Investors should prepare for a more volatile macroeconomic environment in 2025 that will offer opportunities as well as risks.

Eli Lee
Managing Director,
Chief Investment Strategist,
Chief Investment Office,
Bank of Singapore Limited

Investors should prepare for a more volatile macroeconomic environment in 2025 that will offer opportunities as well as risks.

In the US, a second Donald Trump term is likely to cause inflation to rise again. The president-elect aims to steeply increase tariffs, cut taxes, tightly curb immigration and loosen regulations.

The incoming government’s economic policies are set to support US growth and equity markets initially by boosting corporate confidence. But the risk of inflation rebounding in 2025 may force the Fed to stop cutting interest rates by early 2025, leaving its fed funds rate elevated near 4%.

Thus, after the US elections, we have revised our 12-month 10Y UST yield forecast up from 4.25% to 5%. We also see the US Dollar (USD) staying stronger for longer now under a new Trump administration.

For the rest of the world, a second Trump term may prove challenging given the risks of steeper US tariffs, a stronger USD and less US commitment to overseas security.

In Europe, the threat of higher US tariffs and less US defence spending in the region are set to hit economic growth and strain national budgets. We expect the ECB will cut interest rates at each of its meetings to 2% or less now, putting downward pressure on the Euro.

In Asia, US tariffs are also likely to curb the growth of large exporting nations, including China and Japan, forcing governments to take more action to support their domestic economies.

Going into 2025, we are therefore Overweight equities given the prospects of tax cuts and deregulation in the US and further stimulus in China. But investors should Underweight fixed income and turn cautious on duration as 10Y US Treasury (UST) yields are likely to increase to 5% again.

US – Major economic policy changes ahead

Trump will return to the White House in late January 2025. We expect his second term to lead to striking shifts in economic policies. The Trump administration is likely to start with steep tariffs increases. The new president may propose a 60% rate on Chinese exports to reduce the US trade deficit, action that can be taken through executive orders without congressional approval. The extreme tariffs are likely to be a negotiating tactic. But we expect still very high tariffs of 20-30% will come into force in the second half of 2025 on Chinese goods once the public consultation period for the new tariffs ends.

Similarly, we expect immediate action from January through executive orders to curb immigration and lessen regulations for firms.

Last, the new president is keen to extend the 2017 Tax Cuts and Jobs Act (TCJA) passed during his first term that will expire at the end of 2025. The new budget is likely to result in a significant increase in the US fiscal deficit - which is already high at 7% of GDP - towards the end of in 2025. Investors should thus prepare for major changes to the economic outlook in 2025.

First, US growth is set to stay firm in 2025 at 2% but inflation may rebound rather than fall further towards the Fed’s 2% target.

We therefore expect the Fed will stop reducing its fed funds rate in early 2025 after making three more 25 basis points (bps) cuts at its December, January and March meetings from 4.50-4.75% to 3.75-4%. A terminal interest rate near 4% and the risk of inflation rebounding is set to push UST yields higher. We have thus revised our 12-month 10Y UST yield forecast from 4.25% to 5% and advise investors to Underweight fixed income and reduce duration.

Second, we have turned Overweight on US equities as tax cuts and less regulation will boost earnings.

Third, less Fed rate cuts and steep US tariffs will keep the USD stronger for longer in 2025.

Fourth, inflation risks, potential pressure on the Fed and concerns about the rule of law and US foreign policies are likely to keep gold in demand in 2025.

China – Stimulus hopes versus tariff fears in 2025

The economic outlook in 2025 is set to benefit from further stimulus measures by China’s authorities to support growth versus the risks of sharply higher US tariffs on Chinese exports.

Since September, officials have undertaken several steps to revive China’s flagging recovery from the pandemic. With consumers staying cautious, property markets fragile and corporate confidence subdued, the People's Bank of China (PBOC) has cut its key interest rates by 20-30bps to 1.5% and 2%, eased banks’ reserve requirement ratios (RRR), set up a new facility to allow insurers, funds and brokers to borrow from the PBOC to buy shares, and helped lower mortgage rates.

In November, the National People’s Congress also announced a CNY10t relief package for cash-strapped local governments to swap their costly hidden debts with cheaper low interest, long duration central government bonds.

We expect further measures are likely in the next few months to support consumers and ease the overhang of unsold properties. Thus, the near-term outlook should support China’s markets.

But over the course of 2025, steep US tariffs up to 60% on China’s exports are set to hurt growth in the second half of the year. We forecast GDP growth to fall from 4.7% in 2024 to 4.2% in 2025, a low annual rate compared to China’s last few decades.

Europe – More risks to growth in 2025

The economic outlook is set to be the most challenging for Europe in 2025.

The Eurozone is already stagnating with GDP only likely to be around 0.8% in 2024, barely up from 0.5% in 2023, as the region continues to suffer from the loss of cheap Russan energy supplies after the invasion of Ukraine and the rapid rise in interest rates to a peak of 4% by the ECB in 2022 and 2023 to counter inflation.

For 2025, the threat of higher US tariffs and less US defence spending in the region are set to hit growth and strain national budgets. We see GDP growth staying weak at 0.8% in 2025 to the detriment of Eurozone markets. In addition, the ECB is likely to keep cutting interest rates at each of its meetings to 2% or less now, putting downward pressure on the Euro.

In contrast, the UK is less dependent on exports and thus less vulnerable to US tariffs. We forecast GDP growth to firm further from 1.2% in 2024 to 1.4% in 2025 as the new Labour government’s first budget lifts spending, and the Bank of England (BOE) keeps cutting interest rates every quarter by 25bps from 4.75% currently to 3.75% in 2025.

Japan – Further interest rate rises are likely

We expect Japan’s economy to be less affected by US tariffs compared to China and the Eurozone. We forecast GDP growth to rebound from this year’s likely 0% rate to 1.2% in 2025 as wage growth outstrips inflation and thus supports stronger consumption.

To keep inflation anchored at its 2% target after reaching four-decade highs of 4% when Japan reopened from the pandemic, we expect the Bank of Japan (BOJ) will keep gradually raising its overnight call rate from 0.25% to 0.5% in December, its third hike of 2024, and again by two more 25bps steps to 1% in 2025.