Paul Diggle

Hello and welcome to Macro Bytes, the economics and politics podcast from abrdn, with me, Paul Diggle. In our final episode for 2024, capping off what has been a massive year in macro and markets, I've asked each member of the economic research team here at abrdn to outline the key theme or macro question that they're monitoring heading into the coming year. 2025 will once again provide plenty of economic and political challenges and opportunities for investors to navigate. So let's hear what it might have in store.

James McCann

Hello, my name is James McCann and I'm an economist covering the United States for the team. My focus as we move into 2025 will, of course, be on what a second presidential term for Donald Trump means for the US economy. And certainly Republicans have won a mandate in the 2024 election to deliver material changes across trade, fiscal, regulatory and immigration policy. And critically, of course, they have the tools to do so, now controlling the White House and both chambers of US Congress. So when we think about the impact, it's possible that it takes time to materialise. So the early stages of 2025 will probably be characterised by the solid, if not robust, growth that we've been experiencing this year, helped by strong balance sheets and relatively strong aggregate supply growth in the United States. But I think as we move through the year, changes in that policy mix will start to perhaps lead to a modest acceleration in US activity. So certainly we think you could start to see early evidence that the deregulatory agenda bearing fruit, but also we might see some early benefit, or anticipated benefit, of that fiscal loosening that we think will be delivered in late 2025. We think the majority of that fiscal change is extending tax cuts that are due to expire next year, but we think there will be additional tax giveaways for businesses and corporates, which will provide a small boost to US growth. I think some of the shine of that stronger growth story will be taken off by disruptive trade policies. So certainly, selected tariff increases on places like China, on selected other trade partners and other product groups. I think that will take a little bit of the shine off that positive growth story. Similarly, a more aggressive immigration policy will probably crimp labour supply growth, and I think that will equally take a little bit of growth out of the US economy, too. 

But in aggregate, we're raising our growth expectations as we go into 2026, although we do think some of those more disruptive parts of the agenda will weigh more heavily as we move through Donald Trump's presidential term. Now, while some of those growth dynamics are perhaps somewhat offsetting, we think the inflationary impact of the policy mix is more consistently towards stronger price growth. That's certainly the case around stronger demand side policies from fiscal loosening, but also some of the drags from lower net migration and also tariff increases, which we think will add to the inflation mix in the US economy. Putting that all together, we think that inflation get stuck closer to 2.5% next year, and we think that's a level of price growth that the Fed would feel uncomfortable with. And so, while we think there’s scope for some interest rate reductions over coming meetings, we think the Fed probably stalls its easing cycle at around three-and-a-half to 3.75%. Now I think one point to raise just to close off is all this is extremely uncertain at this juncture. It's certainly possible that more aggressive moves on the trade policy side, or the fiscal policy side, cause stronger dislocations in growth and inflation and perhaps provide the Fed even less room to ease policy over the course of next year and into 2026. So we’ll have to watch very carefully for signs of how that policy agenda is evolving, and adjust our thinking and forecasts as we go. 

Lizzy Galbraith

I'm Lizzy Galbraith, political economist on the team. And the main thing I'll be watching for in 2025 is how the incoming Trump administration affects the ongoing war in Ukraine, as well as the stability of the Middle East going forward. On Ukraine, Trump has been very clear that he is unwilling to keep the current pace of aid indefinitely, and has gone so far as to say he will seek a ceasefire agreement within 24 hours of his inauguration. While I think the complexity of the situation will prevent any quick agreements, the US administration does have some levers it can pull to attempt to bring both sides to the negotiating table. If talks do go ahead, then there are two key questions. The first: are Russia and Ukraine willing to make the necessary compromises to secure a ceasefire? And: will any agreement be durable? On the first point, I think there may be some possibility of an agreement, but on the second, I think it's highly doubtful. And any agreement will be vulnerable to collapsing. Moving on to the Middle East, I see two main considerations. The first, again, is how durable any ceasefire agreement will be between Israel, Lebanon and Hamas, respectively? And the second is: how the Trump administration plans to alter US policy. I think over 2025, the main focus of Israeli and US security policy in the region is going to be related to Iran. This may mean that we see more sanctions introduced, that includes potentially on Iranian oil, and as well, there is some potential for ongoing military action. While domestic pressure may be sufficient that Iran seeks a deal with the US, I think there are serious doubts over whether such an agreement is viable. 

Bob Gilhooly

Hi, my name is Bob Gilhooly. I'm the senior emerging markets economist. And I'm going to be watching Donald Trump's favourite word and go-to-tool of economic intimidation –tariffs. Specifically, how high tariffs on Chinese goods could get and whether the next US-China trade war escalates. 60% tariffs across the board was the mantra on the campaign trail, but there's been no shortage of additional threats recently – another 10% if fentanyl-related exports aren't stopped and 100% tariffs if China and its BRICs partners were to try to move away from the quote unquote ‘mighty dollar’. Our best guess is actually the USTR will use the existing 301 legislation to up tariffs on goods already being hit. So that could push the average bilateral tariff rate from around 16% currently to more like 35 to 40%. That’s still a decent way below 60, but it's still a pretty sizable shock, akin to the first trade war. The good news, at least relatively speaking, is that Chinese policy makers are already easing and the policy machinery is primed to do more. That should limit the damage to China's economy. Like it did during Trump's first-term skirmish, a currency depreciation should help take a bit of the pressure off this time round too. The RMB is down a bit over 2% since the US election, but even a relatively restrained reaction could see it potentially lose another 10 to 15%. But the risk is that letting the currency fall could pour fuel on the fire, perhaps motivating further tariffs or non-tariff actions by the US. And it's really these kind of non-tariff actions that I'm actually most worried about. If the focus moves away from tariffs and towards rules of origin, i.e. the share of components that originate from China on say, all of the US’s imports, this could have a much more damaging effect on China and would also spill over into APAC’s deep manufacturing supply chains. In this case, we might see China retaliate much more forcefully. Just today, we had export restrictions announced on critical minerals, and I think those could be really expanded and toughened up to quite a large degree. The authorities in China might also look to retaliate on US businesses operating in China, in particular that of Trump's ‘first buddy’, Elon Musk. At the same time, the worse the trade war gets, the more policy stimulus we should see coming out of China. But this is unlikely, I think, to fully offset the shock. And it's not going to do much to provide a positive growth impulse to the rest of the world. Indeed, there's some risk that authorities will double down on investment in strategic industries to reduce reliance and exposure to the rest of the world.

Michael Langham 

Hi, I'm Michael Langham, an emerging market economist on the team and the key thing I'll be looking at in 2025 is what the implications are for emerging markets ex-China, from the Trump administration's policies. Clearly, in the very near term, the implications are going to manifest themselves via market volatility as we get statements from Trump and his team. That will keep central banks on edge and, in some cases, even stall easing cycles. I think Indonesia is a good example of that, where FX pressures can mean that the central bank remains on hold. But over the next year, I'll get more clarity on Trump's approach to things like tariffs, immigration, sanctions and military ties. And through this, I'll be looking for winners and losers across emerging markets. Even though that thinking is quite time-horizon dependent. Clearly, trade will be one of the key channels of impact next year, and I'm expecting most DMs outside of China can negotiate their way out of the most disruptive tariffs and use policy tools, such as allowing exchange rate adjustments to limit the impact on their economies. But I see a tougher US stance on Chinese components and re-exporting could cause some trouble for some of those emerging markets closely integrated into China's supply chain, such as Vietnam or Malaysia. But then there's EMs which are less so, such as India, which could prove a winner. Another thing is that we're expecting an emerging market easing cycle through next year, but there'll be divergences, and widening of the US budget deficit and higher nominal growth is a challenge for the EMs looking to cut. Particularly those still facing inflation challenges, like Brazil. Conversely, where output gaps are evident and inflationary pressures are dissipating, I think policymakers can increasingly turn their attention to supporting growth. Like I said, winners and losers will be time dependent, so some of the less immediately exposed EMs may actually prove the winners next year. But ultimately, longer term, as the US is seeking to reduce its reliance on China, it will need other EMs to do so. And that can still mean some of the winners of Trump's last presidency win again. 

Tettey Addy

Hi, I'm Tettey Addy, emerging markets economic analyst focusing on Latin America. So next year I'll be paying particular attention to Mexico, with it being one of the markets most exposed to shifts in US policy on trade and migration. This also follows the past year having been tough for Mexico, due to its own politics and weak economic growth, which have weighed heavily on assets. So 2025 will be a major transitional year for the country, with new leaders settling in on both sides of the border. Now on the trade front, Mexico was a big winner of Trump's push to decouple from China from his first term and became the US's biggest source of imports last year. But those gains also mean that Mexico now has even more to lose compared to other EMs, should the US try to limit trade across the border. Now, as we've already seen since Trump's victory, tough rhetoric from the US regarding tariff threats and mass deportations are going to be major themes over the coming year. The coming and going of tensions with the US will create periods of noise for Mexico in financial markets, and I'm expecting this uncertainty to weigh on both domestic and foreign investment in 2025. Now, we can't rule anything out, but I'm still confident that Mexico can avoid major trade restrictions with the US. China should remain Trump's main target, and Mexico will remain key in the US's decoupling strategy as a source of inputs. Rather like in Trump's first presidency, I'd say we can still assume that these threats are more of a means to appease his base and get concessions from Mexico on the border. Back then, we saw then Mexican President Obrador take measures like deploying the National Guard to beef up border security, and those moves contributed to both presidents building a generally favourable relationship, which avoided major tariffs and ultimately led to the formation of a USMCA free trade pact. Now, there's a lot of uncertainty about how much rapport Mexico's new president, Claudia Sheinbaum, can maintain with Trump. I'll also be keeping a close eye on the implications of her reform agenda for Mexico's business environment. Some of these objectives, such as overhauling the judicial system and abolishing regulators in certain sectors, really dragged on the peso this year and have raised investor concerns about Mexico as a destination for foreign direct investment. So overall, I'd say Mexico is in a very precarious spot due to its high exposure to the US and market concerns about domestic reforms. But I'd also stress that its integration in US value chains still leaves it with major potential gains from near shoring over the medium to long term. 

Felix Feather

Hi, my name is Felix Feather. I'm an economist in the Global Macro Research team at abrdn. And the key question for 2025 I'm interested in is: how much is the eurozone going to become the centre of political risk next year? So I see a few areas of uncertainty in the eurozone where political risk could flare up in market sensitive ways. First is in Germany, where the collapse of the governing ‘traffic light’ coalition of the SPD, the Greens and the FDP means elections are now likely to be brought forward to the spring. Now, this raises uncertainty of the future of the debt brake, which is Germany's fiscal rule, and it limits deficit spending to 0.35% of GDP. Left of centre parties, including current chancellor Olaf Scholz’s SPD and the Greens, are in favour of relaxing these rules in general. Now the CDU, which would be the likely beneficiary of next year's election, has expressed some openness to reform. We do think Germany's next government will reform the debt brake in some capacity. But how such a government might choose to reform this rule is less certain. So a two-thirds majority in the Bundestag is required to pass constitutional amendments to the debt brake clause. If the government does not command this kind of supermajority, it might have to pursue an alternative workaround, perhaps by triggering the escape clause. Though the form of debt brake reform does matter, any sort of reform is likely to translate only to modest fiscal expansion, partly because of domestic unpopularity of fiscal extravagance, and also because of EU fiscal rules. Another area of potential political risk is in France, where fiscal problems are actually quite a lot more acute. And at the time of recording, Prime Minister Barnier's minority government looks to be on the brink of collapse. Whoever governs France's fiscal challenges are deep and structural. So the task of consolidating its fiscal position looks very challenging indeed. Lastly, we see a downside risk to the growth outlook from EU-US trade relations. As a base case, we expect Trump to use the threat of tariffs mostly as a bargaining chip. However, the EU could find itself on the wrong end of significant barriers to trade to its top export market if negotiations go badly. If that happens, we see a serious risk of eurozone recession. In any case, the ECB will now move pretty swiftly to normalise policy.

Sree Kochugovindan

Hi, I'm Sree Kochugovindan. I'm a senior economist in the team, and I'll be covering Japan, the outlook for the next year. So starting with growth, growth has been relatively resilient. And looking under the lid, consumer spending has been strengthening, and that's very important going forward in terms of driving domestically generated inflation and the outlook for the BOJ. So real incomes have been rising, fiscal support measures are likely to continue to support consumer spending. But the external demand picture could be challenging. Trade tensions could be a drag. But in the past Japan has been quite adept at negotiating exemptions. During the 2016, period, there had been exemptions to previous tariffs. There have been some political changes obviously, since then, but we seem to have some relative stability for now. We have a minority government in Japan, and there is, we do need to keep an eye out for that upper house election and the continuation of political stability there. Now, inflation outlook is obviously very important. Headline inflation has been steadily declining. But there are signs of stability in core services inflation. Now what's really important is the outlook for wage growth and the Shinto wage negotiations. And the trade unions have currently said there's going to be an average 5% gain for next year. Yen weakness has been pushing up goods prices. So there is a lot of room for manoeuvre for the Bank of Japan. And we do expect a 25 basis points hike to 50 basis points in January. Now, in the past, the Bank of Japan have not been scared of surprising markets, but this time they will be a bit more cautious and wait for pricing to move in their favour. So it won't want to surprise investors and at the moment, the OIS curve is starting to bring forward the next 25 basis point hike so there's a stronger chance of a January hike there. And finally, watch out for Japan equities. The longer term structural outlook is quite enticing. Japan is very well positioned in terms of the global value chain and a strong position in robotics and semiconductors. So structural outlook there remains quite strong.

Luke Bartholomew

Hi, it's Luke Bartholomew. And a key question I'll be watching in 2025 is whether the Chancellor will need to come back for further tax increases in the UK. Of course, the budget back in October delivered a significant increase in taxation, which, along with a large increase in borrowing, then financed a big increase in spending and investment. And in the immediate aftermath of that budget, there was some adverse market reaction – bond yields rising, which, combined with some negative political fallout, saw the Chancellor commit to avoiding further tax increases or indeed borrowing through this Parliament. And there's actually now been a bit of an effort to soften the definiteness of that guidance recently. But the clear message from the government is that they have no plans to increase taxation further. However, it's far from clear how credible that commitment is. First, the Chancellor's new fiscal rules, which allowed for a large increase in borrowing, now have very little headroom against the existing fiscal plan. That is, if government borrowing costs are much higher, or economic growth much weaker than the OBR accounted for in its latest forecast, then the existing fiscal plans will be judged to be no longer compatible with the new fiscal rules. And indeed, the rise in bond yields following the budget and the US election looked at one point to have comprehensively wiped out that headroom. Now the market has come back a little bit since then, and currently it looks a very close run thing, where the OBR in its next set of forecasts due by spring, will judge if the Chancellor is breaking her rules. Now if she is breaking those rules she does have a little bit of wiggle room, which mean an immediate policy change won't be necessary. But by the time of the next budget in the autumn, she would need to do something to make up that lost fiscal space. Second, even if bond yields and growth behave, there will still be pressure to increase taxation over time. The current spending plans for the second half of the parliament currently look way too tight to be politically or economically sustainable, once you account for the various protected departments and the desire to increase defence expenditure as well. And so any further increase in government spending will need to be financed. Of course, fiscal rules are made to be broken, or at least rewritten, with recent governments cycling through many rules over the years. So it would not be hugely surprising if the Chancellor ends up coming up with a new set of rules at some point to help get out of trouble. But if she does that, she then risks testing the patience and confidence of financial markets. 

Paul Diggle

And you're back with me, Paul Diggle, my key question for the year ahead is: what is everything you've just heard mean for markets? Well, the abrdn House View is positive on global equities and the US dollar. And it's recently turned positive on real estate. While it's neutral on many bond markets, that broad asset allocation is based on the expectation of a more reflationary environment in the US. As we've heard, the incoming Trump administration with a unified Republican control should mean tax cuts and deregulation, as well as higher tariffs and lower immigration. And that probably means higher nominal GDP growth, mainly through high inflation, but also with some real growth. And that should be supportive for corporate risk, as well as, meaning a slower path for interest rate cuts, which is a potential headwind for bonds. As the team has argued, shifting US policy could mean more monetary policy easing in Europe, more stimulus in China, but less easing in many other EMs. So Europe could be the place to hold interest rate risk, albeit more in the core than the periphery. Of course, many equity markets, especially the US, have done very well this year, leaving valuations elevated and market concentration high. That brings risks. But the abrdn House View also sees fundamental support to corporate earnings, both from the economic cycle but also from tech stocks, high margins, high free cash flow generation and strong balance sheets. While there's been a deep valuation correction across global real estate markets, that process now looks largely complete. Listed real estate, direct real estate in geographies such as the UK and Europe, sectors such as residential, hotels, data centres, logistics, all look interesting. But as ever, with macro markets, there are several important risks to the outlook. You've heard about some of these from the team. One is, of course, Trump's policies. A big trade war could push up on global inflation, down on growth, causing equities and bonds to sell off. But there's also an upside in which Trump focuses on tax cuts and deregulation in a way that could be very supportive for markets. Another big risk is renewed escalation in the Middle East that could send oil prices substantially higher. And third is the outlook for the Chinese economy. A bigger stimulus in China could give the economy a boost, but there's definitely risks that China is heading for a form of Japanification. 

 Thank you for listening to Macro Bytes from abrdn this year. We’ll be back in 2025.  As ever, goodbye and good luck out there.

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