. So it's come down, but it hasn't come down by anywhere near as much as goods inflation. Now we think that services inflation will continue its gradual decline as we go into next year. However, the stickiness that you've talked about reflects what tends to drive services inflation. It's less influenced by global factors, and it's more sensitive to domestic economic conditions and in particular, labor cost trends. So the key concern we have regarding sticky services inflation will be that labor market conditions remain quite tight and labor cost growth rates remain quite elevated as a result. Now of course, if that happens at the same time as core goods inflation starts to pick up, then that will make life quite difficult for central banks.

Kristen Hallam  

Thanks, Ken. Chris, what has been the direction of travel on goods and services inflation in the PMI data? And how can we use the PMIs to stay on top of these trends?

Chris Williamson  

Yes. So very similar to what Ken said. One of the nice things about the PMI data is it's a little bit like wholesale data. So it tends to move in advance really of consumer price data. A further advantage is that we track the service sector. So there's not a lot of other data sources that has good information on that part of the economy. And it's a big one. And it's the one that's very influenced by those wage effects in particular. So to be able to monitor that and to try to see what's changing quickly is a real benefit in terms of gauging where inflation is going to go. And indeed, during the pandemic, I think a lot of people were caught out because they were super focused on manufacturing data, goods prices, where we did, of course, see the inflationary peak come very early and then a strong disinflationary trend. Of course, everyone just moved their spending to services, and that's where you saw the next rise in inflationary pressures, caught a lot of people out, but it was there in the PMI data. It showed that stubborness of overall inflation as the manufacturing inflation phase got superseded by the service sector. Now where we are at the moment, as Ken points out, that started to come down. But that service sector deceleration of price growth is painfully slow. Yes, it's down to a 4-year low now, so the lowest that we've seen post pandemic, but it's still elevated by pre-pandemic standards. This is where the central banks are concerned and that stickiness is still there. So we've got to watch these data, both on firms’ costs and their selling prices and how those indices change in relation, especially to tariffs. As Ken said, if you get manufacturing data start to come up again, while that service sector inflation rate is elevated, then it's going to cause problems for central bank policy when they might want to be cutting to help stimulate growth if tariffs are indeed causing uncertainty and weaker global expansions.

Kristen Hallam  

Thanks, Chris. Now Ken, we'll come back to you. Another one of our insights for 2025 is that commodity price trends are likely to mitigate some of the inflationary effects of U.S. trade policy. Could you walk us through that, Ken?

Ken Wattret  

Yes, sure. So if we start with crude oil prices, our colleagues in Commodity Insights believe that the balance of supply and demand conditions favor somewhat lower crude prices next year. Their base case is for an average price of dated Brent crude of around $70 a barrel in 2025, and that compares to an expected average for 2024 of around $80 per barrel. Now their forecast assumes that OPEC+ producers will not follow through on their plan to raise production by an average of 2.5 million barrels per day in 2025. Now in the event that production does increase, that implies potentially much lower crude prices than assumed in the base case. As for nonenergy commodity prices, our colleagues in the pricing and purchasing team, they forecast only a modest increase on aggregate during 2025, and that's primarily related to production restraints. The demand outlook is expected to remain pretty sluggish, very much in line with all of the factors we've been discussing so far.

Kristen Hallam  

Great. Thank you, Ken. Now -- let's zero in on emerging economies for a moment. We're expecting that less favorable financial conditions will dampen growth in emerging economies. And in some regions, key growth drivers will differ from the norm. Hanna, can you give us some examples? And what is driving these trends in emerging markets?

Hanna Luchnikava-Schorsch  

Thanks, Kristen. So I think we shall first maybe clarify what we mean here by the norm, right? If we think of emerging economies, we usually think of regional anchor economies that are driving growth within that region. And here, we typically think of some of the BRICS countries, Brazil, Russia, China, Turkey. And I think for 2025, we are looking at the situation where the scope for growth outperformance is actually the largest outside of the traditional anchors of growth. It is true that the higher-for-longer interest rates will limit the scope of the central banks to ease monetary policy. And in combination with the global trade slowdown and some of the restrictions on trade, which are likely, we might see slowing momentum in general. But as I already mentioned, there might be some economies, not necessarily the traditional ones, which we typically think about, that will see stronger performance. And the examples here could be some of the economies within the Asia Pacific region. India is, of course, one of them. Despite some of the moderation in growth we saw recently in the third quarter, we still believe that growth will be fairly robust during the next year. Vietnam, Indonesia and the Philippines will be another example of economies where we expect acceleration of growth, and that will be primarily driven by strong public investment, particularly in infrastructure but also general economic diversification and supply chain realignment, including some of the accelerated reshoring trend because of the tariffs as well. Outside of the Asia Pacific region, in Latin America, the recovery in Argentina is another bright spot. The rest of Latin America region will still be probably held back by some of the fiscal problems, particularly in Brazil. In Sub-Saharan Africa and Middle East region, again, government reforms and strong investment will support the expansion in economies like Saudi Arabia, Egypt, South Africa and Nigeria. And in emerging Europe, we are still likely to see the sensitivity of growth of the economies to the struggling manufacturing sector in Germany.

Kristen Hallam  

All right. Great. Thanks, Hanna, for giving us some bright spots in this conversation. You mentioned Germany there, Hanna. Let's go to Western Europe, where the larger economies in that region are forecast to remain weak with an increased risk of technical recessions. Ken, what challenges are Western European economies facing that may hinder their growth compared to other regions?

Ken Wattret  

I mean as you just suggested, the outlook is rather less bright here than in the areas that Hanna was referring to. I mean, where to begin, probably the industrial sector. I mean if we look at the euro area industrial sector, it's really been struggling, and this has been the case now for quite a long time. That reflects various headwinds, some structural, some cyclical, higher energy costs related to the invasion of Ukraine and its consequences, deteriorating competitiveness, weak demand, both cyclical but also related to some of the products that Western European economies traditionally have produced. Now on top of that, we've got the recurring theme of the discussion today, the threat of tariffs. on exports and the uncertainties associated with that, plus some political instabilities, including in the 2 largest economies, Germany and France. They're likely to hold back investment and employment. And then in addition, we've got fiscal adjustments in many economies in Europe, which are also expected to weigh on domestic demand. So it looks pretty gloomy. There is some good news, I guess, a silver lining in the rather dark cloud, which is household real incomes will be benefiting from the lower inflation that we're forecasting. That provides some support to consumer spending. And monetary policy is becoming more accommodative. That typically feeds through to economic conditions with a lag, but we're heading in a more positive direction. And those 2 factors, real incomes and monetary conditions, they're the 2 key reasons why recessions are not the base case for our forecast for the euro area and for Western Europe in general. We can't rule them out, though. And the most export-sensitive economies, including the biggest, Germany, they look to be the most vulnerable given the prospect of escalating trade tensions.

Kristen Hallam  

All right. Thanks for those silver linings, Ken. Everybody loves a silver lining. Chris, to what extent are these challenges that Ken talked about already showing up in our PMI data?

Chris Williamson  

Yes. Well, the silver linings aren't very apparent yet. The weakness is though, so we've already got -- well, for a long time now, Germany leading the decline in the eurozone industrial sector is in quite a fight barring the lockdowns of the pandemic. It's been seeing the steepest downturn since the region debt crisis over a decade ago. So that's been also feeding through to weaker expansions in neighboring countries, certainly the big supply chains feeding into Germany around Czechia and Poland and so forth. They've been dragged down, if you like, with Germany's weakness. However, really for the first time in November, we saw that manufacturing malaise really start to spill over to the service sector. So dragging things down. Total contrast, for example, to the U.S., where we're seeing resilience of the service sector, but it's not the case in Europe at the moment, albeit it's not in anything like the decline in manufacturing, as Ken says, you're getting a little bit of support from the easing cost-of-living crisis, lower energy costs and the promise of further rate cuts are helping there. But offsetting that is the political stress that you've got in Europe at the moment, in particular, France. So France is now faring even worse than Germany in November as we saw the political uncertainty about the government and its budget setting and potential paralysis there really start to impact businesses. So we now have the Eurozone as a whole moving into contraction in November. The bright spot is Spain, where there's a lot of spending coming through from the consumer side on things like travel tourism and the food industry doing well there. But otherwise, Eurozone is looking quite bleak. Jump over the channel to the U.K., and we've also got problems there as well. The U.K. was performing reasonably well in Europe. New government came in -- and there was a lot of hope that, that would create some stability for businesses making an investment. So we saw a nice growth spurt, if you like, leading up to that election. But in the last couple of months post-election, the government has been talking very gloomily about prospects, the need to rein in fiscal spending and so forth to raise taxes, which they did in their last budget. And we create some headlines with the PMI about businesses giving a big thumbs down to this government's almost austerity, if you like. So we now have a situation where the U.K. economy looks like it could also be stalling in contrast to strong growth early in the year. So a few of those silver linings really evident yet, but I think we are seeing the ECB, for example, potentially stepping up to the mark with more rate cuts to try to arrest any further signs of recessionary risk come through. But yes, we'll be looking out for those silver linings in those PMI data.

Kristen Hallam  

Thanks, Chris. We are going to talk about the ECB in a minute or 2 here. So moving on to our next insight for 2025. We're expecting global financial conditions to be less accommodative than previously forecast, dampening global growth along with structural factors like an aging workforce. Ben, let's bring you back in to talk about our expectations for the terminal rate in the U.S. When might we get there?

Ben Herzon  

All right. So let's first talk about the terminal rate, and then I'll turn to when we might get there. So for several years, we've been forecasting a terminal funds rate of 2.75%. Now if President-elect Trump gets the fiscal expansion that he campaigned on and if he goes through with the tariffs as he's described, which eventually will redirect demand to domestic firms and domestic labor, this all means that neutral interest rates in the U.S. will be higher. In our December forecast, which we're working on now, we will be projecting a terminal funds rate of 3.25 which is 50 basis points higher than we've shown in recent forecast. And given that the Fed, in our view, will need to pause its easing cycle for long enough to ensure that the inflation that we expect will be returning eventually to the Fed's 2% objective. The funds rate does not reach that higher terminal rate of 3.25% until early 2027. So by the end of 2025, we expect the funds rate to still be hovering around 4%, and it will remain there through mid-2026 before the Fed is able to resume its easing cycle.

Kristen Hallam  

Thanks for that, Ben. And now as promised, circling back to the ECB. What about Western Europe, Ken? What can we expect from the ECB and the Bank of England in terms of rates?

Ken Wattret  

Well, if we focus on the ECB first, you've heard us talk about difficult economic conditions and continued disinflation. So it won't be a big surprise to know that we expect ECB rate cuts to continue through into next year. Now the old adage used to go, the Fed leads, the ECB follows, but that's not the case in this cycle. The ECB started to cut interest rates before the Fed this time around. And we think 2025 will again break the mold in that regard. We're expecting the ECB to cut rates by 25 basis points later this month, taking the deposit rate down to 3%. Now we talked a little bit earlier on about sticky services inflation. We have, in the recent past, seen some progress in the euro area in bringing services inflation down. And if that continues, that means there's a decent chance, not our base case, but a decent chance that the ECB could opt to cut rates a bit more quickly and lower rates by 50 basis points. Would that be a game changer for the euro area economic outlook? No, it wouldn't be. But would it help? Yes, at the margin, it would. The Bank of England, in contrast, we think, is going to continue to move relatively cautiously. I mean, so far, the Bank of England has been moving every quarter by 25 basis points in tandem with its quarterly forecast updates, and we think that pattern is likely to continue in 2025. So we're assuming in total next year, 100 basis points of rate cuts. Now again, that's helpful, but we think the policy rate will end 2025 at 3.75%, so still pretty elevated. So not, again, a game changer for the economic outlook.

Kristen Hallam  

Thank you, Ken. The U.S. dollar is forecast to remain elevated for longer than previously forecast. What are the primary factors driving that forecast, Ben?

Ben Herzon  

Well, there are several factors that we look at when projecting the trade value of the U.S. dollar. The factors that are included in our model for the dollar are the inflation differentials. So that is the differential rate of inflation between the U.S. and other countries. The U.S. current account balance is also a factor that determines the trade value of the dollar. But the big one that we're focused on most -- we've been focused on recently and we're focused on in the forecast is the interest rate differential. That is the differential between interest rates and the treasury yields in the U.S. and the rest of the world. So the main factor that will be contributing to a stronger dollar in our updated forecast is this interest rate differential. So as I just described, neutral interest rates are higher. That means interest rates are permanently higher in the forecast. So higher neutral interest rates in the U.S. relative to the rest of the world will draw capital into dollar-denominated assets. And this will put new upward pressure on the trade value of the dollar. So we do still expect the dollar to eventually depreciate somewhat as interest rate differentials come down from current levels. But in our updated forecast, the dollar does not depreciate nearly as much as it did in previous forecast because of the permanently higher yields in the U.S.

Kristen Hallam  

Thanks, Ben. And Ken, how might this impact other currencies? Maybe there are a few that you could highlight for us.

Ken Wattret  

Yes, sure. I mean we forecast a huge number of economies, and we forecast a very large number of currencies. So if we stick to a few of the currencies of the U.S.'s key trading partners, we'd highlight as an underperformer, the Mexican peso. I mean that's been a theme of ours already prior to the U.S. election results. We're concerned about post-election policy uncertainty in Mexico, and we expect relatively rapid declines in interest rates there compared to our view on the Fed. Elsewhere, thinking about widening interest rate differentials and challenging economic conditions, again, it won't be a surprise to know we're expecting weakness to persist for the euro and for the U.K. pound. An outperformer, we think, will be the yen. That's expected to appreciate against the dollar due to continued monetary policy divergence. We are expecting the Bank of Japan to hike rates again by January next year at the latest, possibly even this month. Now having said that, we are likely to moderate the expected magnitude of yen appreciation in our forecast later this month to reflect the shift in our Fed view. So again, subject to domestic drivers and their comparison to the U.S., some differences in our expectations for some of those key currencies.

Kristen Hallam 

All right. Thank you, Ken. And last but not least, our tenth and final economic insight for 2025. Persistent high fiscal deficits and debt will be an increasing focus of concern. Ken, what is driving this?

Ken Wattret  

Well, in short, it's a rather worrying and unstable combination of factors. So let me list a few of those. Persistent large budget deficits, a world of higher interest rates than we became accustomed to prior to the pandemic, downward pressure on trend growth rates, already rather elevated debt burdens and political and social obstacles to effective fiscal consolidation. So a combination of factors that lead us to be concerned about fiscal prospects. Now we had budget deficits in many economies soaring during the pandemic as support was put in place to help economic activity to try and buy time until we got back to more normal conditions. But what we've seen in many of the world's largest economies is there's been very little underlying adjustment in deficits since. And we're expecting that the weighted average general government deficit to GDP ratio for the world's 10 largest economies will exceed 5% in 2025 for the sixth year in succession. Now we did have the benefit of strong nominal growth coming out of the pandemic, and that helped to reduce debt-to-GDP ratios. But looking forward, the relative interaction of growth and interest rate is becoming much less helpful from a debt sustainability perspective. So in summary, while our base case is not for a debt crisis for the various reasons we've highlighted, we do see a rising risk of a loss of confidence in markets about debt sustainability and related pressure on governments to take more substantive corrective action.

Kristen Hallam 

All right. Thank you, Ken. Ken, here's an interesting one for you. We talked about the potential for technical recessions in some European economies, but what are the chances of a global recession?

Ken Wattret  

Another good question. I think the first thing to highlight is that global recessions are comparatively rare, thankfully. Typically, they require a major shock. So the 2 things I would probably highlight that could potentially generate those shocks are, first of all, a spiraling of tariffs undermining global trade, confidence, investment pushing up inflation, requiring tighter financial conditions. That would be a hugely turbulent, very unstable and potentially recessionary environment. Again, that's not what we assume in our base case, but the risk of that happening has clearly risen. The second ties in with the last of the predictions, which is a surge in bond yields due to worries about debt sustainability. That, again, would tighten financial conditions. It would also pressure governments into pro-cyclical fiscal adjustments more quickly, and it would also generate instability in the financial sector. If we think back to spring of 2023 when Treasury yields were soaring, that caused some problems in the U.S. financial sector. So again, that would be a very destabilizing potentially recessionary scenario. I probably see those 2 as tail risks, certainly not the most probable outcomes, but were they to materialize game changers for global economic conditions.

Kristen Hallam  

And that is all the time we have for today. Huge thanks to our dream team of economists, Ken, Ben, Hanna and Chris.