KUWAIT: Global monetary easing is continuing despite a bumpy path back down to two percent inflation. And while global GDP growth for 2025 is forecast to be broadly unchanged from 2023-2024 at 3.2 percent, the world economy seems at a pivotal juncture, given the re-election of Trump as US president. That election has already contributed to shifting the US interest rate outlook, with markets now expecting the Fed funds rate will be 75-100 bps higher, by end-2025, than when the Fed started cutting rates in September.

In the Euro-zone, the ECB is set to deliver a fourth rate cut this month given a weakening outlook and increased trade uncertainties. In the UK, the economy has lost momentum, but the expansionary budget should lift growth and inflation next year. In Japan, the BoJ is finally set to resume its monetary policy normalization by hiking rates in December or January, after pausing for two meetings. Finally, China’s macroeconomic outlook has become even more uncertain, but the likelihood of a sizable fiscal policy support in 2025 has increased.

US economy remains strong

Even with the Fed’s prior aggressive monetary tightening, the US economy continued to record strong growth, standing at 2.8 percent (annualized) in Q3, slightly below 3 percent in Q2. A resilient consumer amid robust wage growth (more than 4 percent y/y for the past three years), and supportive wealth effects from record-high stock and housing prices, has been a key driver of this momentum as seen in ongoing solid growth in private consumption (3.5 percent in Q3). GDP looks on track to record further robust two percent growth in Q4, and the IMF forecasts decent 2.2 percent growth in 2025.

And while headline PCE inflation continued to broadly decelerate, the core rate has been stuck at around 2.6 percent-2.8 percent y/y for the past six months, with projections that both rates will inch up in the coming months, complicating the Fed’s job. Meanwhile, the major worry about a rapidly deteriorating labor market that surfaced following July’s employment situation report proved overblown and was short-lived. Monthly job gains averaged 173K in the three months to November, only slightly weaker than the January-August average, with the unemployment rate increasing to a still-low 4.2 percent in November from 3.7 percent at end-2023, indicating that the labor market continues to cool but remains robust, and not signaling any imminent economic downturn.

With the election of Donald Trump as president, along with the Republican Party’s sweep of Congress, the US economy is at a crossroads. Trump’s plan to focus on deregulation, increase oil production, and, most importantly, cut taxes may boost GDP in the shortterm, but along with his plans to enact sweeping tariff hikes and conduct extensive illegal immigrant deportations can possibly lead to higher interest rates/inflation, a big rise in debt (which is already on an unsustainable path), and pressure on GDP growth over the medium term.

In fact, Trump’s election has contributed, along with the recent inflation and growth trends, to a major change in the interest rate outlook with markets currently expecting only a 75 to 100 cumulative cut by end-2025, bringing down the Fed funds rate (upper limit) to 3.75 percent-4 percent, up from 3 percent when the Fed first cut rates by an outsized 50 bps in mid-September.

Increased headwinds

The Euro-zone economy grew by a higher-than-expected 0.4 percent q/q in Q3, up from 0.2 percent in Q2, the strongest expansion in two years with growth in retail sales in August through October above 2 percent y/y, more than a two-year high. However, this momentum seems to be fading in Q4 with the composite PMI dropping to a 10-month low of 48.3 in November while the services PMI (49.5) fell below the 50-threshold for the first time since January.

Given this weakness, the euro has been under pressure, touching two-year lows recently and is down by around 6 percent versus the USD since the end of September. Against this backdrop, the ECB still seems adamant in prioritizing growth over further disinflation and is almost certain to cut rates by 25 bps in its 12 December meeting, the fourth cut since monetary easing commenced in June. This is despite core inflation remaining stuck at 2.7 percent y/y for three months, services inflation still elevated at 3.9 percent y/y in November, and wage growth remaining higher-than-wished at 4.5 percent y/y in Q2.

After hitting a trough of 1.7 percent y/y in September, headline inflation reaccelerated to 2.3 percent in November driven by energy-related base effects, but is seen falling back to the 2 percent target in the course of 2025. Looking ahead, the trade-dependent and currently sluggish Euro-zone economy faces increased headwinds given the possibility of 10 percent-20 percent blanket tariff enacted by the Trump administration, which if materializes, will be at a time of already fractious relations and trade with China, noting that US/China are the Euro-zone’s two largest trading partners. Furthermore, the outlook for the block’s two largest economies, Germany and France, is increasingly uncertain given the former’s snap election set for February and the latter’s recent government fall following the budget debacle.

UK economy loses momentum

The UK economy has weakened lately, with GDP growth in Q3 slowing to a near-standstill of 0.1 percent q/q from 0.5 percent in Q2 and 0.7 percent in Q1. The Autumn budget’s painful measures likely contributed to the composite PMI falling to a 13-month low of just above 50 in November (50.5). After the Labor party’s landslide election victory in July, and given the relatively poor fiscal situation, Chancellor Reeves announced in the budget several revenue-raising measures (an additional £40 billion/year), but also a greater increase in outlays (by around £70 billion/year), resulting in higher projected budget deficits (4.5 percent of GDP in FY24 and FY25) than previously expected.

The bond market initially sold-off, but then stabilized with yields on 10-year government paper currently not far from their pre-budget levels. The Bank of England (BoE), in its updated forecasts released in November, and given the expansionary budget, upgraded the GDP growth forecast for 2025 to 1.5 percent from 1 percent earlier, but lowered this year’s to around 1 percent from 1.2 percent. Meanwhile, with headline inflation having steadily come down to near the 2 percent target, the BoE delivered a second 25 bps rate cut in its November meeting.

However, the measures for core inflation, services inflation, and wage growth all remain elevated while headline inflation is seen re-accelerating until Q3 2025, partly driven by the expansionary budget as well as household energy costs, and then gradually falling, hitting target again only in 2027. Given that, along with a better economic outlook next year, the BoE will likely follow a cautious approach in terms of monetary easing, with the futures market currently expecting only three more 25 bps rate cuts by the end of 2025.

Growth in Japan slows

GDP growth slowed to 0.3 percent q/q in Q3 from 0.5 percent in Q2, driven by declining investment spending and net exports while private consumption growth improved slightly to 0.7 percent q/q (0.6 percent in Q2) benefiting from the robust increase in wages and the tax cut program that started in June. PMI figures for October/November indicate likely further deceleration in economic activities in Q4. Meanwhile, headline inflation softened to 2.3 percent y/y in October (from a recent high of 3 percent in August) helped by the temporary resumption of utility subsidies, but a measure of core inflation (excluding fresh food and energy) increased for the third straight month to stand at 2.3 percent y/y in October.

And while the BoJ’s projection for core inflation for the next fiscal year stands at a lower 1.9 percent, the upcoming (April) wage increase negotiations could stoke further inflationary pressures. Against this backdrop, the prime minister approved a new stimulus package worth JPY21.9 trillion ($142 billion, 3.6 percent of GDP) to boost growth and ease price pressures on households. According to official estimates, the package is projected, over the next three years, to raise annual GDP growth by more than 1 percentage point.

The moderating economic activity and the market turbulence following the interest rate hike at the end of July have pushed the BoJ to pause in its last two meetings, holding the key rate at “around 0.25 percent”. Nevertheless, the BoJ remains committed to normalizing monetary policy (if macroeconomic data meet the bank’s projections), and the current consensus is for a rate hike either at this month’s meeting (19 December) or in January 2025. This has supported the yen recently, which has rallied by around 3 percent since hitting a recent low in mid-November.

China’s outlook uncertain

GDP growth continued to weaken in Q3, standing at 4.6 percent y/y, down from 4.7 percent in Q2 and 5.3 percent in Q1, amid the ongoing real estate downturn and soft domestic demand. The latter is reflected in barely positive inflation readings (0.2 percent y/y in November) and in weak import trends. Despite several stimulus measures, the property market is not likely to have bottomed out yet (new and existing home prices were down around 6 percent to 9 percent y/y in October) although there are initial signs of a marginal improvement.

Given this backdrop and the risk of missing the “around 5 percent” growth target for this year (+4.8 percent y/y in 9M2024), the authorities have, over the past few months, released a string of far-ranging stimulus measures, but held back on the long-awaited sizable fiscal policy support. This likely drove the recent improvement in some activity indicators with the composite PMI hitting a six-month high of 50.8 in October/November and retail sales growth strengthening to an eight-month high of 4.8 percent y/y in October.

Meanwhile the central bank, after cutting rates in September/October, paused in November but reiterated its accommodative monetary policy while a recent top-leaders Politburo meeting announced it supports a “moderately loose” monetary policy in 2025. Looking ahead, the outlook has become more uncertain given Trump’s 60 percent tariff threat on all imports from China, but this heightened uncertainty has also increased the likelihood of a sizable fiscal policy support in 2025.