2025 Global Macroeconomic Outlook
First Quarter
Global Fixed Income team’s view as of November 22, 2024
Global Economy: Growth Remains Uneven
U.S. Economy Is Likely to Slow Before Rebounding
Although U.S. gross domestic product (GDP) has remained surprisingly resilient, recent data suggest a slowdown may be brewing. In particular, the labor market appears to be weakening. The economy added only 12,000 jobs in October, well below forecasts. Meanwhile, private sector activity in November reached its highest level since April 2022, but the underlying data were mixed. The services sector soared while manufacturing contracted for the fifth consecutive month. Given these trends, along with Trump administration tariffs and government efficiency initiatives, we expect the economy to slow through the first half of 2025. By the second half, deregulation, onshoring, tax policy clarity and rekindled animal spirits may kick in, creating more positive economic momentum.
Economic Activity Is Still Sluggish in Europe, U.K.
We expect the European economy to continue struggling, largely due to ongoing weakness in Germany and potential U.S. tariffs. European private sector activity recently logged its sharpest-ever month-to-month contraction in November. The services sector snapped a nine-month expansion streak as business activity declined for the first time since January. Manufacturing, which struggled throughout 2024, dipped further into contraction territory in November. In the U.K., private sector activity declined in November for the first time in a year. Manufacturing dropped for the third straight month as demand waned alongside worsening domestic business conditions and geopolitical uncertainty. Weakening business confidence weighed on the services sector, which declined for the third consecutive month.
Ongoing Challenges Pressure China’s Growth
China’s economy underperformed expectations in 2024, weighed down by property sector turmoil, uneven domestic demand, slowing industrial output, deflation risks and geopolitical tensions. Amid declining home values, the nation’s property crisis is sinking consumer confidence and straining local governments’ coffers. Additionally, China’s trade relationships, particularly with the U.S., remain strained and may intensify under the Trump administration, further pressuring the nation’s growth outlook. Slowing consumer demand and the challenges in the property sector have prompted China’s government to boost spending and cut interest rates. Combined with continued export growth, these efforts aim to get China’s growth trajectory back on course.
Inflation: Pricing Pressure Persist
Inflation Fight Forges On
After steadily declining for several months, some broad measures of U.S. inflation have recently edged higher or stalled, highlighting ongoing pressures on consumers. The services component, namely housing and rent costs, remains the key driver of still-elevated inflation. While an increase in multifamily housing units should lead to lower rent resets, the timeframe will be slow. Additionally, the nationwide shortage of homes persists and is helping to fuel home price appreciation. We still believe inflation will moderate toward the Federal Reserve's (Fed’s) target, but by 2025’s second half, potential tariffs, broad deglobalization and deportations could reignite inflation. Nevertheless, we believe a potentially strong U.S. dollar and deregulation in the energy sector should help soften inflationary pressures.
European Inflation Held Steady
Core consumer prices in Europe remained steady in October, but at 2.7% (annualized), the core inflation index was still above the central bank’s 2% target. Meanwhile, annual European headline inflation accelerated to 2% in October, but the jump was largely due to base effects. (The sharp drop in energy prices in 2023 is no longer factored into the annual inflation calculation.) With recent rate cuts, policymakers are trying to balance their economic support with their inflation mandate. However, they expect a softening labor market and moderating wage growth to help drive inflation to the target level by early 2025. The Bank of England faces a similar challenge, as annual core inflation edged higher in October and remained well above target. Headline inflation also surged to a six-month high. Policymakers expect the government’s latest budget, featuring tax, spending and borrowing hikes, to further pressure inflation.
Deflation Risks Persevere in China
Unlike its developed markets peers, China continues to confront below-target inflation even as the government has launched efforts to spark growth. After recovering in February from a four-month bout of deflation, the nation’s annual headline consumer price index climbed slightly each month. But in October, inflation grew only 0.3%, its slowest pace in five months. Declines in transportation and housing costs largely accounted for the weak inflation reading. Food prices, the index’s largest component, eased slightly after climbing to a 20-month high in September.
Monetary Policy: Central Banks Are Cautiously Cutting Rates
Fed to Gradually Ease
Fed Board Chair Jerome Powell has described the latest easing effort as a “recalibration” of monetary policy, giving policymakers flexibility to restore a neutral target rate. Powell still believes the current short-term rate interest target is restrictive. He also recently said the neutral level is probably much higher than the previous 2% consensus. Yet, it’s not yet clear what he believes that higher rate will be. Fed rhetoric initially suggested policymakers would implement several consecutive rate cuts well into 2025. However, recent comments indicate that the Fed will take a wait-and-see approach amid resilient growth and persistent above-target inflation. We expect up to four rate cuts in 2025, with the central bank proceeding cautiously, according to labor market and inflation data.
Economy, Inflation Drive Policy in Europe
Like the Fed, the European Central Bank (ECB) has indicated that its rate-cut considerations will remain judicious and data-dependent. Despite market expectations for additional cuts to spark economic growth, ECB officials have said they will remain cautious amid continued inflationary pressures. Similarly, Bank of England policymakers want to promote growth but remain wary of lingering risks. Specifically, they worry that the government’s massive tax, spending and borrowing plans will fuel inflation. Meanwhile, the Bank of Japan has pursued a different course by raising rates amid persistent inflation.
China’s Central Bank Seeks to Spark Growth
Reflecting its efforts to restore growth to the government’s target level, the People’s Bank of China cut key corporate, consumer and mortgage loan rates to record lows in October and July. However, with little evidence that their current policy is working, we expect policymakers to launch additional economic support measures in the coming months.
Interest Rates: Yields Will Likely Be Lower in the Near Term
Large and Growing Deficit Likely to Push Yields Higher Over Time
While inflation, Fed policy and other cyclical factors are near-term drivers of interest rates, we expect secular trends to push longer-maturity rates higher over time. Our shorter-term outlook calls for inflation to ease, interest rates to fall and economic growth to slow. Against this backdrop, we expect the yield curve to continue normalizing. Once these data points bottom, we believe fiscal policy will emerge as a dominant force pushing interest rates higher — and the curve steeper. Larger fiscal deficits and higher interest rates go hand in hand, given the need for increased U.S. Treasury issuance to fund the government’s record deficit spending. And to keep investors interested in purchasing longer-maturity Treasuries over time, Treasury yields must remain at attractive (higher) levels. However, given the nation’s massive record deficit and the bond market’s disciplinary reaction, we don't expect new large-scale fiscal programs.
European Yields Should Head Downward
With the ECB and Bank of England now in easing mode, we expect yields in Europe and the U.K. to decline slowly. Dovish monetary policy, slowing inflation and sluggish economic growth data should keep government bond yields on a downward trend. We believe yields in Germany and the U.K. remain among the most attractive.
EM Rates Likely to Follow U.S. Rates Lower
High U.S. interest rates have been the main factor pressuring EM interest rates. As the U.S. economy slows, the Fed eases, and U.S. rates decline, we believe more EM central banks will follow suit to defend their currencies.
References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.