A Transformational Approach in Kebri Beyah WoredaEthiopia Local Economic Development (LED)Pilot Repo.
2025-03-11
86页
5星级
March 2025Public Sector PracticeNew York 2040:Time to reinvent.Again.This article is a collaborative.
2025-03-11
17页
5星级
CoverResearch IntelligenceLooking Back and Ahead:Evaluating Risks to the US EconomyMarch 2025Krungsr.
2025-03-10
20页
5星级
CoverResearch IntelligenceImpact of Trade War 2.0on the Thai EconomyMarch 2025Krungsri ResearchConte.
2025-03-10
23页
5星级
OECD Economic Surveys:Czechia 2025March 2025Volume 2025/4versionlaunchOECD Economic Surveys:Czechia2.
2025-03-06
130页
5星级
JANUARY 2025THE ECONOMIC IMPACT OF KBR IN THE UK2The economic impact of KBR in the UK3The economic i.
2025-03-06
28页
5星级
Chinas economy willstrive forward andprioritize stability whilepursuing progress in 2025March 202520.
2025-03-04
12页
5星级
Important disclosures are in the disclosure appendix.For other important disclosures,please refer to the disclosure&disclaimer at the end of this Standard Bank February 2025 2 Contents Contents.2 G10 outlook for 2025.3 EM outlook for 2025.8 Resilient ambitions:Africas economy in a volatile global climate.16 SA politics in 2025:risks,and opportunities,abound.39 SA:Slowly heading into the right direction.45 Standard Bank February 2025 3 G10 outlook for 2025 Stability at risk 2025 looks set to be another year of steady,if unspectacular,growth amongst developed nations.Advanced countries are likely to grow by just short of 2%in aggregate,much like the likely 2024 outcome.While growth might be modest,we still should remember that most economies have enjoyed a relatively soft landing after the surge in policy rates in 2022 threatened to tip the advanced economies over a cliff.But risks abound,most of which are associated with the new US administration under Donald Trump.For the spectre of damaging tariffs has come back to haunt global policymakers and financial markets alike.Optimists will point to the fact that the last surge in US protectionism,which started in 2018 during the first Trump administration,did not prevent robust global growth.However,the tariffs were far less draconian than those being talked about by the second Trump administration.At the same time,it is difficult to disentangle the impact tariffs had on the global economy after 2020 because Covid decimated the world economy.Most projections relating to the effects on the US of new tariffs now point to weaker growth,higher inflation,less Fed policy easing(and possibly rate hikes),and a stronger dollar.In short,it does not look good,and it could be even worse for other countries,especially those that trade heavily with the US such as Canada,Mexico,and China.Many policymakers and investors will hope that the Trump administration holds tariffs back as a threat rather than a policy of choice.But the Trump administration sees tariffs as a source of revenue,and this cannot be realised if tariffs remain a threat and no more.And with tax cuts in the pipeline,the Trump administration looks as if it could use all the revenue it can muster given that the budget deficit is set to remain a very high 6%of GDP or so for as far as the eye can see,and debt has soared to around 100%of GDP.With this in mind,and given how Trump threatened,and then delivered,tariffs during his first term,we suspect that new tariffs will be delivered during this period in office,even if only sporadically.Will these be sufficient to blow advanced countries off course?We doubt it,but we also suspect that advanced countries will fail to achieve potential growth as fast as they could if tariff threats were absent.A difficult last mile Advanced countries made further progress in reducing inflation last year.For after the recent peak of around 7.5ck in 2022,inflation is likely to have been around 2.75%last year and is seen slightly lower still,at around 2.5%in 2025.The slowing in the rate of decent illustrates what policymakers have said for some time;that achieving the last mile of inflation reduction to the 2%target level desired by most major central Figure 1:Trade uncertainty surges again Source:Bloomberg 01234562005 2006 2007 2008 2009 2011 2012 2013 2014 2015 2016 2018 2019 2020 2021 2022 2023World trade policy uncertainty index Standard Bank February 2025 4 banks would be the hardest.The difficulty relates largely to the fact that labour markets have remained quite tight,even in countries where economic growth has been meagre,such as the UK.This tightness has,in turn,limited the reduction in wage growth.While this is welcome,as the fall in inflation below wage growth prompts the sort of rise in real income that should aid economic growth,central banks could be left facing the fact that sustainable on-target inflation remains just out of reach.In addition,new inflation risks are arising,not least in the US,from the triple threat of tariffs,deportation of illegal migrants and tax cuts.But it is not just in the US.Should governments hit by US tariffs retaliate with tariffs of their own on US imports,which seems very likely,we could see global price pressures rise.And,as far as migration policy is concerned,we are also seeing far tougher policies from many European governments as they face political pressure from far-right parties that campaign on anti-migration platforms.On balance,we do not expect these factors to spur notable reversals in the progress towards target-level inflation,but achieving this last mile of inflation reduction down to 2%may prove elusive.Even though central banks have admitted that achieving the last mile of inflation reduction is proving the hardest,they have still cut policy rates.This is something we would expect.Only Norway and Australia have held out,but this should end soon,while the Bank of Japan continues to drive in the other direction by lifting policy rates as it seeks to exit the unconventional easing that has been in place for many years.Only in the US have questions arisen about further easing as the Federal Reserve has entered a pause period.The desire to pause is partly related to the policy uncertainty associated with the new Trump administration.As already mentioned,policies that include tariffs,deportations and tax cuts can serve to lift inflation and so complicate the Feds path to bring the Fed funds target rate down to what the bank considers as neutral,which is 3%,according to the median projection of Fed members.Many,including us,believe that the neutral rate is higher than the Feds estimate.We put the rate at around 3.5%and expect the Fed to get to this level in the first half of 2026.Many other central banks would seem to have a clearer path to bring policy rates down to more neutral levels,and some may even have to go below neutral.In the euro zone,for instance,many members seem to point to the 2%region as neutral and a level that can be achieved this year.We believe that the paucity of growth,falling wage growth and sub-target inflation can combine to bring policy rates down to 1.75fore the end of 2025.Bond market problems Given that most developed country central banks are easing policy,we might have expected longer-term bond yields to fall.This is what usually happens in an easing cycle.But it has not happened this time around,at least not yet.For instance,US 10-year Figure 2:Labour market tight despite modest economic growth Source:Bloomberg-6-4-2024684,04,55,05,56,06,57,07,58,08,59,0198119841987199019931996199920022005200820112014201720202023Advanced countries unemployment rate(%)Advanced countries GDP(%yr)(RHS)Standard Bank February 2025 5 treasury yields have risen by just over a percentage point since the Fed started to cut rates last September.A part of this is down to the adjustment of future expectations about Fed easing as the Fed started to cut rates.For instance,when the Fed first cut the policy rate by 50bps,to 5%,in September 2024,the Fed funds futures market was priced for the bank to trim rates down to just below 3%by the end of 2025.But now,after another 50bps of rate cuts from the Fed,the market is priced for the Fed funds rate to be just under 4%at the end of the year.In other words,the more the Fed cut rates,the less optimistic the market became about future reductions.This has helped lift treasury yields and other bond yields have moved in sympathy even though none of those that have eased policy appear to have paused yet.However,the rise in yields does not just seem to reflect less dovish expectations for Fed policy;it also reflects a rise in the US term premium.The 10-year US term premium has turned positive again as investors demand to be paid more for holding 10-year treasuries than from rolling over shorter maturities.A positive term premium has been largely absent over the past decade,having been dragged down by factors such as Fed bond purchases.But now quantitative easing has turned to tightening and,although the Fed may stop this process later this year,there are new concerns to contend with,primarily associated with rising government debt which is now around 100%of GDP.It is projected to rise by a further 20%of GDP over the next decade by the bipartisan Congressional Budget Office,even before allowance is made for the deficit-boosting policies of the Trump administration.In all,it could create an environment in which the Fed eases,but longer-term bond yields continue to rise,while higher yields are also seen outside of America,even though debt concerns lie mostly in the US.Given that budgetary concerns in the UK back in September 2022 provoked a dramatic surge in UK gilt yields,there have been concerns that the so-called bond vigilantes could come for the US next.We do not take this view.So,while there are undoubted risks that yields rise further in the short term,to 5%for 10-year treasuries,we do not see such levels as likely over the longer term,provided the Federal Reserve brings the policy rate back to our estimate of the neutral rate of around 3.5%.In this event,wed expect 10-year treasury yields to ease down to the 4.0%region,and possibly just below,over the next year or so.Such declines should help encourage lower bond yields in other developed countries.Indeed,yield declines could be more rapid elsewhere given the absence of any pause in policy easing,the better inflation outlook,and fewer government debt strains.The tariff question The pausing of Fed easing has contributed to a rise in the dollar in recent months,although it seems clear that the biggest contributor to the greenbacks rise has been the election victory for Trump last November.Just like his first victory in November 2016,Figure 3:Term premium is positive again Source:Bloomberg-2-10123456198019831986198919921995199820012004200720102013201620192022US 10-year bond market term premium Standard Bank February 2025 6 the dollar has risen based on the likely consequences of a very similar policy combination of tariffs,tax cuts,and tougher migration laws.However,what was notable about Trumps first term in office between 2017 and 2021,was that the post-election surge in the dollar quickly evaporated and,if we take the four years as a whole,Trump left the dollars value against other major currencies 10%lower than the level he inherited.In other words,this policy combination of tariffs,tax cuts and tough migration laws seemed to contribute to a fall in the dollar,not a rise.In fact,the greenback never managed to reach the heights seen immediately after his 2016 victory through his first term.Whats more,we should remember that 2017 and 2018 saw the Fed tightening policy while all other major central banks left policy unchanged.And then there was the Covid pandemic in early 2020 which did not produce new highs for the dollar in spite of the greenbacks supposed safe-asset allure during times of such severe global economic stress and asset-price meltdown.One final point to note was that the dollar rose during the pre-Trump years,under Obama and again in the post-Trump years under Biden.In short,Trumps arrival appeared to reverse the dollars appreciation temporarily.Can we expect history to repeat itself,or is history only a good guide to the past?We suspect it will be the former and that Trump will leave office with a lower dollar than where he found it.We take this view for several reasons.On tariffs,we should remember that tariffs are bad for the US economy,as well as those targeted by tariffs.Both theory and evidence suggest that the imposition of tariffs leads to a stagflationary combination of weaker growth and higher inflation.It is true that US importers may need to buy fewer Canadian dollars,Mexican pesos and Chinese renminbi if tariffs are levied but trade flows account for such a small proportion of FX turnover that they really do not matter.Another argument,that tariffs and other policies such as tax cuts and mass deportations could keep the Fed on hold while others ease,is not a surefire way to create dollar strength.For a start,these policies threaten to lift inflation,and if that reduces US real(inflation adjusted)rates relative to others,the dollar is more likely to fall than rise.For it is real interest rates that count for currencies,not nominal rates.If nominal rates were most important,FX investors would buy the currencies of the highest interest rate countries but that does not happen because these countries usually have the highest inflation as well.In fact,the countries with the highest nominal interest rates tend to find that they have the weakest currencies on average.Another issue to consider is that tariffs,along with many other policies of the Trump administration,such as pulling out of multilateral institutions and embracing crypto currencies,undermine US hegemony and the dollars safe-asset status.In our view,these things seem likely to provoke more diversification away from the dollar.The US should remember that it is beholden to the rest of the world to provide the dollars that allow the country to maintain such low levels of saving(the large budget deficit,for instance)relative to investment.Americas so-called exorbitant privilege,of owning the worlds dominant currency,means that it can accumulate huge external debt,which Figure 4:The dollar stalled in the Trump years Source:Bloomberg 7075808590951001051101152009201020112012201320142015201620172018201920202021202220232024Dollar index(DXY)Trumps first term Standard Bank February 2025 7 stands at close to USD24tn,without incurring the sort of currency weakness and bond-market vulnerability that other countries would be expected to endure.In fact,evidence rather suggests that the US has attracted too much overseas savings because it has led to a potentially dangerous concentration of risk.The US stock market,for instance,has seen its weight rise from just over 30%of the global aggregate(MSCI World index)back in 1990 to around 70%today and thats despite the US share of global GDP having declined over the period.This increased weighting,as reflected in US stock market outperformance,has sucked foreign capital into the US and probably lifted the dollar in the process.This could certainly continue in the future,but we regard the situation as increasingly fragile.This does not mean that we expect some sort of huge reversal in capital flows to the US and dollar collapse,but we do think that those sending capital the USs way may require some cheapening of assets,via a weaker dollar,to continue supplying the ever-increasing amount of capital that the US requires.Another key component here is whether other developed countries can make their own economies and financial assets more attractive.In the past,the growth deficit and the asset price deficit to the US has been large and seemingly responsible for the dollars rise.This year should bring some reduction in the USs growth advantage.We see the US economy growing by closer to 2%than the near 3%from 2024.At the same time,the euro zone and UK are more likely to see growth this year of 1%,or above,compared to the sub-1%figures from last year.That might not be a big closure of the growth gap but,when it comes to the dollar,it does appear that market participants are heavily invested in the theme of US economic exceptionalism such that only a modest unwinding of this advantage is required to weigh the dollar down.In the near term,we think that the Trump-led dollar euphoria can continue for a bit longer,pushing euro/dollar,for instance,down into a 0.95-1.0 range.But as this euphoria fades,wed expect the euro to be back up to the 1.10 level in a years time,with similar improvement for other currencies,such as 1.35 for the pound and 140 for the yen.Steven Barrow This material is non-independent research.Non-independent research is a marketing communication as defined in the UK FCA Handbook.It has not been prepared in accordance with the full legal requirements designed to promote independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.Figure 5:US growth advantage expected to narrow Source:Standard Bank Research-0,50,00,51,01,52,02,53,0USEurozoneJapanUKCanadaAustraliaNZGDP forecast 2024GDP forecast 2025 Standard Bank February 2025 8 EM outlook for 2025 Introduction As we kick off 2025,the outlook for emerging markets might seem rosy at first glance.Sure,there are some solid fundamentals in play:decent economic growth,stable inflation,and low debt levels.But lets not get too carried away.This optimism could very well be misplaced.The real story lies in the intricate dance of monetary policy,trade dynamics,and broader economic conditions.Much is riding on a few key factors:Will the Federal Reserve cut rates?Will the US dollar weaken?And can we trust that Chinas growth wont falter under the weight of its own complexities?And obviously,the looming threat of an ever-escalating trade war and elevated geopolitical tension.On each of these scores the jury is still out.The markets may be putting on a brave face,whilst forecasts seem to be erring on the side of optimism and ignoring some a significant pivot from Beijing towards a less circumspect response.At this juncture,it seems that the balance of risks certainly leans more toward the downside.Buckle up!Relatively benign forecasts As we look ahead to 2025,IMF(2025)projections indicate a global economic growth rate of 3.3%,mirroring the pace of the past three years.While both developed economies and emerging markets are expected to expand at similar rates as last year,advanced economies will likely grow at less than half the speed of their emerging counterparts.This baseline forecast suggests a“smooth landing,”as described by the Bank for International Settlements(BIS,2024),fostering conditions favourable for rising stock markets,tighter credit spreads,and more relaxed financial environments.However,these seemingly optimistic projections mask significant challenges for emerging markets.The trajectory of the US dollar,fluctuations in commodity prices,shifting global risk appetites,and increasing macroeconomic uncertaintyparticularly due to slowing growth in China,their most critical trading partnerpose serious threats.Compounding these issues are escalating geopolitical tensions among major economies,raising alarms about potential global economic fragmentation(IMF,2023).Such fragmentation could undermine financial market stability(Boungou&Urom,2025)and drive up borrowing costs(Nguyen&Thuy,2023).The growth rate of emerging markets is not nearly as lofty as it once was The growth trajectory of emerging markets is markedly less robust than it once was.Current projections indicate that around two-thirds of the worlds emerging economies are expected to expand faster than their five-year pre-pandemic trendsa slight improvement over 2024.However,only three of the ten largest emerging marketsIndonesia,the Philippines and Polandare anticipated to accelerate in 2025.This small group of larger economies,primarily driven by China and to a lesser extent India,represents a staggering 80%of the overall economic growth in this category.When expanding the analysis to include the 20 largest emerging market economies,only India,Indonesia and the Philippines are forecast to achieve growth rates near or above 5%in 2023 fewer than in previous years.Overall,these economies are projected to grow by an average of 3.5%in 2025,significantly below the pre-pandemic average of 4.5%per year.Regionally,Sub-Saharan Africa is expected to see a boost,with growth accelerating from 3.5%to over 4.2%in 2025.This growth places it between the lagging performances of Latin America and Emerging Europe,driven largely by Asias dynamic economies.While these forecasts underscore the resilience of emerging markets,they also highlight the headwinds facing several larger economies that could derail their growth trajectories.Much like the uneven impacts felt during the pandemic and subsequent Geopolitical tensions,the US dollars strength,and inflation trends,pose challenges for emerging markets Fewer and fewer large emerging markets are expanding at rapid rates Standard Bank February 2025 9 recovery,2025 is likely to reveal a mixed bag of performances across the board.Growth rates will vary due to factors such as differing initial conditions,reliance on commodities,sensitivity to US interest rates and dollar fluctuations,levels of institutional maturity and resilience,and the overarching influence of geopolitical dynamics.In essence,while some emerging markets may show signs of strength,the overall landscape is fraught with challenges that could hinder progress and create a patchwork of growth across the globe.Inflation trend and rates still up in the air too The trajectory of inflation remains uncertain,with forecasts suggesting a decline to 4.2%in 2025,followed by a further drop to 3.5%in 2026.This reduction will be a welcome respite after the inflationary surge that marked the post-pandemic recovery.However,its crucial to note that advanced economies are expected to reach target inflation rates more swiftly than their emerging market counterparts.Major central banks,including the US Federal Reserve,are likely to shift toward easing restrictive monetary policies in 2025.Yet,the spectre of increased tariffs from the Trump administration loom ominously over these inflation forecasts.Such tariffs could stifle growth and exacerbate inflationary pressures(McKibbin et al.,2025).Coupled with the risks posed by potential inflationary effects stemming from US tax cuts and deregulation,these factors are likely to keep the Fed cautious for much of the year.In contrast,other central banks are expected to continue easing their policies,with some that have yet to do so likely to follow suit.This general trend toward easing will provide much-needed support for economic growth.However,the influence of treasuries may act as a headwind,preventing yields from declining as much as they otherwise might.Therefore,while the forecasted decline in inflation is encouraging,the interplay of tariffs,fiscal policies,and central bank strategies will be critical in shaping the economic landscape.The outlook remains complex,and stakeholders must navigate these uncertainties carefully.USs path biased towards strengthening albeit uncertain The trajectory of the US dollar appears biased toward strengthening,albeit with significant uncertainties.Wider yield spreads between the US and other countries,combined with punitive US tariffs,are likely to sustain a robust dollar.Analysts generally predict a strong US dollar relative to other currencies,particularly given the dimmer prospects for many advanced economies.These dynamic influences investor psychology and capital flows,often resulting in adverse effects on emerging market asset prices,especially equities(Mouffok et al.,2023).Research by Druck et al.(2018)and others highlights the negative correlation between dollar strength and the real economy,underscoring the challenges ahead.The primary mechanisms driving this relationship include:(i)an income effect stemming from the dollars impact on global commodity prices,(ii)increased costs for importing capital and inputs necessary for domestic production,and(iii)heightened inflationary pressuresparticularly for emerging markets already burdened by substantial levels of USD-denominated debt,which has doubled to USD 4 trillion as of Q3 2024 over the past decade(BIS,2024).While we anticipate that this dollar strength may diminish later in the year as the growth gap narrows and the Federal Reserve resumes easing,the current robust dollar complicates the outlook for emerging markets.A pressing concern is whether the dollars ascent may fuel further protectionist sentiments within the US administration.Although a deliberate devaluation of the dollar seems unlikely,its consequences would undoubtedly send shockwaves through the global economy.Emerging markets face complexities from US dollar fluctuations,commodity market changes,and geopolitical tensions that could affect growth Standard Bank February 2025 10 Commodity prices Commodity and oil markets are poised to be pivotal battlegrounds that will shape our economic landscape in the coming years.While oil prices may stabilize or even decline due to increased global production,a stronger dollar could exacerbate inflationary pressures in oil-importing nations.This challenge will be particularly pronounced in countries experiencing dwindling demand from China,which is anticipated to have a lasting impact on global commodity exports.It is crucial to recognize that commodity markets have yet to fully adjust to the reality of Chinas ongoing structural slowdown.For instance,China recently added an impressive 277.2 GW of new solar capacity,reflecting a staggering 28%year-over-year growthan amount that is almost double the entire installed capacity of the United States.Renewable energy has evolved beyond a mere driver of decarbonization efforts;it is now an integral component of Chinas economic framework.As we look ahead,many emerging markets remain heavily dependent on Chinese demand for their commodities.This reliance underscores the critical role of advanced economy long-run bond yields and commodity prices as key determinants of capital flows to emerging markets(Byrne&Fiess,2016).The stakes are high:should trade tensions escalate into a full-blown conflict,the repercussions could be catastrophic,not just for the regions involved but for the global economy.In essence,the interplay between commodity prices,currency strength,and geopolitical dynamics will be crucial in navigating the uncertain economic waters ahead.Reasons for some optimism in emerging markets Before delving into the significant challenges facing emerging markets in 2025,its essential to recognize the reasons for cautious optimism.However,for investors to shift more decisively toward emerging market assets,a compelling narrative highlighting potential recovery and growth is necessary.This narrative should be supported by factors such as plausible US rate cuts(though not guaranteed),a weaker US dollar(dependent on the Feds actions),favourable economic indicators especially from China(which seems less likely)and signs of easing geopolitical tensions(which appear very unlikely).Despite these concerns,emerging market growth is expected to surpass that of developed markets,suggesting greater opportunities for returns.In China,growth expectations have notably increased,largely due to existing stimulus measures.Its important to note that cross-country correlation studies do not robustly support the assumption that higher equity returns are exclusive to faster-growing economies.Gajdka and Pietraszewski(2016)argue that stock price returns are primarily driven by company earnings,which do not necessarily correlate with GDP growth.Encouragingly,earnings in emerging markets are projected to be relatively supportive,with a forward price-to-earnings(P/E)ratio of 14.5x,lower than that of advanced economies.Mayur(2015)finds that while the P/E ratio can serve as an effective performance proxy,it is most relevant for firms with substantial market capitalizations.Additionally,emerging market assets remain relatively under-owned,still below pre-COVID levels where they had been oversold especially in markets with smaller capitalizations(Harjoto&Rossi,2023).Moreover,similar to most advanced economies,many emerging market central banks are adopting an easing bias,creating a favourable environment for equity markets.Should the US Federal Reserve lower rates later this year,it could further bolster equities and temper US dollar strength(Lakdawala&Schaffer,2019).It is notable,however,that the impact of Fed policies on emerging markets can vary significantly(MacDonald,2017),influenced by the depth of domestic financial markets and Emerging markets are projected to grow faster than developed markets,presenting attractive investment opportunities.The diversity of contributing countries enhances this potential Standard Bank February 2025 11 stronger macroeconomic fundamentals(Mishra et al.,2018).This variability can create tensions between macroeconomic and financial stability(Kolasa&Wesoowski,2023).China economic prospects For the full year,Chinas GDP growth settled at 5%,slightly down from 5.2%in 2023,yet still aligning with Beijings targets.However,doubts linger regarding the reliability of economic data amidst sluggish stimulus efforts and persistent growth challenges(Rosen et al,2025).Looking ahead to 2025,Beijings primary mission is to elevate domestic consumption to address these entrenched economic disparities and sustain growth momentum,even amid deteriorating trade relations with the US.The December Central Economic Work Conference emphasized the urgent need to vigorously spur consumption to combat weak domestic demand and reduce reliance on exports.Beijing has indicated a substantial uptick in government spending as authorities ramp up efforts to rejuvenate the economy.The Politburos December economic work meeting underscored the necessity for unconventional counter-cyclical adjustments to stabilize growth.We project that Beijing will target GDP growth of around 5%for 2025,mirroring the 2024 target.However,with the property sector facing headwinds and exports unlikely to provide substantial support,government spending will be pivotal.We anticipate a fiscal deficit target of 4%,up from 3%target in 2024.Beyond the expanded budget deficit,we expect further measures to enhance fiscal support,including increased issuance of special-purpose bonds by local governments and special treasury bonds by the central government.We project GDP growth of 4.5%for 2025,heavily influenced by the impact of potential tariffs from the incoming Trump administration and the extent of fiscal and monetary support required to sustain growth.To foster enduring improvements in consumer confidence,policymakers must prioritize increasing household incomes and revitalizing the property sector.With external uncertainties looming,it is imperative to mitigate systemic risks and avert shocks to domestic demand that could result from declines in real estate or stock markets.The Peoples Bank of China(PBoC)is adopting a proactive approach to stabilize the yuan.While speculation suggests that Beijing may permit yuan depreciation in response to Trumps tariffs,the PBoC remains vigilant against potential capital flight,aiming to reassure the public that any depreciation will be modest,thus alleviating concerns about the necessity of moving funds offshore.Importantly,with the gradual liberalization of Chinas exchange rate system,shocks from the renminbi markets contribute more to fluctuations more currency markets than before(Chow,2021).Risks to the emerging market outlook Beyond the idiosyncratic challenges facing individual nations,we must confront the formidable geopolitical risks that overshadow the emerging market landscape.The Trump administrations trade policies will be crucial,likely injecting volatility into the market.During his first term,Donald Trump threatened significant tariffs,including a staggering 60%on Chinese goods,and has already implemented a 10%tariff on imports from China.The imposition of such tariffs is poised to inflate prices across a wide array of goods,potentially reigniting inflation in the US economy(McKibbin et al.,2025).A resurgence of inflation diminishes the likelihood of interest rate cuts this year,further complicating the economic environment.The spectre of destructive trade wars looms not only with China but also with key US allies,including Mexico,Canada,the United Kingdom,and Taiwan.Such conflicts could fracture the foundational economic and security arrangements that have long underpinned the global multilateral system,leading to heightened uncertainty in global markets.The repercussions of these trade wars would ripple through emerging markets,undermining their growth prospects and stability.We expect growth of 4.5%in China,but much will depend on geopolitical tensions and the corresponding fiscal response The outlook for emerging markets in 2025 is significantly affected by a range of risks,particularly geopolitical tensions and the potential for trade wars Standard Bank February 2025 12 The prevailing trend of mutually antagonistic policies has fostered a worldview where competition is viewed in zero-sum terms.During his previous tenure,Trumps withdrawal from international institutions weakened global multilateralism(Sullivan de Estrada,2023),prompting debates about the efficacy of a“multilateralism minus one”approach to pressing global challenges like climate change and trade(Fehl&Thimm,2019).Trumps America First doctrine could precipitate significant market fluctuations in the year ahead.While a shift towards a multipolar world is likely unavoidable(Krishnan&Kassab,2024),the journey ahead is fraught with uncertainty.Emerging markets may find themselves caught in the crossfire as the contours of this new geopolitical landscape begin to take shape.Chinas response In response to escalating US restrictions,Chinese authorities are intensifying their use of export controls and other retaliatory measures.Following the expansion of US export controls targeting Chinas chip industry in December 2024,Beijing acted swiftly,banning exports of critical dual-use minerals and launching an anti-monopoly investigation into Nvidias acquisition of Mellanox.Similarly,after the US enacted an additional 10%tariff on all Chinese goods,China responded with a multifaceted strategy,imposing tariffs of 15%on coal and liquefied natural gas(LNG),and 10%on crude oil,agricultural machinery,large-displacement vehicles,and pickup trucks.Moreover,Chinas response extends beyond tariffs.The Ministry of Commerce has enacted export controls on essential materials and added companies like PVH Group and Illumina,Inc.to its Unreliable Entity List.Furthermore,the State Administration for Market Regulation(SAMR)has initiated an investigation into Google for suspected antitrust violations.This suggests that Chinese officials are fully prepared to leverage their lawfare toolkit,indicating a shrinking number of potential offramps for de-escalation.As tensions rise,the potential for miscalculations and misunderstandings increases,creating a more volatile and unpredictable environment for emerging markets.Confirms a less circumspect Beijing in 2025 In the coming weeks and months,Beijing will be grappling with critical questions about its future trade relationship with the US.Trumps broader commitment to impose tariffs on all imports to the US might inadvertently encourage other major economies to strengthen their trade relations with China,creating a complex environment that Beijing must navigate carefully(Polk,2024).Technology and export controls presents another layer of uncertainty as it remains unclear whether Trump will revert to the less systematic approach he employed during his first term.Back then Xi Jinping successfully engaged in personal diplomacy to persuade Trump to lift restrictions on companies.Additionally,Trumps potential alienation of other key chip-producing nations,such as Taiwan,might open the door for China.Related,a shift in US diplomacy could alienate traditional allies undermine global multilateralism a spot China has been eager to full.At the World Economic Forum in 2017,President Xi stated,Pursuing protectionism is like locking oneself in a dark room Wind and rain may be kept outside,but so is light and air.Consistent with Chinas evolving foreign policy China is committed to promoting a partnership model that emphasizes development while rejecting a one-size-fits-all approach to human rights,advocating instead for respect for sovereignty and national contexts.A significant change in the past decade has been the introduction of Major Power Diplomacy with Chinese Characteristics.Previously,Chinas foreign policy language was carefully crafted to reassure the global community,emphasizing that China had no intention of challenging US primacy and would not export its political ideologies or development model.During Hu Jintaos era,the narrative of Chinas peaceful rise emerged,with leaders preferring to refer to China as the largest developing country rather than a power.With Xis leadership,Chinas swift retaliation to US tariffs and restrictions,including export controls on critical materials and investigations into foreign companies,indicates a readiness to engage in tit-for-tat economic strategies Standard Bank February 2025 13 China has begun to identify itself as a new major country,aiming for new major country relations.What is new in this approach?First,China has sought a leading role in shaping the new world order and international security.Although the narrative of peaceful rise persists,Xi conditions his vision of Asian harmony on the acceptance of Chinas regional supremacy(Thornton&Thornton,2018).In Africa,China has actively engaged in peace and security initiatives(Alden&Jiang,2019).Etyang and Oswan Panyako(2020)note that the principle of non-interference is undergoing a deliberate transformation,reflecting Chinas changing role in global geopolitics.Also,the ambition to tell Chinas stories well,introduced by President Xi in August 2013,aims to counter negative perceptions of China(Mattingly et al.,2024).Goals and strategies in Chinas global positioning The higher-level objective involves restoring Chinas standing in the world and calibrating its influence in global affairs to align with its economic status as an emerging superpower.The latest Government Work Report(GWR)reflects this aim,explicitly calling for a multipolar world and a new type of international relations,while affirming Chinas opposition to bullying tactics.In the broader context,President Xi has re-established confidence in Chinas Party-led political system after decades of ideological drift.This reassertion is aimed at revitalizing the Chinese Communist Party as a Leninist entity capable of delivering comprehensive leadership,fostering party-centric nationalism,and enhancing legitimacy(Tsang&Cheung,2022).A new model of governance Chinas previous stance of“no export”has evolved into the export of the China model of development and governance,particularly to the developing world.China aims to present a distinct approach to modernization and governance which emphasizes growth,stability,and effective leadership,offers compelling lessons for other nations(Alterman,2024).Simultaneously,China is advocating for reforms to increase its influence and representation in international institutions,framing this as the democratization of international relations.Importance of the Global South and Africa China is strategically positioning itself to champion the discourse power of developing economies within international organizations,aspiring to lead the Global South(Xu,2020).This involves a transformation described by Wang et al.(2022)as a matriculation from participant to practitioner to leader in multilateral settings.Herein,Chinas diplomatic and commercial engagement in Africa plays a crucial role providing a platform for China to act as a responsible power on the global stage(Mthembu&Mabera,2021).Overall,unlike in many other regions,perceptions of Chinas influence on African development are relatively positive,often more so than those of the United States.In many respects,China has cultivated a constructive narrative on the continent.This positive reception is bolstered by deep and robust diplomatic and commercial ties,supported by substantial multilateral frameworks like the Forum on China-Africa Cooperation(FOCAC),high-level visits,proactive diplomacy,and increasingly strong bi-directional commercial relationships.Conclusion The outlook for emerging markets is relatively benign.As 2025 kicks-off,emerging markets exhibit a relatively robust fundamental backdrop characterized by decent economic growth,stable inflation,and relatively low debt levels and default rates.However,the interplay of monetary policy,trade dynamics,and broader economic Chinas foreign policy is undergoing a significant transformation,which adds another layer of uncertainty to the emerging market outlook Standard Bank February 2025 14 conditions will be crucial in determining the trajectory of growth in 2025 and in the coming years.Much seems to orbit around expectations for Fed cuts,USD weakness,a decent level of growth in China and Trump proving to be more bark than bite.At the very least,the jury is out regarding each of the above,and the balance of risk on each of these scores seems to tilt to the downside.Jeremy Stevens ReferencesReferences Alden,C.Jiang,L.2019.Brave new world:debt,industrialization and security in ChinaAfrica relations.International affairs(London),2019-05,Vol.95(3),p.641-657 Alterman,J.B.2024.The China Model in the Middle East.Survival(London),2024-03,Vol.66(2),p.75-98 Byrne,J.P.Fiess,N.2016.International capital flows to emerging markets:National and global determinants.Journal of international money and finance,2016-03,Vol.61,p.82-100 BIS(2024).BIS Quarterly Review.Bank of International Settlements.December 2024.Boungou,W.Urom,C.2025.Geopolitical tensions and banks stock market performance.Economics letters,2025-02,Vol.247,p.112093,Article 112093 Chow,H.K.2021.Connectedness of Asia Pacific forex markets:Chinas growing influence.International journal of finance and economics,2021-07,Vol.26(3),p.3807-3818 Druck,P.Magud,N.E.Mariscal,R.2018.Collateral damage:Dollar strength and emerging markets growth.The North American journal of economics and finance,2018-01,Vol.43,p.97-117 Etyang,O.Oswan Panyako,S.2020.Chinas Footprint in Africas Peace and Security:The Contending Views.The African review,2020,Vol.47(2),p.336-356 Fehl,C.Thimm,J.2019.Dispensing With the Indispensable Nation?:Multilateralism minus One in the Trump Era.Global governance,2019,Vol.25(1),p.23-46 Harjoto,M.A.Rossi,F.2023.Market reaction to the COVID-19 pandemic:evidence from emerging markets.International journal of emerging markets,2023-01,Vol.18(1),p.173-199 Gajdka,J.Pietraszewski,P.2016.Economic growth,corporate earnings and equity returns:Evidence from Central and Eastern European countries.Comparative economic research.Central and Eastern Europe,2016-09,Vol.19(3),p.93-111 IMF,2023.Safeguarding Financial Stability amid High Inflation and Geopolitical Risks.In:Financial Stability Report.Washington,DC.Kolasa,M.Wesoowski,G.2023.Quantitative easing in the US and financial cycles in emerging markets.Journal of economic dynamics&control,2023-04,Vol.149,p.104631,Article 104631 Krishnan,A.Kassab,H.S.2024.The twilight of us dollar hegemony and the coming multipolar world.Austral(Porto Alegre),2024-03,Vol.12(24)Lakdawala,A.Schaffer,M.2019.Federal reserve private information and the stock market.Journal of banking&finance,2019-09,Vol.106,p.34-49 MacDonald,M.2017.International capital market frictions and spillovers from quantitative easing.Journal of international money and finance,2017-02,Vol.70,p.135-156 Mayur,M.2015.Relationship between PriceEarnings Ratios and Stock Value in an Emerging Market.Paradigm(Ghziabd,India),2015-06,Vol.19(1),p.52-64 This material is non-independent research.Non-independent research is a marketing communication as defined in the UK FCA Handbook.It has not been prepared in accordance with the full legal requirements designed to promote independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.Standard Bank February 2025 15 Mattingly,D.Incerti,T.Ju,C.Moreshead,C.Tanaka,S.Yamagishi,H.2024.Chinese state media persuades a global audience that the China model is superior:Evidence from a 19-country experiment.American journal of political science,2024-07 McKibbin,W.Hogan,M.Noland,M.2025.The international economic implications of a second Trump presidency,PIIE Working Paper 24-20.Mouffok,M.A.Mouffok,O.Bouabdallah,W.2023.Emerging markets economies sensitivity to us dollars strength during Russia-Ukraine war.Journal of Social Sciences,Vol.6(3),p.6-19 Mishra,P.NDiaye,P.Nguyen,L.2018.Effects of Fed Announcements on Emerging Markets:What Determines Financial Market Reactions?IMF economic review,2018-12,Vol.66(4),p.732-762 Mthembu,P.Mabera.,F.2021.Africas changing geopolitics:towards an African Policy on China.Africa China Cooperation.International Political Economy Series.Nguyen,T.Thuy,T.2023.Geopolitical risk and the cost of bank loans.Finance Res.Lett.,54(2023),Article 103812 Rosen,D.Wright,L.Smith,J.Mingey,M&Quinn,R.2025.After the Fall:Chinas Economy in 2025.Rhodium Group.Available online at:After the Fall:Chinas Economy in 2025 Rhodium Group()Sullivan de Estrada,K.2023.US retreat,Indian reform:multilateralism under Trump and Modi.India review(London,England),2023-03,Vol.22(2),p.139-149 Thornton,W.H.Thornton,S.H.2018.Sino-globalisation:The China Model After Dengism.China report(New Delhi),2018-05,Vol.54(2),p.213-230 Tsang,S.Cheung,O.2022.Has Xi Jinping made Chinas political system more resilient and enduring?Third world quarterly,2022-01,Vol.43(1),p.225-243 Polk,A.2024.Trivium Markets Macro.Trivium Advisory.Washington.Wang.,L.Zhang.,Y.Xi.,H.2022.The political economy of Chinas rising role in the BRICS:strategies and instruments of the Chinese way.Chinese Academy of Social Sciences.Beijing.Standard Bank February 2025 16 Resilient ambitions:Africas economy in a volatile global climate The global outlook for 2025 remains modestly optimistic,with growth projected at 3%.Central banks in advanced economies are expected to maintain an easing bias,supporting consumer spending and global risk appetite.However,geopolitical tensions and domestic political risks,such as potential US tariff policies and Europes fiscal struggles,could disrupt this stability.Against this uncertain global backdrop,Sub-Saharan Africa(SSA)faces a mix of external headwinds and internal opportunities that shape its growth prospects.Growth in SSA is forecast to recover to 4%in 2025,from 3.6%in 2024,with domestic consumption remaining a stabilizing force for many economies.However,reliance on exports to China makes countries such as Angola,DRC and Zambia vulnerable to any economic slowdown in China.US tariffs could exacerbate these risks by dampening global trade flows,further pressuring commodity-dependent economies.Despite these challenges,several SSA countries are demonstrating resilience,driven by robust private consumption.Climate-related shocks continue to weigh heavily on the region.Severe droughts in 2024 reduced agricultural yields and hydropower generation in Zambia and Malawi,exacerbating economic challenges.La Nia conditions in 2025,though less intense than initially feared,may not provide the rainfall relief necessary to fully replenish resources and support recovery in these economies.As climate risks intensify,the need for investment in resilient infrastructure and diversified economic activity becomes more pressing.The global transition to clean energy presents a significant structural opportunity for SSAs critical minerals sector.Rising demand for minerals such as copper,cobalt and nickel,driven by electric vehicles,solar energy and battery technology,positions Zambia and the DRC as key suppliers.The DRC,with 70%of the worlds cobalt reserves,and Zambia,with vast copper deposits,stand to benefit immensely.Infrastructure projects,such as the Lobito Corridor and the TAZARA rail line,aim to address logistical inefficiencies,reduce transportation costs,and enhance mining profitability.However,policy consistency and regulatory clarity are crucial to attract the long-term investment needed to unlock this potential fully.Fiscal consolidation remains a central theme for many SSA economies as they navigate high debt burdens.While governments increasingly rely on raising revenue rather than cutting expenditure,this approach has its limitations.For instance,Kenyas tax hikes since 2023 have triggered public protests even as revenue collection growth eases,highlighting the challenges of implementing fiscal reforms in economies with large informal sectors.Broader tax bases and improved governance are essential for sustainable fiscal health.Mozambique exemplifies the fiscal pressures facing the region,with rising domestic debt and liquidity constraints increasing the risk of defaults.External ratings agencies have downgraded this country,reflecting growing investor concerns.Monetary policy in SSA is expected to remain largely accommodative in 2025,with central banks in countries such as Angola and Malawi likely maintaining cautious stances.Egypts declining inflation provides room for further easing,while Kenya plans new infrastructure bonds to address significant maturities.Zambia and Nigeria face challenges related to exchange rate pressures.Ugandas rising government bond yields,driven by increased domestic borrowing due to large local debt maturities,offer potential opportunities for duration trades despite fiscal risks into the January 2026 elections.Standard Bank February 2025 17 The political landscape in 2025 is less crowded than in 2024 but includes significant elections in Cte dIvoire,Malawi and Tanzania.Cte dIvoires elections could see unrest if President Ouattara seeks a fourth term,while Malawis political landscape has been reshaped by the dissolution of key alliances and the passing of Vice President Chilima.Tanzanias ruling CCM party is expected to retain power,leveraging infrastructure achievements and economic reforms.These elections will influence governance,stability and economic trajectories across the region.Despite external challenges,SSA economies will likely continue to show resilience,with several countries approaching,or surpassing,pre-pandemic growth levels.This regions ability to capitalize on opportunities,such as the rising demand for critical minerals,while managing risks from climate shocks and fiscal pressures,will be crucial for sustaining its recovery and long-term growth.Climate-related shocks frequency increasing GDP growth in SSA is likely to recover to around 4.0%y/y in 2025,from an expected 3.6%y/y in 2024.Our assessment,that SSA growth will likely prove resilient from the January 2024 AMR(African Markets Revealed)publication,amid sluggish global growth and fading external demand,seems to have transpired.We had emphasized back then that,since private consumption expenditure comprises a notably larger share of overall GDP,subdued external demand from weaker global growth wasnt likely to majorly disrupt economic activity in many of the SSA markets in our coverage.But still,SSA economies that are reliant on robust external demand from China for their key exports may still face downside risks to growth over the coming year,should US tariffs become detrimental for economic activity in China.Of the markets in our coverage,DRC,Zambia and Angola have a sizeable concentration of their exports that are routed to China.In Angola,around 45%of their total exports of goods go to China,while in DRC this is higher,at around 48%.In Zambia this ratio is also elevated,at around 28.7%.However,this is lower in other economies such as Botswana at c.7.2%,Ethiopia c.8.4%,Ghana c.8.7%,Kenya c.2.8%,and Nigeria at c.3.3%.Nonetheless,oil-exporting economies such as Nigeria may still be susceptible to a slowdown in the Chinese economy,as this may coincide with a decline in international oil prices and worsen the external position.In the past,this has exacerbated FX liquidity conditions and weighed on growth in the non-oil sector too.However,recent pledges by Chinese authorities,to ramp up their stimulus support,may underpin economic activity in China and thereby support prices for both oil and copper.Figure 1:Exports to China%total exports Source:UNCTAD 0102030405060MauritiusUgandaEgyptKenyaNigeriaSenegalMalawiTanzaniaCote dIvoireRwandaBotswanaEthiopiaGhanaNamibiaMozambiqueZambiaAngolaDRC Standard Bank February 2025 18 But as weve stressed in previous AMR editions,more than shocks to external demand,domestic shocks that drain personal consumption expenditure such as prolonged weather shocks,aggressive monetary policy tightening from an overheating of the economy and entrenched political disruptions,are likely to have a larger and durable negative impact on economic growth in our markets.In fact,over the better part of the past decade or so,economic growth in SSA has increasingly been influenced by climate-related shocks.For instance,droughts and floods are not only becoming acute,but the frequency has also increased.Extreme La Nia drought conditions in 2024 weighed heavily on GDP growth in both Zambia and Malawi.The drought,described as a humanitarian catastrophe by the United Nations,destroyed key crop harvests,reduced hydropower production and drained livelihoods in Zambia,Malawi and other southern African economies.As we have highlighted in our previous edition of the AMR,hot on the heels of the El Nio weather conditions experienced in 2024,which resulted in severe droughts in Zambia and Malawi and heavy rainfall in Kenya and Uganda,a transition towards La Nia conditions is now being widely expected by weather experts.This would likely reverse the weather trend experienced in 2024,with the East Africa region expected to face drier conditions,while southern Africa,including Zambia and Malawi,could now face increased rainfall.La Nia conditions were expected to begin in H2:24,although,per the International Research Institute for Climate and Society(IRI),this will likely only transpire around Q1-Q2:25.But,more importantly,the intensity of La Nia conditions is likely to be milder,compared to earlier expectations from climate experts.While the weaker than expected La Nia may be a point of celebration for economies in East Africa,economies such as Zambia and Malawi may now potentially experience lower rainfall than was previously envisaged.This would in turn not aid the expected replenishing of the hydropower dams and would also not underpin any rapid improvement in agricultural productivity.However,with base effects expected to unwind,GDP growth in Zambia is likely to receive a statistical boost in 2025.Notwithstanding the risks of below-average rainfall from the weaker-than-previously expected La Nia,we see GDP growth recovering to 5.8%y/y in 2025,from an expected outturn of 2.2%y/y in 2024.In fact,the mining sub-sector could add an additional 75k MT in copper production in 2025,based on guidance from listed mining firms.This would equate to about 10.3%y/y growth in copper output for 2025.But of course,there are notable downside risks to this forecast,should agricultural productivity and hydropower generation remain subdued.Figure 2:IRI probabilistic seasonal rainfall forecast for Africa Source:IRI Standard Bank February 2025 19 In Malawi,too,GDP growth will likely recover to 2.5%y/y in 2025,from an expected 1.8%y/y in 2024.Despite a weaker intensity La Nia being expected,the governments meteorological department expects above-normal rainfall in Q1:25.Should this transpire,food harvests will likely improve,which may reduce cereal imports and thereby likely underpin net exports and GDP growth.Furthermore,government expenditure could also increase ahead of the September 2025 elections,which could support growth.However,in addition to the downside risk of below-average rainfall for growth,too much rainfall can also create flooding and destroy crops in key food-growing regions of the country.The agriculture sub-sector accounts for around 22.0%of GDP.Climate-related shocks have also increased in frequency in Mozambique.Following the detrimental effects of Cyclone Freddy back in 2023,Cyclone Chido has already hit parts of northern Mozambique,resulting in notable damage to infrastructure.But the cyclone is also likely to weigh down agricultural output,considering that the agrarian sector accounts for nearly 25.0%of GDP in Mozambique.We have slashed our GDP growth forecast for Mozambique to 2.5%y/y in 2024,from our initial expectation of 4.6%y/y.For 2025,we now expect growth of 3.0%y/y(3.8%y/y previously).Growth may have contracted in Q4:24 due to post-election protests and,with the risk of entrenched domestic political disruptions,growth may even potentially contract in Q1:25.Moreover,aside from the risks of protests becoming durable,economic activity may be dragged lower by FX liquidity pressures that may persist,intensifying fiscal pressures,and recurring episodes of insecurity in Cabo Delgado which will further delay FDI in the LNG sector.GDP growth in Kenya will likely be lower at 4.6%y/y in 2024,from our earlier forecast of 4.9%y/y.This downward revision was largely due to economic disruptions during the Gen-Z led protests in mid-2024.Growth in Q3:24 eased to 4.0%y/y,from 4.6%y/y in Q2:24,and 5.0%y/y in Q1:24.Due to this slower impetus from 2024,we now see GDP growth rising to 5.0%y/y in 2025,lower than our earlier expectation of 5.3%y/y.Interestingly,despite the torrential El Nio rainfall in Q2:24,growth in the agricultural sub-sector remained resilient,at 4.8%y/y,from 6.1%y/y in Q1:24.In fact,positively,it appears that the Kenya Kwanza governments increased emphasis on agriculture sector reforms could be bearing fruit.Growth in the agricultural sub-sector averaged 5.0%y/y in the 9-m to September 2024 and 6.4%y/y in 2023.This exceeds the average growth of 2.2%y/y in the sector between 2018-2022.The government has been providing fertiliser subsidies to farmers,while also providing seeds to spur cotton cultivation.Of course,favourable base effects should help overall GDP growth recover in Kenya in 2025.However,the risk of drier weather conditions from the La Nia drought may still weigh down agrarian output.Additionally,personal consumption expenditure may also remain sluggish over the coming year due to still elevated taxes and higher statutory deductions from salaried employers.However,declining KES interest rates may help spur private sector credit(PSC)lending and underpin consumer spending in 2025.However,with government arrears owed to suppliers and contractors still in excess of KES700bn(c.4.4%of GDP),PSC growth could remain subdued as banking sector non-performing loans(NPLs)typically dont decline when arrears are also increasing.The government still has plans to issue local bonds to roads contractors to clear part of these arrears.However,should arrears remain elevated,public investment in infrastructure may also decline further,likely weighing down growth.Growth in Uganda has been impressive,in line with our expectations.This has largely been on the back of higher investment spending around the oil sub-sector.We see GDP growth rising further,to 6.5%y/y in FY2024/25 and 7.5%y/y in FY2025/26,from 6.2%y/y in FY2023/24.We expect the government to secure and finalise all the Standard Bank February 2025 20 funding requirements for the East Africa Crude Oil Pipeline(EACOP)in 2025.However,on first oil,we see this being delayed into H2:26,while the government still sees first oil by the end of 2025.But again,as we have highlighted before in previous editions of the AMR,even should first oil be delayed beyond our 2026 baseline assumption,FDI in the oil sector will probably remain robust and thereby support GDP growth.Furthermore,government spending outside the oil sector will also likely increase in 2025 ahead of the January 2026 elections.This could also support growth.However,with Ugandas external position looking weak,should the UGX come under pressure from either a stronger USD globally or looser fiscal policy,the Bank of Ugandas MPC is likely to tighten monetary policy conditions again,which could drag down consumption expenditure.Also,should a stronger-than-expected La Nia occur in H1:25,growth in the agrarian sector will likely decline and drag down overall growth too.In West Africa,growth in Nigeria will likely recover to 3.5%y/y in 2025,from an expected 3.2%y/y in 2024.With most of the reforms,such as removing fuel subsidies and adjusting the NGN drastically to address overvaluation and USD liquidity concerns now behind us,consumer growth could gradually recover.We see 7.6%y/y growth in crude oil production in 2025,which equates to an average of 1.63m bpd.Notwithstanding sluggish new investment in the oil sub-sector,the authorities continue to focus on curbing oil theft and pipeline vandalism.Moreover,commencement of operations at the Dangote refinery should also boost growth in the oil refining sub-sector and support overall growth through linkages with other sectors such as construction and transport.Further,the improvement in FX liquidity will also likely continue to bode well for growth in the non-oil economy.However,should oil production falter or should exchange rate pressures re-emerge,growth will likely be dented,particularly as inflationary pressures remain elevated.Growth in Ghana has surprised to the upside in 2024.We now expect GDP growth to rise to 6.2%y/y in 2024,from our initial view of 3.8%y/y.Despite a poor performance from the cocoa sub-sector,the mining sector outperformed in 2024.We expect this trend to continue in 2025 following the commissioning of the Cardinal Namdini mine in Q4:24,and a new mine Ahafo North is also expected to commence production in mid-2025.The authorities expect these two mines to cumulatively contribute around 600k ounces to gold production.Hence,this development may also result in higher GDP growth in 2025 than our current core scenario.Figure 3:Nigeria oil production Source:CBN;NUPRC-20,0%-15,0%-10,0%-5,0%0,0%5,0,0,0 ,0%1,001,201,401,601,802,002,202,402,6020062007200820092010201120122013201420152016201720182019202020212022202320242025fOil Production(mbpd)y/y growth(RHS)Standard Bank February 2025 21 In Botswana,we forecast 3.7%y/y GDP growth in 2025,from an expected contraction of 3.5%y/y in 2024,driven largely by a slower decline in net exports and an increase in domestic spending,courtesy of increased monetary and fiscal stimulus.The likely contraction in growth in 2024 was worsened by domestic supply-side constraints,particularly in the utilities sector where the Morupule B power plants maintenance works created significant energy supply shortages,while the agricultural sectors performance remained subdued due to drought conditions in the broader southern Africa region.Our baseline scenario for 2025 includes a slower decline in natural diamond prices as the market stabilizes,with production cuts potentially easing price pressure from lab-grown alternatives and 20-y high inventories.Laying the tracks for a structural shift The long-term demand for critical minerals such as copper,cobalt and nickel may surge over the coming decades,driven by electric vehicle growth,solar power expansion,artificial-intelligence(AI)data centers,and robotics.This battery-technology super-cycle represents a major structural tailwind for electrification metals,with estimates by the SBR mining and resources team indicating global annual copper demand as likely to double,from currently 25m MT,to 50m by 2050.Zambia and the Democratic Republic of Congo(DRC)are ideally positioned given their hefty high-grade deposits.According to the United States Geological Survey(USGS),DRC has approximately 70%of the worlds cobalt reserves,and copper reserves of approximately 80m MT(USD750bn at current prices).Zambias copper reserves are estimated at 21m MT(USD189bn).Critical minerals demand growth creates a structural growth opportunity,not only for these two countries but also for Angola by way of the Lobito Corridor,and for Tanzania by way of the TAZARA rail line,which,respectively,connect the Zambia-DRC Copperbelt to the US export market via the Atlantic facing Lobito port,and to China via the Dar es Salaam port on the Indian Ocean.The Lobito corridor investment project,funded by the Partnership for Global Infrastructure and Investment(PGII),is a USD10bn rehabilitation and development of rail,road,bridges,and energy infrastructure.Angola is the primary beneficiary given that 90%of the rail line falls within its borders,as does the Lobito port.Figure 4:SBR vs IMF GDP forecasts 2025 Source:Standard Bank Research;IMF 0,02,04,06,08,010,012,0AngolaBotswanaCote dIvoireDRCEgyptEthiopiaGhanaKenyaMalawiMauritiusMozambiqueNamibiaNigeriaRwandaSenegalTanzaniaUgandaZambiaIMF 2025fSBR 2025f Standard Bank February 2025 22 In Zambia,the refurbishment of the Lobito corridor may boost efficiency and throughput of existing mines,while simultaneously laying the foundation for broader economic growth.Local contractors can see immediate benefits in track rehabilitation and station upgrades,while secondary towns near the rail corridor may develop bonded warehouses and other services for metals and general cargo.From a mining perspective,long-term investment decisions tend to be based on long-term copper demand and sustained high prices.As such,for mining,the benefits of the Lobito corridor are likely to stem from wider margins by way of logistical efficiency gains.Currently,much of Zambias and DRCs copper travels up to 2,000 kilometers by truck from mines to Durban or Richards Bay ports in South Africa,along the way facing border delays,security risks,and high insurance costs.Turnaround can be up to 60 days from mine to port.Therefore,streamlined logistics from trucking should improve margins for mining operators.Beyond mining,an optimized Lobito and TAZARA corridor can reduce truck congestion on existing road networks throughout Zambia,expedite delivery of capital goods imports,and enable Zambias non-traditional exports(including agricultural products)to reach regional markets faster and cheaper.To maximize the opportunity presented by critical minerals demand,a consistent and transparent regulatory framework is as important as infrastructure investment.Frequent changes to mining taxes or royalty rates,and uncertainty over production-sharing agreements,may erode investor confidence and deter the long-term capital needed to develop large-scale mining projects.By upholding regulatory clarity,Zambia and DRC should attract reliable investment and fully capitalize on the structural opportunities provided by copper,critical minerals,and the infrastructure supporting their extraction.Is revenue-driven fiscal consolidation failing?Fiscal consolidation,the term increasingly commonly referred to when discussing SSA debt sustainability and/or public finance management dynamics.Often,when there is a concern about public debt vulnerabilities,reducing the fiscal deficit invariably becomes an urgent requirement.However,it is becoming habitual for economies in Africa to increasingly focus on mobilising higher revenue,rather than cutting back on expenditure notably,in order to advance fiscal consolidation and restore public debt on a more sustainable trajectory.Figure 5:Lobito and TAZARA corridor Source:Standard Bank Research Standard Bank February 2025 23 Arguably,many would assert that African governments prefer revenue-based consolidation as they have a limited propensity to scale back on exorbitant and bloated government costs.But,in many instances,even the IMF frowns on expenditure-based fiscal consolidation,arguing that it can increase inequality.The IMF has been proponents of not cutting back on capital expenditure or critical social spending programmes,believing that this could dent long-term growth.In essence,the IMF prefers a balanced approach that combines spending cuts and revenue increases which can help ensure both fairness and economic development.However,there is substantial support for expenditure-based consolidation in OECD research papers,which emphasizes that reducing government spending,particularly on current expenditure,has a greater likelihood of achieving long-term debt stabilization.The World Bank also agrees that reducing spending typically has a smaller negative impact on economic growth than would raising taxes.Tax hikes,according to the World Bank,can lower private sector activity by reducing disposable income and discouraging investment,while well-targeted spending cuts can maintain investor and consumer confidence,keeping an economy stable.Indeed,many countries probably rely on raising revenue to address fiscal problems because their ability to cut essential spending is limited.However,focusing too much on increasing tax rates can push these economies beyond the point where higher taxes generate more revenue.Of course,this has been well documented by the Laffer Curve theory.However,based on empirical research,the Laffer Curve doesnt always necessarily hold in developing countries,with results being mixed.While there isnt much recent research conducted on this,studies from the 1980s found some evidence of increased tax revenue in Jamaica after tax rates were reduced,although this wasnt the case in India.Interestingly,in Jamaica,when tax rates were cut,the number of taxpayers grew significantly.But still,other factors,such as improved tax administration,may have influenced this outcome.For instance,Kenyas recent tax policy adjustments which eventually resulted in youth protests in mid-2024,such as the VAT revision on fuel to 16%from 8fective July 2023,and the introduction of new individual personal income tax rates and bands,provide valuable insights into revenue dynamics.Interestingly,VAT collections rose by 17.3%y/y in FY2023/24,compared to the 10-y average of 12.6%y/y(20102019).Similarly,income tax collections grew by 10.74%y/y in FY2023/24,falling below the 10-y average growth rate of 14.2%y/y(pre-2019).Admittedly,one must acknowledge that other factors may have either dampened or underpinned economic growth during these periods.However,we suspect that the Laffer Curve probably doesnt hold in this instance due to the large informal sector in Kenya,which accounts for around 86%of total employment statistics.In fact,despite recent improvements,Kenyas tax as a%GDP remains below the levels seen between 2015 and 2018,perhaps signalling a decline in the efficiency of tax mobilization relative to economic growth.Standard Bank February 2025 24 But then again,notwithstanding a misalignment of the Laffer Curve theory in this case,we find it unsurprising that the return on the VAT increase is higher than the hike in personal income tax.This is likely due to the large magnitude of the informal sector workforce where VAT increases,as an indirect consumption tax,would probably capture the vast informal sector.On the other hand,the increase in personal income tax rates wouldnt necessarily tap into the large informal sector.In fact,there clearly appears to be a relationship between the size of the informal sector and the revenue collections as a%of GDP for VAT and income tax.For example,per data from the International Labour Organisation(ILO),economies in SSA such as South Africa,Mauritius and Namibia,have a relatively smaller share of the informal sector as function of total employment statistics,at 39.8%,46.9%and 58.6%respectively.Ergo,unsurprisingly,VAT collections as a percentage of GDP are higher in South Africa at around 6.2%,7.3%in Mauritius,and 6.7%in Namibia.This would be in comparison to Kenya at 4.1%,Ghana at 4.2%and Uganda at 3.8%all economies with informal sector workforces reported at between 85%and 95%.In some economies,such as Nigeria where the VAT rate is the lowest amongst the economies in our coverage at 7.5%,while the informal sector size is reported at over 90%by the ILO,an increase in the VAT rate(which is widely expected by the market this year)may boost collections not just because of the large informal sector but also as the VAT rate is perhaps just way too low.Figure 6:Kenya tax revenue VS GDP growth Source:Central Bank of Kenya Figure 7:Relationship between informal employment and tax revenue Source:Various ministries of finance,IOL -1012345678-10-5051015202530200220042006200820102012201420162018202020222024%y/y%y/yIncome TaxVATTotal tax revenueGDP growth(RHS)AngolaBotswanaBrazilCte dIvoireDRCEgyptEthiopiaGhanaKenyaMalawiMauritiusMozambiqueNamibiaNigeriaPakistanRwandaSenegalSouth AfricaTanzaniaTrkiyeUgandaZambia203040506070809010011005101520253035Informal employment%total employment Tax revenue%GDP Standard Bank February 2025 25 Moreover,Mozambique,has the highest corporate tax rate amongst the countries in our coverage,at 32%.They collect around 6.6%of corporate tax as a percentage of GDP,while in Mauritius and Egypt,where the corporate tax rate is 15%and 22.5%(some of the lowest in our coverage)respectively,they collect around 3.6%and 3.9%of GDP respectively.However,the corporate tax rate in Uganda and Kenya is at 30%,yet these economies collect corporate tax of around 1.9%and 1.0%of GDP respectively,perhaps reflecting deficiencies in the investment climate.Ugandas 20122013 personal income tax reform,which raised the top marginal rate from 30%to 40%,while adjusting lower-income thresholds,also highlights interesting dynamics.Personal income tax revenue rose by 21.4%during 20122013,only marginally above the 8-y average of 21fore the reform.But again,Ugandas informal sector is large,estimated at nearly 95%of total employment statistics,per the ILO.In Ghana,when VAT was cut to 12.5%,from 15.0ck in 2018,y/y growth of VAT collections averaged just 4.5%during 2018 and 2019,from 22.6%in the 3-y to 2017.This isnt surprising given that Ghanas informal sector is c.85%.But,crucially,while there is probably enough evidence to suggest that VAT increases will likely grow tax revenue faster in most economies in SSA given their large informal sectors,some economies may have their tax rates way lower than is optimal.Hence,in this scenario,any increase in tax rates off a low base will likely spur tax revenue Table 1:Tax rates vs tax revenue%GDP CIT VAT Personal income tax rates Tax revenue%GDP Angola 25 14 25 15.4 Botswana 22 14 25 13 Cte dIvoire 25 18 32 13.6 DRC 30 16 40 7.1 Egypt 22.5 14 27.5 12.9 Ethiopia 30 15 35 6.8 Ghana 25 15 35 13.1 Kenya 30 16 35 14.5 Malawi 30 16.5 35 10.8 Mauritius 15 15 20 22 Mozambique 32 16 32 21.9 Namibia 30 15 37 30.3 Nigeria 30 7.5 24 1.5*Rwanda 28 18 30 15.4 Senegal 30 18 43 19.8 South Africa 27 15 45 24.5 Tanzania 30 18 30 11.4 Uganda 30 18 40 12.6 Zambia 30 16 37 17.9 Source:Various tax authorities;Various ministries of finance;Standard Bank Research*Tax revenue refers exclusively to revenue streams allocated to the federal government Figure 8:Uganda tax revenue vs GDP growth Source:OECD;Uganda Bureau of Statistic 0,002,004,006,008,0010,0012,00-50510152025302004200620082010201220142016201820202022%y/y%y/yTotal Tax revenueTaxes on income,profits and capital gains of individualsGDP growth(RHS)Standard Bank February 2025 26 collections in the near term at least.But,more importantly,as it is becoming increasingly difficult to formalise informal sectors in SSA,authorities perhaps need to relentlessly focus on broadening the tax base,instead of relying solely on increasing tax rates.Of course,hiking VAT rates,regardless of the size of the informal sector,is politically challenging.Thus,perhaps utilisation and leveraging off technology will likely be a quicker way to broaden the tax base and thereby improve tax compliance.Although,various studies suggest that growing non-tax compliance in SSA is perhaps less to do with inefficient tax administration,but rather strongly linked to the perception amongst citizens that the government isnt providing adequate and quality public services such as health,transport and education.This change in perception,along with efforts to continue broadening the tax base,will be central in reviving tax revenue durably for economies in SSA.Mozambique:higher risk of domestic debt default,and poor prospects of any improvement in sovereign ratings We examine Mozambiques domestic debt performance as this economy faces recurrent episodes of government bond arrears and a large increase in bond maturities in 2025 and 2026.Before,arrears were partly attributed to poor debt management office(DMO)capacity,which saw the Ministry of Economy and Finance(MEF)completing in 2024 the migration of external debt data to the Meridian IT system,from CS-DRMS,with a similar process being followed for domestic debt,to help improve debt management.However,we foresee administrative issues as well as entrenched liquidity pressures culminating in a higher risk of a domestic debt default in 2025.Indeed,external rating agencies too have been flagging Mozambiques sovereign debt pressures.In October 2024,S&P downgraded Mozambiques local currency(LCY)long-term sovereign rating to CCC,from CCC ,while affirming the short-term LCY rating at C,with a stable outlook or both LCY and FCY.In August 2024,Fitch has affirmed Mozambiques foreign currency(FCY)rating at CCC .This rating agency has not assigned LCY ratings on Mozambiques sovereign since August 2023.The agency decided to withdraw due to a dearth of reliable information on the resolution of late coupon payments on domestic bonds.Moodys however has kept Mozambiques LCY and FCY sovereign debt at Caa2,but with the outlook downgraded from positive to stable in September 2023.We see little chance of this economy garnering any material improvement in sovereign ratings soon unless a speedy resumption of LNG investment can manage to lift economic growth.An alarming rapid rise in domestic debt in 2024An alarming rapid rise in domestic debt in 2024 We estimate central government domestic debt to have grown by an alarming 30%y/y in 2024,to just over MZN400bn(c.USD6.4bn),or 29%of GDP,from 23%of GDP in 2023.This may be due to poor revenue performance during 2024 and general election overspending.Mozambiques rapid rise in domestic debt began in 2016 when over USD2bn in previously undisclosed publicly guaranteed loans came to light,resulting in the suspension of an IMF programme at that time.This has also limited access to external borrowing in the meantime.Therefore,central bank financing to the government rose to more than double of the legal limit of 10%of revenue of the previous fiscal year.Standard Bank February 2025 27 More recently,the implementation of the governments unique salary(TSU)in the latter part of 2022 saw the wage bill rising by a staggering 40%y/y in that year,partly financed by a 24%y/y increase in central government domestic debt,with part of that in the form of domestic bonds issued which are now maturing in 2025 and 2026.The wage bill in 2024,targeted at MZN199.4bn(c.USD3.1bn),or 14.1%of GDP,consumes over 70%of government revenue,forcing the government to continue borrowing aggressively in the domestic market.Data reported to Q3:24 shows central bank financing corresponding to 18%of central government debt balances,with T-bills carrying a 31%weight,bonds representing 44%of the exposure,and other term-facilities accounting for 7%.A material rise in bond repayments in 2025 and 2026A material rise in bond repayments in 2025 and 2026 We have been flagging an 88.7%y/y increase in government bond repayments in 2025,to MZN37bn(c.USD580m),from MZN19.6bn in 2024,then rising further,by 19.1%y/y in 2026,to MZN44.1bn(c.USD690m).Poor government bond subscriptions meant that the government has had to increase its reliance on T-bill issuances to fund the Treasury.Figure 9:Central government domestic debt balances Source:Banco de Moambique;Ministrio da Economia e Finanas;Standard Bank Research Figure 10:Government domestic bond principal repayment Source:Bolsa de Valores de Moambique;Standard Bank Research 05101520253035050100150200250300350400450201620172018201920202021202220232024e%of GDPMZN bnOtherBondsT-billCentral bankCentral government domestic debt(MZN bn)Central government domestic debt(%of GDP)024681012141618Jan-25 Mar-25 May-25 Jul-25Sep-25 Nov-25 Jan-26 Mar-26 May-26Jul-26Sep-26 Nov-26MZN bn Standard Bank February 2025 28 Rolling over these bonds,most likely via switch auctions,was the strategy of the previous cabinet to help in dealing with large domestic bond repayments and avoid defaulting.The new cabinets approach is not known.Mozambiques capital markets remain underdeveloped,implying a heavy concentration of government T-bill and bonds exposures in commercial banks balance sheets,pension funds and insurance companies,as well as limited participation from other companies and the public.Notably,investment by foreigners in these instruments is also minimal.Per the latest published commercial bank financials reported to December 2023 and June 2024,the top five commercial banks hold over 50%of government debt exposures in the form of T-bill and bonds,with pension funds,including the National Social Security Institute(INSS),also holding a large portion of these instruments,which could range at 20-30%.Such heavy concentration may assist the government because it implies managing a limited number or stakeholders in performing switch auctions.Debt service metrics now alarming,in the context limited fiscal spaceDebt service metrics now alarming,in the context limited fiscal space At face value,per the 2025-2027 medium-term fiscal framework,Mozambiques domestic debt service(interest plus principal)ratio,seen at 17.4%of revenue in 2025 and 14.9%in 2026,with external debt service(interest plus principal)to revenue ratios at respectively 11.6%and 10.8%in 2025 and 2026,does not look particularly alarming,especially when compared with the debt service ratios of economies that have defaulted.However,Mozambiques wage bill,consuming over 70%of revenue,translates into severe liquidity constraints for this sovereign,which does raise deep concern about domestic debt service levels.Still,Mozambique compares favourably from an inflation perspective.Monetary policy being kept tight,by means of high real interest rates,and high cash required reserves(CRR)at 39%for LCY deposits and 39.5%for FCY deposits,has helped to sterilize the impact of fiscal slippage on inflation.This,alongside the USD/MZN pair being kept stable since mid-2021,has seen inflation outcomes low,last reported at 4.2%y/y in December 2024,and remaining in single digits since April 2023.We forecast inflation closing 2025 at 6.1%y/y because of constrained aggregate demand and a stable metical limiting imported inflation.Easing inflation has allowed the Banco de Moambique to cut the MIMO policy rate by a cumulative 450 bps in 2024,to 12.75%,from 17.25%,which helps in lowering the cost of financing,especially for the government.This goes a long way in helping to reduce the governments domestic debt interest bill.Further,the central bank could use the LCY CRR to help in releasing some LCY liquidity and thereby entice commercial banks participation in the likely government debt reprofiling exercise this year and next.We view domestic debt defaults risks as having increased,especially due to the Treasurys severe liquidity constraints.The measures announced by President Daniel Chapo during his inaugural speech on 15 January may not relieve the governments liquidity pressure.The president announced expenditure cuts of MZN17bn(c.USD266m)by reducing the size of the government,dealing with ghost workers,improving the governments procurement process,and dealing with corruption.Standard Bank February 2025 29 However,low government bond subscriptions in some 2024 issuances,and the already high concentration of bond repayments in H1:25,implies an imminent domestic debt crunch unless the new cabinet can successfully implement some switch auctions.Fixed income and currency strategy Except for Zambia and Ethiopia,we expect most central bank Monetary Policy Committees in our coverage to maintain an easing bias in 2025.However,the Committees in Angola and Malawi will likely keep rates on hold over the coming year.Of course,should guidance from the US Federal Reserve on future expected rate cuts change,some MPCs will likely turn cautious and perhaps not ease as much as we currently expect.Admittedly,high beta markets,where the concentration of foreign portfolio investment in local debt has risen over the past year,will likely be more cautious if the global inflation outlook changes.However,in a market such as Egypt,where headline inflation is likely to decline sharply from February 2025 onwards,the MPC should have room to ease its policy stance during 2025,even if the Federal Reserve were to further scale back its expectations of rate cuts.The carry trade that we recommended back in March 2025 has returned 13.3%since inception.The EGP came under pressure into Q4:24 as T-bill maturities fell due in Dec,resulting in higher USD demand.In addition,previous restrictions on USD demand for certain sectors were lifted,which also placed upside pressure on USD/EGP in Q4:24.But,with inflation likely to materially ease from February 2024,in large part due to unwinding base effects,T-bill yields have begun edging lower.However,roll-over risks remain large,particularly in March 2025 when a large chunk of the 1-y T-bill investments from last year will fall due.Hence,these roll-over risks towards March 2025 will likely keep nominal T-bill yields elevated.However,as real EGP yields likely improve notably from February 2025,we could still see more investors add exposure to the 3-y government bond.Figure 11:Mozambique government domestic bond subscription rates Source:Bolsa de Valores de Moambique;Standard Bank Research 050100150200250300350400mandAllocation Standard Bank February 2025 30 But,even as our trade in our shadow portfolio matures in March 2025,we would still extend this trade with another carry trade.We still view the EGPs valuation on a REER basis as favourable,undervalued by around 26%,per our estimates,while current account dynamics may also improve after the recent ceasefire deal which may revive Suez Canal receipts.In fact,even before the ceasefire deal,despite a large current account deficit(exacerbated by increased gas imports),and elevated external debt service(between USD15.0-20.0bn per annum)in both 2025 and 2026,the Egyptian governments external funding sources remained ample to cover this.Kenya will issue another infrastructure bond(KENIB)in February 2025.In fact,the government may even prefer to issue new KENIBs in the months where there is a coupon reinvestment risk,being February and August 2025.But also,in April 2025,cumulative maturities of T-bills and government bonds rises to KES254.7,from KES174.9bn in March 2025 and KES128.2bn in February 2025.Thus,with this large roll-over risk,the government may also look to potentially issue another KENIB closer to April.Recall that the government had initially communicated the intention to conduct a switch auction to deal with this large redemption in April 2025 but then decided to delay these liability management plans on the expectation that KES yields may fall further.With KENIB yields having fallen to around 13.5%in the secondary market at the time of writing,there is probably limited scope for further large duration gains right now,considering that KENIB yields havent historically been lower than c.12.0%.In addition,we dont expect the KES to rally sharply from current levels.However,we also dont expect the KES to sharply depreciate in 2025,which would imply that the KENIB trade may still provide an attractive avenue for the carry.The KENIB 2032 position,that we had opened in our shadow portfolio last year,has returned 36.1%in USD terms.We took profit on this trade in early September 2024.But,looking ahead,we will only re-enter the KENIB trade if new primary issuances provide entry level yields of 15-16%.Of course,there is always the risk that offshore investors take profit,and move to other markets such as Nigeria and Egypt.Further,if Kenya doesnt secure a new IMF programme in 2025,portfolio investors may become nervous,particularly if this coincides with a volatile global risk environment.Indeed,while FX reserves have risen to above USD9.0bn,Kenyas external debt service remains elevated over the medium term,which perhaps makes it appropriate for the government to secure a funded,rather than a precautionary,programme.Figure 12:Inflation forecasts(%y/y period end)Source:Standard Bank Research 0510152025303540Cote dIvoireSenegalMauritiusBotswanaNamibiaUgandaTanzaniaRwandaKenyaMozambiqueDRCZambiaGhanaEgyptEthiopiaMalawiAngolaNigeria2025f2024e Standard Bank February 2025 31 The government is keen to secure another funded programme,although may potentially have to tap into exceptional access again to receive a sizeable IMF arrangement because the government is already close to the SDR quota ceiling.But also,should the government increase uptake of new non-concessional financing,such as the recently discussed UAE financing beyond the USD675m agreed limit with the IMF under the current fiscal framework,the pending ninth,and final,review under the current IMF programme may not transpire.This may then complicate the remaining disbursements under the RSF tranche of the arrangement.Nevertheless,real KES yields remain relatively attractive,with inflation also unlikely to become troublesome for the MPC.KES liquidity at primary debt auctions may also be anchored by further increases in the National Social Security Fund(NSSF)contributions.However,a La Nia drought may still increase food inflation but the MPC will still probably look to cut the CBR further in H1:25.In Uganda,the 5-y bond yield is now approaching 17.0%.The government has ramped up domestic borrowing over the last few months due to large redemptions in January 2025 as well the requirement to clear the remaining overdraft at the BoU.Recall that the government had to clear UGX7.8tn of the BoU overdraft through issuance of marketable securities to the apex bank,with a further UGX1.3tn expected to be cleared in cash.Positively,as of Q4:24,the government had already issued UGX7.8tn in securities to the BoU and cleared that portion of the overdraft.This will likely improve the governments chances to secure a new IMF programme,which they aim to finalise by June 2025.We still expect further upside for UGX bond yields over the next 3-m due to upcoming large maturities in May 2025,which rise to UGX2.45tn,from UGX722bn in February 2025 and UGX547bn for March 2025.The yield on the 5-y government bond could reach 17.0-17.5%,a range that may well see us recommending the duration trade in Uganda again,more so if the USD/UGX pair reaches 3800-3850 levels in Q1:25,typically a period where USD demand spikes due to dividend repatriation.However,the risk of supplementary budgets being issued would normally increase UGX bond yields.Also,with elections expected in January 2026,government domestic borrowing and issuance of supplementary budgets could increase in 2025.However,we will closely track whether any tactical duration opportunities arise between March and May 2025.Figure 13:Real 3-m rate Source:Bloomberg;Various central banks -20-15-10-5051015AngolaNigeriaZambiaRwandaBotswanaMauritiusEgyptNamibiaGhanaTanzaniaKenyaUgandaMalawiMozambique%Standard Bank February 2025 32 The carry trade via the 364-d T-bill that we recommended in Zambia will mature in August 2025.The trade is down 0.9%due to ZMW weakness in Q4:24.This weakness was largely on the back of increased seasonal agricultural input demand,in addition to looser ZMW liquidity.We expect moderate upward pressure on USD/ZMW to persist in H1:25,with ZMW liquidity conditions expected to remain loose,in large part due to concerns that domestic funding pressures would deteriorate if ZMW liquidity were tightened,amid the still elevated increase in social spending from the severe drought in 2024.ZMW pressure in 2024 was also exacerbated by the El Nio drought which increased both food and electricity imports,thereby widening the trade balance.Admittedly,the resumption of favourable rains will be crucial in easing these trade account pressures by replenishing the Kariba Dam and boosting agricultural productivity.However,even if La Nia rains were weak,as is widely expected,which would imply weaker rains in Zambia,we would expect an improvement in the trade account largely due to a significantly lower base from 2024.Looking ahead,a large portion of the local debt maturities in 2026 is skewed towards foreign portfolio investors estimated at around USD800m.This is more likely to be a balance of payments challenge,rather than a debt sustainability issue,according to us,as non-resident holders are likely to increase USD demand.We believe that the authorities would benefit from signalling to the market how this potential large capital outflow in the financial account would be funded,particularly given that 2026 is in an election year and the current IMF funded programme expires in October 2025.Such signalling would perhaps help alleviate challenges for the government to roll over ZMW debt,which would also anchor investor confidence.Given our entry point at a 19%yield,we maintain our shadow portfolio position in the carry trade.Our base case is that Zambia will muddle through the high maturity wall both in 2025 and 2026 as the banking system maintains high levels of liquidity.That said,likely looser ZMW liquidity may place further upside pressure on USD/ZMW than we currently envisage in our baseline assumption.But crucially,we also believe that it is likely that Zambia extend,or enter,a new IMF programme once the current one expires in October 2025.However,the authorities are keen to extend the current programme before the October expiry,which would then also make them eligible for the Resilience and Sustainability Facility(RSF).In Nigeria,our carry trade recommendation is down around 12.6%since inception in April 2024.The NGN came under pressure in Q3:24 largely on the back of both seasonal(college fees)and speculative USD demand.The NGN appreciated in Q4:24 Figure 14:Real 10-y rate Source:Bloomberg;Various central banks-20,00-15,00-10,00-5,000,005,0010,0015,0020,00NigeriaEgyptGhanaMauritiusZambiaBotswanaNamibiaTanzaniaUgandaKenya%Real 10-y rate Standard Bank February 2025 33 due to an increase in FX reserves from the USD2.2bn Eurobond issuance.This was further complemented by the introduction of the B-Match system,which has aided price discovery in the FX market.However,as USD/NGN declined from late last year,we have seen right-hand-side USD demand also pick up.In fact,the NGN started 2025 on the back foot,with structural USD demand still persisting.The NGN has been under pressure despite the CBN selling USD536m in December 2024 and USD360m so far in January 2025.Hence,we will now cut our losses and exit the 364-d T-bill in our shadow portfolio.However,we will wait for better entry levels for USD/NGN between 1600-1700,as OMO yields will likely continue to range around 30.0%for the better part of 2025.Our expectation for an IMF-sponsored,stepped-up depreciation of the Ethiopian birr(ETB)against the USD has materialized.Our recommendation to buy a 24-month USD/ETB NDF in January 2023 proved highly effective,delivering a strong return of 53.73%upon maturity on 21 January 2025.Table 2:Open trades Positions Entry Date Entry Yield,%Entry FX Latest yield,%Latest FX Total return,%Since inception Egypt:buy Egypt 364-d 28-Mar-24 25.9 47.40 25.43 50.31 13.4 Zambia:buy Zambia 364-d 22-Aug-24 19.00 26.11 15.50 27.8-0.9 Source:Bloomberg,Standard Bank Research Standard Bank February 2025 34 Glossary For brevity,we frequently use acronyms that refer to specific institutions or economic concepts.For reference,below we spell out these and provide definitions of some economic concepts that they represent.1414-d d 14-day,as in 14-d deposit,which denotes 14 day deposit 1010-y y 10-year 16 Jan 1316 Jan 13 16 January 2013 3 3-m m 3 months 3m3m 3 million,as in USD3m,which denotes 3 million US dollars 3bn3bn 3 billion,as in UGX3bn,which denotes 3 billion Ugandan shillings 3tr3tr 3 trillion,as in TZS3.0tr,which denotes 3 trillion Tanzanian shillings AOAAOA Angola Kwanza BAMBAM Bank Al Maghrib BCCBCC Banque Central du Congo(Central Bank of Congo)BCEAOBCEAO Banque Central des tats de LAfrique de lOuest(Central Bank of West African States)BCTBCT Banque Central de Tunisie BMBM Banco de Moambique BNABNA Banco Nacional de Angola BOBBOB Bank of Botswana BOGBOG Bank of Ghana BOMBOM Bank of Mauritius BONBON Bank of Namibia BOPBOP Balance of payments a summary position of a countrys financial transactions with the rest of the world.It encompasses all international transactions in goods,services,income,transfers,financial claims and liabilities.BOTBOT Bank of Tanzania BOUBOU Bank of Uganda BOZBOZ Bank of Zambia BRBR Bank Rate(Reserve Bank of Malawi)Standard Bank February 2025 35 BRVMBRVM Bourse Rgionale des Valeurs Mobilires(Regional Securities Exchange)BWPBWP Botswana Pula C/AC/A Current account balance.This is the sum of the visible trade balance and the net invisible balance of a country.The latter includes net service,income and transfer payments.Capital Capital accountaccount Captures the net change in investment and asset ownership for a nation by netting out a countrys inflow and outflow of public and private international investment.CBECBE Central Bank of Egypt CBKCBK Central Bank of Kenya CBRCBR Central Bank Rate CDFCDF Congolese Franc CPICPI Consumer Price Index An index that captures the average price of a basket of goods and services representative of the consumption expenditure of households within an economy.Discount Discount raterate Policy rate for Bank of Uganda DisinflationDisinflation A decline in the rate of inflation.Here prices are still rising but with a slower momentum.Disposable Disposable incomeincome After tax income DMDM Developed markets ECBECB European Central Bank EGPEGP Egyptian pound EMEM Emerging markets ETBETB Ethiopian Birr EurobondEurobond A bond denominated in a currency other than the home currency of the issuer.ExportsExports The monetary value of all goods and services produced in a country but consumed broad.FMDQFMDQ FMDQ OTC Securities Exchange,Nigeria FXFX Foreign Exchange FY2016/1FY2016/17 7 2016/17 fiscal year GCEGCE Government Consumption Expenditure-Government outlays on goods and services that are used for the direct satisfaction of the needs of Standard Bank February 2025 36 individuals or groups within the community.This would normally include all non-capital government spending.GDEGDE Gross domestic expenditure,the market value of all goods and services consumed in a country both private and public including imports but excluding exports.This is measured over a period of time usually a quarter/year.GFCFGFCF Gross Fixed Capital Formation this is investment spending,the addition to capital stock such as equipment,transportation assets,electricity infrastructure,etc to replace the existing stock of productive capital that is used in the production of goods and services in a given period of time,usually a year/quarter.Normally,the higher the rate of capital,the faster an economy can grow.GDPGDP Gross Domestic Product the monetary value of all finished goods and services produced in a country in a specific period,usually a year/quarter.GHSGHS Ghanaian Cedi H1:16H1:16 First half of 2016 ImportsImports The monetary value of goods and services produced abroad and consumed locally.InflationInflation The rate at which the general level of prices of goods and services are rising.It is usually measured as the percentage change in the consumer price index over a specific period,usually a month/year.Invisible Invisible trade trade balancebalance The value of exports of services,income and transfers,less imports of same.Jan 16Jan 16 January 2016 KBRRKBRR Kenya Bankers Ref
2025-03-03
58页
5星级
09 January 202504Then and now what a difference a quarter of a century makesAllianz ResearchGermany .
2025-02-27
31页
5星级
1st Quarter 2025SVB Asset Management views on economic and market factors affecting global markets a.
2025-02-27
31页
5星级
The great balancing actGlobal Economic Outlook 2024-2026Allianz Research04Steady(not stellar)global .
2025-02-27
30页
5星级
04Global economic outlook:Four years in a row of below 3%economic growth08Inflation should finally r.
2025-02-27
31页
5星级
After the climb comes the descent Economic and Market Outlook 2025After the climb comes the descent2.
2025-02-26
15页
5星级
Missions for Prosperity:Unlocking Canadas PotentialFEBRUARY 2025INTRODUCTIONExecutive SummaryMessage.
2025-02-26
18页
5星级
lnstitute for Fiscal Studies abrdn Financial Fairness Trust Nuffield Foundation Economic and Social Research Council IFS Report R340Benjamin NabarroUK economic outlook:navigating the endgameThe IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 1 1.UK economic outlook:navigating the endgameBenjamin Nabarro(Citi)Key findings 1.The UKs economic performance over the past two decades is hard to describeas anything other than a policy failure.Productivity growth has been dire with per-worker growth over the past decade the weakest on average since at least 1850.Theinnovative engine behind the UK economy seems to have stalled.In 2014,a littleunder 6%of all firms in the UK(14,000)were high-growth firms employing at least10 people and growing their headcount by more than 20%per annum for three yearsrunning.This has fallen to just under 4%now.Macroeconomic resilience also seems tohave suffered as low growth,low investment and weak income growth have all fedback into one another.2.The growing global challenges surrounding ecological and geopoliticaltransition should add to a sense of urgency.These imply further economicheadwinds to growth in the years ahead,alongside heightened volatility.More physicalinvestment will be required to ameliorate these effects.But this does not constitute astrategy for addressing the UKs existing growth shortfall.High debt levels,astructural external financing gap and elevated rates volatility mean the stock ofoutstanding debt is a growing vulnerability.In this sense,the UK likely finds itself ina worse position than the US or the Euro Area.3.The UK needs to lift growth despite these growing challenges,in the context of limitedpolicy space.Here we think the focus should be on boosting intangible and ICTinvestment,alongside broader efforts to improve diffusion from the technologicalfrontier.Both growth and resilience will need to be areas of focus.The UK,as asmall open economy,remains particularly exposed to future shocks.Efforts to bolsterresilience,as well as better coordinating monetary and fiscal policy,will be crucial tonavigating these shocks better in future.In our view,without countercyclical burdenUK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 2 sharing between monetary and fiscal policy,structural efforts to lift trend growth are unlikely to be successful.4.The cyclical outlook we present here is one of near-term sogginess and medium-term optimism.Globally,we think the near-term outlook is likely to remain somewhat weak.Supportive factors for demand in particular,significant fiscal support are beginning to fade.Continued structural uncertainties in China recent stimulus notwithstanding remain a headwind across Europe.And US growth exceptionalism does appear to be gradually fading as the impact of tighter monetary policy feeds through.We expect global activity to fall back in the second half of this year.This implies fading external support for UK growth as we move into 2025.External inflationary influences are also likely to continue to fade.5.The UK economy has surprised to the upside since the start of 2024.We now expect real GDP growth of 1.0%this calendar year,compared with a forecast of just 0.1ck in January.But these welcome improvements are not yet indicative of a secure economic recovery.Instead,they primarily reflect transient improvements in capacity as energy prices have fallen back.For now,the outlook for the core domestic demand engines for the UK remains subdued.A sharp improvement in real incomes since the start of the year has not yet translated into stronger consumer spending.Firm sentiment and investment intentions have improved but remain on the defensive side.And public consumption is likely to prove constrained.We expect growth to remain positive but weak in the near term,with real GDP increasing by 0.7%next year.6.A procyclical monetary policy approach risks slowing the recovery in our view.Structural changes have slowed the transmission of monetary policy into economic activity.The effects of higher interest rates may become more material as many parts of the economy are forced to borrow once more;around half of the cumulative effect of monetary policy is still to be felt.This will suppress demand,just as the supply side of the economy begins to recover.Better news in the latter case reflects lower energy prices,and rebalancing between labour and non-labour inputs in production.This is cause for optimism,although monetary headwinds will make it difficult to capitalise immediately.We expect growth to accelerate markedly through 2026 and 2027 as monetary and fiscal constraints are eased.7.The outlook for the household sector should improve modestly in the months ahead,although household sentiment remains somewhat defensive.Much will depend on developments in the household saving rate.The cash saving rate i.e.excluding the imputed equity of pension funds has climbed from 3.4%just before the pandemic to around 8%now.This has been pushed higher by a The IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 3 combination of uncertainty,consumption smoothing and balance sheet impairments.In the months ahead,we think the saving rate may come down modestly as uncertainty dissipates although we expect the rate to remain elevated as households overall are significantly less well off now than before the pandemic.We expect private consumption to increase by only 0.6%in 2025,compared with 1.5%in the Bank of Englands baseline estimate.The outlook for firms should improve as supply growth picks up and costs decline,though any gains will come from a weak base.Business investment should recover gradually as interest rates fall.8.Excess labour demand present through 2022 and 2023 has now been eliminated.We think most recent data suggest the labour market is continuing to loosen.Vacancies have continued to trend down over recent months,if perhaps at a more moderate pace than last year.Private employment dynamics also look weak,at least according to the PAYE data.As public sector employment growth slows,we think the unemployment rate will increase to 4.9%next year and 5.3%in 2026.The risks here seem broadly balanced,although a flattening in the Beveridge curve would,if anything,imply a faster pass-through from lower vacancies into higher unemployment from here.We expect a modest loosening of the labour market to weigh on wage growth and consumer confidence into 2025.9.The UKs inflation process over recent years has been primarily conflictual in that high wage growth and services inflation both reflect efforts to make up for large losses associated with an adverse terms-of-trade shock.This,we think,has contributed to sticky wage and services price inflation over recent months.But increasingly we think there are signs that these effects are beginning to fade,with the real income loss associated with the shock now having been more than fully absorbed.Evidence of further agitation around either inflation or nominal wage growth seems limited,and confined to a few specific quarters.And forward expectations for both wages and prices are now broadly consistent with the inflation target.The natural decay in the UKs inflation processes primarily reflects the relatively high cost of conflict rather than the demand-destructive impact of higher rates.Inflation seems to have broadly returned to target without much direct input from monetary policy.To the degree that the latter now weighs on demand and slack,we expect to undershoot the inflation target through 2026.10.The Monetary Policy Committee(MPC)remains in an inflation-averse state of mind.Having cut rates for the first time in August,we expect the committee to ease policy only gradually over the coming months as evidence around inflation continues to accumulate.However,if the labour market does loosen through the first half of next year,we think that is likely to signal the committee should pick up the pace.In our UK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 4 view,a continued focus on the upside risks around inflation,while understandable,is increasingly inappropriate.We expect the MPC to cut rates into accommodative territory through 202526 as policy refocuses on the risks around the labour market,and monetary policy is forced to correct for a procyclical monetary and fiscal stance through 2023 and 2024.11.After two decades of stagnation,change is needed.The outlook is for a period of near-term sogginess,followed by a more robust cyclical acceleration as supply-side improvements continue to materialise.This may provide a window of opportunity.Already,in the past decade,the gap between what the UK economy can support,and what has societally been promised,has widened.This is combined with the potential for an intermittently binding external liquidity constraint that also poses more acute risks.In a context of growing international rates volatility,the UK does not have time to spare.1.1 Introduction The UKs economic performance over the past two decades can only be fairly described as a policy failure.In the wake of the financial crisis,trend productivity growth has decelerated more abruptly than elsewhere.That has been accompanied by acute fiscal policy error through the financial crisis and then the post-COVID period both of which have added further embedded losses.The result is increasingly pronounced economic weakness,constraints on fiscal policy and a widening gap between what the UK can produce and what society demands.The outlook presents opportunities for meaningful structural reform,but also reaffirms the risks associated with continued inaction.In the near term,the outlook is framed by underlying improvements around the supply side of the economy,but also continued sogginess on spending and demand.We expect growth to remain subdued into 2025,decelerating from 1.0%this year to 0.7%next,as policy headwinds continue to bear down on the recovery.However,we think this is likely to precede a fuller economic recovery through 2026 and 2027 as improvements in supply are realised.Unemployment,in the meantime,will increase to around 5.2%by early 2026 as a margin of excess labour demand emerges,before falling back thereafter.We expect inflation to remain in a 23%range in the near term before decelerating more fully through the end of next year as stronger energy effects fade and slack bears down on domestic prices.We expect an undershoot in headline CPI through much of 2026.Here,our outlook is framed by three themes.The IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 5 First,and on the more optimistic side,we do see potential for some catchup on the supply side after the recent shock-induced stupor.The large shocks that have buffeted the UK in recent years are either fading or reversing.Excess global manufacturing capacity seems to be increasingly feeding into lower UK import prices.Energy prices also seem likely to moderate further recent geopolitical news notwithstanding.In the UK,these supportive headwinds are then complemented by improving productivity as input prices fall,capacity comes back online and production rebalances in a more capital-intensive direction.The net implication is that near-term supply growth is likely to be around 2%or so stronger than the 1.41.5%long-term trend that is often assumed.Second,the outlook for the demand side of the economy is,if anything,deteriorating.Over recent years,fiscal policy has stimulated in response to supply shocks.Some adjustment will be required as this procyclical fiscal stance is gradually unwound.This has also brought fiscal policy increasingly into conflict with monetary policy which has been forced to be more aggressive to offset the impact of fiscal support.The implication is that the UK will likely see concurrent fiscal and monetary headwinds into the end of 2025 as the supply shocks that have so far driven this cycle begin to fade.Demand headwinds could be compounded by balance sheet impairments accrued during the pandemic,which we continue to think will keep household saving somewhat elevated.We think a rise in unemployment may be the result.The third factor is a lingering degree of inflationary aversion on the part of monetary policy.This is understandable given the experience of recent years,but perhaps no longer the right approach.As inflation has jumped in recent years,the scale of the monetary policy response has reflected a desire to weigh disproportionately against the risk of embedded inflation,as well as offsetting the impact of a procyclical fiscal stance.This has meant a more activist and hawkish stance.However,the balance of risks has materially shifted.Supply shocks are reversing.Fiscal policy is inflecting.Inflation is fading.And the labour market appears increasingly vulnerable.The full spectrum of risks should increasingly be incorporated into policy deliberations going forward,rather than simply those around inflation.In our view,the Monetary Policy Committee(MPC)is already too slow on the turn.This adds to the risk that policy is ultimately cut into accommodative territory in the years ahead to make up lost ground.Together,these points suggest that good economic news is coming,but its realisation may be deferred rather than immediate.In the very near term,the UK faces the legacy of the latest round of macroeconomic policy mistakes.But,once adjustments have been worked through,a window of opportunity should emerge.It is vital policy utilises that momentum to drive a more meaningful structural improvement.Below,we begin by discussing the structural challenges posed by the economic inheritance(Section 1.2).We then turn to the global and domestic outlook for activity(Section 1.3),before UK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 6 turning to the labour market in Section 1.4,inflation in Section 1.5 and policy conclusions in Section 1.6.1.2 The economic inheritance On 28 February,Chancellor Rachel Reeves warned that the incoming Labour government would face the worst economic situation since Second World War.1 We would not go that far.But Ms Reeves does take the helm after two decades of chronic economic mismanagement.If the UKs 20th century economic experience was framed by three mistakes return to the gold standard and austerity in the wake of the 1929 crash(Eichengreen,1992;Gwiazdowski and Chouliarakis,2021;Heffer,2024);a failure to engage with Europe from a position of strength in the 1950s(May,1998);and the conflation of serious supply reform with expedient demand stimulus in the early 1970s(Morrison,1974)then all three errors have been repeated to some degree in the space of a decade and a half.The result has been abject economic performance.Trend UK productivity growth has collapsed to near-record lows.And various measures of public service performance and well-being including improvements in longevity have stalled(Health Foundation,2019).This should be a call to arms.Poor performance,when sustained,becomes harder to reverse and more uncertain in its institutional consequences(Eichengreen,2018).It is also likely that the global macroeconomic and financial environment is becoming more adverse.Lifting trend growth is likely to be essential if the UK is going to deal with the choppier waters ahead and make the economic transitions required by major ecological and geopolitical challenges.In this section,we consider what explains the slump in productivity and what might be needed for the UK to transition to higher growth.We then turn to some key issues with the UKs macroeconomic resilience,and to some legacy macro-financial risks which will constrain the Chancellors policy options.What will it take to get higher growth?UK economic activity is 36%lower than it would be had it continued to grow in line with its 19972008 trend.This compares with 31%in the Euro Area and 24%in the US,comparable countries that at least in the latter case have faced similar shocks.While most advanced economies have experienced slower trend growth,the decline in the UK has been particularly severe.This has been compounded by a further relative deterioration in the UKs post-COVID 1 https:/ IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 7 performance,with UK GDP now 6.1%short of its pre-pandemic(201419)trajectory,compared with 4.3%in the Euro Area.Figure 1.1.UK GDP versus historical trends Note:Pre-GFC trend here is calculated between 1960 and 2007 and post-GFC trend is 201019,where GFC is Great Financial Crisis.Source:ONS.Figure 1.2.UK potential growth in GDP per worker(10-year moving average of year-on-year%growth)Note:Potential GDP is measured here by taking observed GDP adjusted by an Okun rule.This is then divided by the number of workers.In more recent years,we have taken OBR estimations of potential.Average is taken over a 10-year rolling window.Source:ONS,OBR,Thomas and Dimsdale(2016).01002003004005006007008009001,000196019641968197219761980198419881992199620002004200820122016202020242028 billion,2022 pricesRealisedCiti forecastPre-GFC trendPost-GFC trend-2%-1%0%1%2%3%468187818881898190819181928193819481958196819781988199820082018%year-on-yearSpanish fluUK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 8 This slow growth in UK output is despite a material increase in labour supply.Productivity measured by output per worker,or per hour worked has therefore fared even worse(Van Reenen and Yang,2024).The recent decline in potential output per worker in the UK is unprecedented since the late 19th century(see Figure 1.2).Nicholas Crafts,before his passing last year,noted that the slump in productivity growth is unprecedented in the last 250 years(Crafts and Mills,2019).A simple growth accounting exercise is useful here.The decline in real GDP growth in the UK of around 1.8 percentage points(ppts)on average between 19952006 and 200719 can be decomposed into changes in:labour supply( 0.1ppt);human capital,as measured by average years of schooling(0.2ppt);2 physical capital(0.5ppt);and total factor productivity(1.2ppt).3 The last is by far the largest driver.According to these data,total factor productivity(TFP)in the UK was 4.6%lower in 2019 than in 2007(similar to the fall in France).Over the same period,TFP has increased by 2.2%in Germany and 5.1%in the US.What explains this weakness?Here it is worth taking the decomposition above with a pinch of salt.TFP is measured as a residual effectively describing those activity improvements that cannot be explained by physical capital,labour or human capital.The outcome is therefore heavily dependent on what kind of capital data are used.Using some more granular data,such as the OECD KLEMS data,suggests slower capital deepening has contributed to a more abrupt productivity slowdown here than it has in France,Germany or the US(Van Reenen and Yang,2024).But this faster slowdown is concentrated in either digital infrastructure or intangible assets,rather than major capital projects.We think this helps explain the faster fall in simpler measures of TFP,which are likely to reflect this deceleration in intangible investment as a residual.Decelerating digital and intangible investment fits with the pattern of UK growth after the financial crisis,with a faster slowdown in productivity in intangible-intensive sectors many of which faced a particularly abrupt credit crunch(Goodridge and Haskel,2022;Bailey et al.,2022).Ahn,Duval and Sever(2020)find there was a materially larger reduction in intangible investment in indebted firms than in less indebted equivalents or indeed in investment in tangible assets across OECD countries.The subsequent increase in many firms preference for internal liquidity seems to have been persistent,with a widening gap between the cost of capital 2 For details,see https:/www.rug.nl/ggdc/docs/human_capital_in_pwt_90.pdf.See also Feenstra,Inklaar and Timmer(2015).3 Decomposition of change in real GDP growth between 19952006 and 200719,assuming a CobbDouglas constant-returns-to-scale production function.Citi analysis based on Penn World Tables and ONS data.Compares the UK with a weighted average of France,Germany and the UK.Similar benchmark countries are used in other studies,such as Van Reenen and Yang(2024).The IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 9 and the rate of return required for firms to deem projects worthwhile their hurdle rate(Cunliffe,2017;Melolinna,Miller and Tatomir,2018).These more persistent effects have effectively strangled investment in digital and intangible assets over recent years.In fact,we think the impact has been twofold.First,these challenges have weighed heavily on investment in the first instance.Second,they have also limited firm entry and competition.For firms of a certain size,borrowing against cash flow is possible,enabling incumbents to continue to grow.But for smaller firms,the tyranny of collateral is more obviously binding(Cecchetti and Schoenholtz,2017 and 2018).For example,in the UK,a 2015 survey found that 90%of all lending to small and medium enterprises(SMEs)was secured against some kind of physical collateral(Haskel and Westlake,2022).This has limited reallocation,weighing on growth.This has also enabled a degree of strategic underinvestment on the part of incumbents.In an oligopolistic market,investment becomes something of a strategic game.If other firms dial back,this can quickly be perpetuated across the sector at large.The logic here is involved and difficult to prove.But a decline in reallocation and competition does fit the broad patterns we see in the data.We also know that the gap in firm productivity levels between sector leaders and laggards has been widening for some time(Andrews,Criscuolo and Gal,2015;Autor et al.,2020).While the contribution to growth of the 10%most productive firms outside of the financial sector has been roughly constant over time,the contribution of the upper middle(those between the 50th and 90th percentiles of productivity)has more than halved since the financial crisis(Office for National Statistics,2022).Given the associated concentration of the growth slowdown in more intangible-intensive sectors,it is plausible that financial constraints are weighing on both new entry and broader digital investment.What will it take to improve this picture?We think the focus should be on institutional arrangements for investment.For example,improving the tax treatment of certain kinds of equity finance could help,and also allow a better sharing of risk and reward between firms and lenders(Hosono,Miyakawa and Takizawa,2017).For now,the tax treatment continues to favour debt finance(Adam,Delestre and Nair,2022).Encouraging larger firms,which can borrow against proven intangible expertise,to finance smaller equivalents could also boost investment,as well as improving the sharing of expertise.4,5 Much more work will be needed here to shift the balance.4 Haskel and Westlake(2022)note that many larger firms are often able to borrow on the basis of cashflow covenants,but this is usually only available to larger firms.See also Lian and Ma(2021).5 The literature on foreign direct investment speaks to potential productivity benefit associated with investment agreements if also associated with knowledge sharing.See Baldwin(2016).UK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 10 Aside from finance,a range of other challenges have impeded reallocation.Four stand out:Technological issues associated with frontier firms,and associated challenges around competition policy,as incumbency advantages count for more.Low labour mobility,as high housing costs have disincentivised workers from moving to more productive regions.Young renters are less likely to move than in the past,and rental prices have tended to grow more quickly than wages in faster-growing areas(Judge,2019).Weak transport infrastructure,particularly in large UK cities outside of London.Only 40%of the urban population can reach these city centres by public transport in 30 minutes,compared with 67%in continental Europe(Rodrigues and Breach,2021).This has stunted thick market effects that can otherwise boost the efficacy of local labour markets.Growing skills shortages,particularly in STEM subjects(Stansbury,Turner and Balls,2023).OECD analysis marks the UK out as suffering a particularly severe mismatch between workers fields of study and job requirements,and a greater extent of workers underqualified for their jobs(Deb and Li,2024).Falling spending on adult skills,from an already low base,will not have helped.In all cases,these effects risk inhibiting competition at the frontier,and more broadly limiting productivity growth.And their effect has been to gradually bear down on business dynamism i.e.the rate of firm turnover.Here the fall has been significant and consistent over recent years(see Figure 1.3).This,we think,is a function of both pull and push factors.On pull factors drivers that are pulling capacity from less productive areas a thinning in the number of growth opportunities has also meant a decline in the number of high-growth firms.6 In 2014,a little over 6%of all firms in the UK(14,000)were defined as high-growth firms.This has fallen to just under 4%now.Brexit may have played a role here,with many such firms historically utilising single market membership to boost their growth(Freeman et al.,2022).There have also been push factors i.e.capacity remaining trapped in suboptimal allocations for longer.Here the most obvious cases have been in the initial period after the financial crisis and in the post-COVID period.In the former case,weak financial institutions may have played a role,with weak financial balance sheets creating an incentive not to recognise losses.But increasingly through the pandemic the same effect has operated,even as financial institutions have remained robust.In part,this may reflect the direct impact of sweeping subsidies,which allowed some firms to cling on.It may also be that in a more intangible-intensive economy,6 Here we are defining these in terms of employment.High-growth firms are defined by the OECD as firms employing at least 10 people and enjoying employment growth of more than 20%per annum for three years running.The IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 11 firms have an incentive to protect sunk costs in the form of firm-specific assets until they become unviable from a cash-flow perspective.This can take some time.While less churn may sound like a good thing,a moderate rate of firm failure and creation is indicative of a healthy process of creative destruction that supports innovation and productive reallocation.The scale of the reduction here should be a growing cause for concern.Figure 1.3.UK job destruction and creation owing to firm turnover(%of total employment)Note:Measure reflects the share of total employment that is reallocated owing to firm creation or destruction per quarter.Source:ONS.Improving macroeconomic resilience The ability of the economy to recover from macroeconomic shocks is important.Supply shocks are as we note below growing more frequent.And the UK,as a small open economy,is often especially exposed.Unfortunately,the UKs performance in this respect seems to be getting worse.Its cumulative recovery from the pandemic has been comparatively underwhelming.And as shown in Figure 1.4,the cumulative recovery in real GDP since the pandemic has been weaker than the UKs recoveries from previous shocks,except for the Great Financial Crisis.Now,as then,we think the loss in the level of GDP is unlikely to be made up anytime soon.While the financial crisis and the pandemic were very different shocks,we think both episodes highlight some key macroeconomic vulnerabilities that may impede future economic recovery.0.0%0.5%1.0%1.5%2.0%2.5%3.0%Q4-1999 Q4-2002 Q4-2005 Q4-2008 Q4-2011 Q4-2014 Q4-2017 Q4-2020 Q4-2023%of total employmentCreationDestructionUK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 12 Figure 1.4.Real GDP recovery from various macroeconomic shocks Note:Figures show the cumulative GDP recovery,with the index linked to the pre-recession peak.The data for the latest cycle run to the end of 2024,with 2024 Q3 and Q4 numbers Citi nowcasts.Source:ONS.First,there has been a structural decline in macroeconomic flexibility.Sectoral reallocation,particularly in an acute context,seems to have slowed.The UKs recovery after the financial crisis,for example,was characterised by an unusually high dispersion of relative prices and capital returns(Broadbent,2012).This reflected challenges reallocating resources across different economic sectors(Barnett et al.,2014).Significant shifts in relative prices are evidence of similar challenges in the post-pandemic period.In recent years,these have also been accompanied by an increase in wage dispersion.In part,this may reflect some of the skills issues above,and an associated drop in intersectoral job mobility.In 2006,52%of all job moves were to a different industrial(SIC)sector,but this had fallen to 37%in the latest data.The gap between tasks in jobs that are being hired for,and those jobs that are being dissolved,is increasingly stark(Nabarro,2022a).For the UK,this is a particularly pressing issue,especially when it comes to reallocation between the tradable and non-tradable sectors.In a more volatile global supply and rates environment,one of the ways the UK can adjust to for example an adverse shock in global rates markets would be to devalue the currency,and reallocate more domestic production towards the tradable sector(Broadbent,2011).If that is becoming increasingly difficult,then more of the associated loss must be absorbed by domestic demand.That is a more painful process.7580859095100105110-1 0 12 34 56 78 9 10 11 12 13 14 15 16 17 18 19 20 21 22Index(pre-recession peak=100)Quarters since start of shockQ2-1920Q4-1925Q1-1930Q2-1973Q4-1979Q2-1990Q1-2008Q3-2019The IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 13 Second,the UK has suffered from a lack of systematic coordination between monetary and fiscal policy.Both in the period after the financial crisis,and in the response to the terms-of-trade shock in 202122,monetary and fiscal policy worked against one another.In the former,fiscal consolidation arrested balance sheet repair,limiting the impact of monetary loosening.In the latter,sweeping cash support limited the effective propagation of the original price shock,and also worked against tightening monetary policy.Early evidence suggests relative success at the height of the pandemic,with monetary and fiscal policy working hand in glove although there is an argument this went somewhat too far with the benefit of hindsight(and the efficacy of the vaccines).At best,this is self-defeating.But at worst,the UK macroeconomic response has not just been imbalanced,but often particularly poorly selected favouring the instrument that is least appropriate.As we note below,in recent history this has reflected the use of an instrument with a long outside lag interest rates to address an immediate inflationary risk,instead of an instrument with a much shorter outside lag acting in the opposite direction.That has forced monetary policy to do more in order to secure the necessary insurance.The implication is a weaker outlook now as further policy adjustment works through.Third is an absence of strategic economic leadership.At times of great uncertainty,providing some strategic clarity can be crucial to triggering an effective investment response.In a context of reallocation,this can be relatively powerful.One way of thinking about this is the effective cost of capital in an investment decision being a function of the rate of interest,the depreciation rate and the expected change in valuation.In the event of economic reconfiguration,at least a portion of the existing asset base is likely to fall in value.But the present value of new investment should,by contrast,be elevated.Appropriate policy interventions can protect investment by separating the former and the latter(Vines and Wills,2020).That,in turn,can help reduce scarring via capital deepening(Krugman,2009).Unfortunately,when confronted by this in the recent past,official silence has been deafening.Managing macro-financial risks and navigating new constraints In the face of the chronic growth challenge,the most obvious,and indeed tempting,response may be a large debt-financed programme of public investment a fiscal throw of the dice.We think this impulse should be resisted for two reasons.First,many of the challenges described above require reform,not only investment.That in turn requires care.And second,and perhaps more importantly,recommendations for such shock therapy pay insufficient attention to the risks the UK increasingly faces as a large dual-deficit economy one with both a government current budget deficit and a current account deficit.Looking forward,we think this will limit policys room for manoeuvre.The fundamental issue here is the combination of a high debt stock,increasing volatility on the supply side of the global economy,and the continued need for the UK to attract international capital.As we have seen in recent years,the risk of adverse supply and price shocks seems to be UK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 14 increasing.Figure 1.5 shows the trend over recent decades,with supply generally a benign and mildly positive economic force through the 1990s and early 2000s.Since the financial crisis,however,this has changed.And rates volatility has begun to increase.The implication,we think,is that we now need to take the outstanding debt stock rather more seriously.The risk scenario is as follows.A further adverse supply shock such as a major increase in the price of tradable goods hits.Inflation begins to rise.Rates,globally and domestically,move(further)above nominal GDP growth.In response to a fall in growth and real incomes,the government feels compelled to offer sweeping support.As more capital is demanded,investors begin to wonder when and how the UK will move from a large primary budget deficit to a surplus sufficient to stabilise debt in the medium term particularly in a context of higher rates.Given higher existing debt levels,investors may be less patient,and increasingly demand a premium.As yields move higher,the underlying fiscal position worsens.This dynamic begins to feed back on itself.Figure 1.5.Decomposition of macroeconomic volatility,1970 to 2027 Note:Supply and demand shocks are identified using an agnostic identification procedure(Uhlig,2005).A positive demand shock is characterised as a positive shock to both output and inflation.A positive supply shock is a positive shock to output but a negative shock to inflation.A negative supply shock is characterised as a negative shock to output and a positive shock to inflation.A negative demand shock is characterised as a negative shock to both output and inflation.The bars show the net balance each year,on a three-year rolling-average basis.Figures for 2023 to 2027 are Citi forecasts.Source:Thomas and Dimsdale(2016),Uhlig(2005),ONS,Citi Research.-2.5-2.0-1.5-1.0-0.50.00.51.01.5197019741978198219861990199419982002200620102014201820222026Index(three-year moving average)Balance of demand shocksBalance of supply shocksForecastThe IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 15 To be clear,the vulnerability here is not the stock of debt per se but stems from the traded character of government bonds(gilts)and the UKs external financing gap.The former means that buyers of UK sovereign debt can exert some market power,effectively going on strike until they are happy with the level of yields.The latter means that in the event of such speculative stress,the UK cannot resort to more forceful forms of financial repression to act as a circuit breaker.As we saw in October 2022,market maker of last resort operations are viable but as the Bank was clear at the time can only arrest the violence of the move,and not offer an effective yield cap.Speculation could also see the currency devalued.But given the weakness of the initial response of the current account,this would do little to address the external financing need as trade values would likely not react.Specifically,as we discussed above,the response of domestic production to the exchange rate seems to have become increasingly muted.This means more adjustment is now pushed to domestic demand.At best,these dynamics can immediately demand a tightening policy response,with painful results.At worst,they could force the UK to close its external financing gap very quickly,with potentially disastrous results.These vulnerabilities are to some extent unique to the UK.In the US,reserve currency status limits the buyer power of bondholders.In the Euro Area,as in Japan,a large current account surplus enables a greater degree of domestic control,at least hypothetically.It is plausible that these governments could find the capital to fund domestic liabilities if they could find a means to direct them.In the UK,there is no such recourse.Structural changes in the gilt market are further adding to the vulnerability here.Domestically,traditional demand for longer-duration bonds seems to be falling as defined benefit pension schemes wind down.7 This leaves the overall debt servicing burden more sensitive to changes in market rates.And the UK remains dependent on foreign buyers of sovereign assets.As gilt holdings in the Bank of Englands Asset Purchase Facility wind down,this dependence is only likely to increase.This should engender caution surrounding further goodwill especially as global investment inflows move away from traditional allies.Fundamentally,alongside a solvency issue,there is a lingering liquidity issue that will stalk UK fiscal policy for some time to come.This,we think,is especially relevant to discussions around the public balance sheet.While it may be appropriate to pay greater attention to the balance sheet position in time,issuing gilts to build physical assets would still reflect an increase in fiscal risks for the UK(see Chapter 2).This needs to be both reflected and managed.For policy,we see three implications:7 https:/ economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 16 1 Higher and more volatile rates should mean more concern around outstanding debt,and stronger preferences for a smaller outstanding stock.Over recent decades,such concerns have been effectively rendered moot by the trend decline in rates.That is unlikely to be as supportive going forward.This should suggest some concern about a further ratchet up in outstanding debt,especially if supply shocks become more common.2 Creative solutions are needed to address investment demands,without accruing even more conventional debt.Here,the underlying risk emanates from the buying power of bondholders and their ability to go on strike.Other avenues of bolstering the asset base may offer better trade-offs from a liquidity point of view.Structures such as co-investment are by no means risk free but,to the extent they enable investment without adding to the stock of liabilities that could be speculated upon,they could create a better trade-off between risk and benefit than merely funding such schemes up front.3 The macroeconomic policy balance in the event of further cost shocks probably does need to be re-appraised.We would argue for fiscal policy to show some initial restraint in the event of shocks,and that monetary policy should be a little more passive.Fiscal expansion not only increases pressure on funding.But to the degree it forces monetary policy to be even more aggressive,this in turn can feed back into the medium-term rates profile.That can fuel speculation about the UKs capacity for fiscal pain.Not only is a rates-driven response to such shocks ineffective or painful economically,it is also financially risky at least if higher rates are expected to persist for some time.Summing up:charting a better path The UK is likely to face a series of strategic demands for resources in the years ahead for the net zero transition,in response to geopolitical risks or for investment in public services(particularly in health and social care as the population ages).While ignoring these demands would ultimately be economically harmful,these investments are unlikely to deliver meaningful growth.In fact,they are likely to cost.To meet these challenges,policymakers need to act urgently to boost growth and improve the UKs ability to recover from future shocks.Transitioning to a high-growth,high-investment equilibrium will require greater policy focus on:the treatment of intangible assets,improving skills,labour mobility and business dynamism.Such efforts will likely need to be accompanied by a more thoughtful playbook in terms of managing supply shocks,particularly when it comes to the balance between monetary and fiscal instruments.This reform agenda must now be delivered within more pronounced policy constraints,and in a context where the risks of overstepping those constraints are plausibly greater.This should temper the impulse to rely primarily on significant increases in debt-funded public investment.We are sure public investment will be part of the answer,but this will need to be funded partly The IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 17 via lower consumption i.e.some combination of higher taxes or lower day-to-day public spending and supported by structural reform.Gains cannot come without some initial pain.In this sense,the Chancellor does inherit some difficult challenges.If funding costs do normalise as expected and economic capacity begins to improve,it is essential that any resulting fiscal space is put to more productive use.But success will depend,first and foremost,on broader structural reform.1.3 The economic outlook:avoiding a hard landing After a period of subdued supply growth,we see potential for a modest degree of catchup in the years ahead.However,that supply-side optimism is checked somewhat in the near-term by lingering consumer caution,modest fiscal consolidation,and lagged effects from higher interest rates.We expect demand to remain somewhat subdued,and a margin of slack to emerge over time.Rate cuts,most likely into accommodative territory,are likely to follow.The risks remain substantial.Globally,there are some signs of labour market loosening in the US,although we anticipate only a modest slowdown,and a swift recovery in 2025.Structural uncertainties in China also remain a concern,generating we think a downside skew to the risks around external demand.The traded component of inflation looks likely to remain relatively soft,with goods prices likely easing in relative terms.Domestically,the key question increasingly surrounds the saving rate.On the household side,real income growth is not yet feeding through into higher consumption.Firms are also still cautious.We expect some modest improvement through the remainder of this year,as uncertainty continues to fade.But still high interest rates alongside a meaningful deterioration in household balance sheets suggest a more persistent increase in household saving.In our baseline scenario,we expect UK GDP to increase by 1.0%this year,but by only 0.7%next year,as shown in Figure 1.6.While we remain cautious into 2025,we expect growth to accelerate markedly through 2026 and 2027 as the monetary and fiscal constraints are eased back and catchup potential is subsequently realised,before normalising through the second half of the forecast horizon.UK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 18 Figure 1.6.Real GDP under different scenarios Panel A.Real GDP,chain-linked volume measure(billion,2022 prices)Panel B.Real GDP growth(%year-on-year)Note:The graph shows our baseline forecast alongside the Bank of Englands modal,market-conditioned forecast for August,and our optimistic and pessimistic scenarios.The latter are discussed in Box 1.1.The OBR forecast is taken from the March 2024 economic and fiscal outlook.Historical forecasts in Panel A are indexed back to the last realised data point at the time the forecast was made.Source:OBR,Bank of England,ONS,Citi Research.620630640650660670680690700710 billion,2022 pricesOptimisticPessimisticBank of England August 2024Realised/CitiOBR March 2024Forecasts-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%Sep2022Apr2023Nov2023Jun2024Jan2025Aug2025Mar2026Oct2026May2027Dec2027Jul2028Feb2029%year-on-yearBank of England August 2024OBR March 2024Citi-BaselineCiti-OptimisticCiti-PessimisticThe IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 19 Given the degree of uncertainty,we also present two alternative scenarios for real GDP in Figure 1.6.In the optimistic scenario,we assume that energy commodity prices fall more quickly.In the pessimistic,we model the impact of a large procyclical fiscal stimulus in the US,which under certain assumptions may weaken the UKs economic outlook.These are intended to illustrate the potential sensitivity of our baseline estimates to different shocks,and to give a sense of what scale of shock would be required to deliver economies of different sizes by the end of the forecast period.These alternative assumptions are discussed more fully in Box 1.1 later,and their impacts on the trade-offs facing the Chancellor at the upcoming Budget are addressed in Chapter 2.In this section,we begin with the recent UK recovery,then turn to the global economic outlook,trends on the supply side of the UK economy,the outlook for demand and for households and firms,and recent trade underperformance.How secure is the UKs economic recovery?The UK economy has surprised to the upside since the start of 2024.We now expect real GDP growth of 1.0%this calendar year,compared with forecasts of just 0.1ck in January.Revisions in the forecasts of the Monetary Policy Committee of the Bank of England have been equally dramatic:from year-on-year GDP growth of 0.2%to 1.2%as of August,at least in the MPCs market-conditioned baseline(Bank of England,2024b).Unfortunately,while welcome,we think these improvements are not yet indicative of a secure economic recovery.This is for three reasons.First,a reasonable share of the upside surprise in the year to date only compensates for a strikingly weak end of 2023.Second,and associated,the pickup in growth that has occurred has remained sectorally narrow and has been unusual.Specifically,most of the growth has been concentrated in the non-consumer,untraded,business-to-business services sector such as scientific research and development.As energy prices have fallen,we think many of these sectors have been turned back on.And third,those sectors that have driven the recent improvement have generally been those to lag,rather than lead,in a cyclical upswing.Indeed,it seems the underlying engines of demand in the UK are not yet obviously motoring.In recent quarters,public consumption has been surprisingly strong,perhaps reflecting in part the overspend noted by the new Chancellor in the 29 July spending audit(HM Treasury,2024).These effects,however,may not last.And there does not seem to be much scope for a sustained consumer-led economic recovery.The tradable sector is already contracting,with global demand likely to soften further.There is little in the data as yet that implies to us that there will be a sustained,demand-led economic upswing.We expect quarterly growth to fall slightly to 0.3%in Q3 and 0.2%in Q4 before falling further into 2025.Figure 1.7 shows a breakdown of the drivers of recent growth,as well as our nowcasts into the end of the year.A correlation-weighted UK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 20 average of the soft data would suggest underlying quarterly activity growth of around 0.2 percentage points.Expectations remain a little more buoyant,although these too have softened in recent months.Figure 1.7.Nowcast of UK gross value added Note:BVAR and Midas nowcasts are products of a Baynesian VAR model and a mixed frequency sampling model respectively.Our main nowcast is based on a dynamic factor model(DFM)of roughly 120 survey indicators.Source:ONS,Citi analysis.The global outlook:subdued demand In this subsection,we consider the economic outlook for the worlds largest economic blocs China,Europe and the US in turn,and then what this may mean for the UK.China Chinas economic growth has slowed.We now forecast growth of 4.7%in 2024,versus 5.0%at the start of the year.Some of the softer data such as consumer confidence appear somewhat worse.Recent weakness is attributable to two main factors.1 Industrial misallocation.The decentralisation of government investment decisions,coupled with central direction,seems to have led to industrial duplication in several target areas.For instance,Liu(2024)argues that China can now produce almost twice the volume of solar panels that the global market can absorb.As higher rates have curbed demand for capital-1.0%-0.5%0.0%0.5%1.0b2022May2022Aug2022Nov2022Feb2023May2023Aug2023Nov2023Feb2024May2024Aug2024Nov2024%year-on-year change in 3-month average Private-strikesPublic-strikesUnderlying private sectorUnderlying public sectorGross value addedDFM forecastMidas nowcastBVAR nowcastThe IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 21 goods,a supply glut has emerged,and manufacturing PMI surveys reflect weak demand and falling prices.2 Domestic real-estate troubles.Residential property prices have been falling for nearly a year,undermining consumer confidence and increasing precautionary saving.Consumer confidence has suffered as a result,and much of the consumption data such as retail sales have remained soft.Stimulus is crucial to turning around Chinas woes.With CPI hovering just in inflationary territory,the longer it takes for a more forceful reaction to emerge,the greater the probability the Chinese economy finds itself caught in some kind of deflationary trap.Recent interventions have provided some limited relief in the property market,but have thus far been predominantly monetary.8 To date,fiscal support to the consumer appears modest with policymakers still seemingly minded to do as little as possible rather than whatever it takes.We expect growth to remain soft into 2025,and global goods inflation to remain subdued.Europe We expect real GDP growth in the Eurozone to average around 1%,although with a clear divide between core and peripheral economies.Spain and Greece are growing at 23%,driven by strong service sectors.German growth is much weaker,reflecting weaker external demand from China,and domestic competition from Chinese imports,which are increasingly competitive(rather than complementary).Europes trade challenges are both structural and cyclical.Structurally,European manufacturers are grappling with increasingly direct competition from China and high unit costs,especially for energy.European households pay some of the highest electricity costs globally,which is eroding market share.Unit costs in March 2023 were$0.21 per kWh in France but$0.52 in Germany,compared with$0.18 in the US,$0.08 in China and$0.47 in the UK.Mario Draghi,former Prime Minister of Italy,has called for a significant increase in public investment to address some structural issues(Draghi,2024),but political barriers make this unlikely.Cyclically,the question is for how long services output can be sustained while manufacturing growth falters.This will depend primarily on the labour market.Softening in manufacturing hiring has so far been offset by public sector strength,and falling structural unemployment in the periphery.However,there is a risk the labour market will loosen further,especially as fiscal 8 In May,multiple steps were taken to stabilise the property market.These included the removal of the mortgage rate floor,a provident fund loan rate cut and a cut to the minimum downpayment ratio.Subsequent government direction included the establishment of a local government buy-back programme,where unsold property would be converted to social housing,and a Peoples Bank of China relending programme for social housing.Four months on,it is clear that the intervention has had a limited impact,with recent research questioning whether it was even net stimulative(Sheets,2024).However,more recent measures could have a larger impact.UK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 22 tightening continues in the European core a similar potential concern in the UK.This risk will be compounded by slowing growth in the US.US After stronger-than-expected growth in the first half of the year,the outlook for the US is finely balanced between a hard landing with a weakening labour market and a soft landing where activity remains stable even as inflation eases.Historical comparisons might suggest a hard landing,with the Sahm Rule an early recession indicator linked to a loosening labour market already triggered,as shown Figure 1.8.But this cycle has been anything but typical,and consumer spending has been fairly robust,countering recession fears for now.Figure 1.8.Recessions and permanent job losses in the US since 1967 Source:BLS.We do expect US economic growth to slow toward the end of the year.A further softening in labour demand is a key concern,if this increases the household saving rate.For now,we anticipate a modest slowdown and a swift recovery through 2025,although the outcome could be less benign.Commodity prices and interest rates Recent events and associated risks notwithstanding,commodity prices are expected to come down near-term political risks notwithstanding.Oil prices have already fallen by 17%since April,in part reflecting the tepid outlook for aggregate demand.Prices have increased sharply in recent days as the geopolitical temperature has increased.Uncertainty has increased as a result.0%1%2%3%4%5%66719721977198219871992199720022007201220172022Share of labour forceRecessionsPermanent job lossThe IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 23 Nonetheless,in the medium term,we expect an expansion of supply,with continued pressure from OPEC members for a lifting of production quotas and non-OPEC production continuing to outpace forecast aggregate demand growth.Citis commodities team expects oil prices to fall to as low as$60/bbl over 2025 as these effects feed through.We expect gas prices in Europe to remain broadly stable(barring further shocks).We also expect shipping prices to normalise,after another period in which prices have been unusually elevated.For instance,the WCI Shanghai to Rotterdam index an estimate of the cost of container freight climbed sharply through 2024,peaking at four times the 2023 rate.Attacks in the Red Sea have driven a large-scale rerouteing around the Cape of Good Hope,elongating journey times and cutting capacity.But prices have begun to fall once again.On interest rates,much will depend on the outcome of the US presidential election at the start of November,but the global picture is one of improving supply and somewhat subdued demand.All three major transatlantic central banks have now begun to ease policy.The Federal Reserve cut rates in September from 5.3%to 4.8%and pencilled in two more quarter-point rate cuts in 2024.We anticipate the Fed will seek to return to a neutral policy rate fairly quickly over the coming months to minimise the risk of a further labour market deterioration.We expect the European Central Bank to seek further reassurance around wage and price setting,and to cut rates more gradually,although later rate cuts may ultimately prove larger overall.What might this mean for the UK?Altogether,demand tailwinds globally are beginning to fade.This reflects demand-based uncertainty in the US and structural concerns in China,and subdued manufacturing and consumer demand in Europe.Our earlier forecasts reflected an anticipated recovery in Chinese domestic output and some associated spillovers in European production.The former has proven disappointing and US growth exceptionalism has become more pronounced.As a result,we have revised down our forecasts for global growth in 2025.In our baseline assessment,global activity falls back in the second half of the year.External inflationary influences are also likely to be fading.We now expect UK-trade-weighted global GDP growth of 1.8%this year and 1.5%next,before a gradual recovery to an annual rate of 2.0%in the medium term.This implies little external support for UK growth as we move into next year,and indeed tradable support fading somewhat.Otherwise,our UK forecast is conditioned on the following assumptions:UK-trade-weighted global real GDP growth of 1.5%in 2025,1.6%in 2026 and 1.9%in 2027,a little softer than other recent official forecasts.UK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 24 Oil prices to fall to around$70/bbl,based on the oil futures curve.Here we see risks skewed to the downside given the views of our commodity team above.Gas prices to fall gradually to 73.4 pence per therm over the forecast horizon.UK-weighted export prices to fall by a further 2%next year,before recovering through 2026.Trade-weighted sterling to settle in an 8283 range,2.53.0%higher than earlier in the year.Box 1.1.Alternative scenarios As in previous years,we complement our baseline forecast with two alternative scenarios,in this case based primarily on differences on the conditioning assumptions.In our optimistic scenario,we assume that global commodity prices fall more quickly.Global oil prices fall to a little over$50/bbl,a further 25cline from current levels,and compared with$70/bbl in our baseline scenario.We assume European gas prices follow a similar profile,perhaps reflecting a more accommodative deal around the transit of gas through Ukraine.We assume that a 10%supply-driven reduction in oil and gas prices boosts medium-term capacity by 0.150.2%and 0.3%respectively.We also assume a modest front-loaded benefit from lower household saving as residual inflation-related uncertainties fade.In this scenario,we would expect real GDP to end up around 1.8%stronger than our baseline forecast,as shown on Figure 1.6.Our pessimistic scenario focuses on the UKs external financial vulnerabilities.We model the impact of a large(5%),procyclical,permanent tax cut in the US.We have opted for a deliberately large move here to explore the risks associated with a shift in global interest rates;we are interested in this,rather than the impact of the tax cut per se.On the spillovers to the UK,we assume a 0.35 spillover from US to UK real GDP a relatively high real economic effect.But we then assume that the scale and procyclical nature of the stimulus mean a larger sell-off at the longer end of the US curve as inflation concerns grow,with associated spillovers into UK rates.We assume UK funding costs increase by around 1%at a five-year horizon,less than half the increase in the US.And we assume that the Federal Reserve responds to the associated stimulus,resulting in a fully offsetting rate-hiking cycle.We assume the Federal Reserve would increase Fed Funds rates by 2.53.0ppt,weighing on subsequent US GDP.We assume that much of the effect of the funding shock must be absorbed via domestic demand reflecting the inelastic nature of the UKs external account.We expect that by the end of the forecast horizon,real UK GDP would be around 2.4%lower under this scenario than in our baseline.Improvements on the supply side In the near term,we think the supply side of the UK economy will continue to recover.Three supportive trends are continuing to work though.The IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 25 First,the last remnants of temporary labour matching issues have diminished.In recent years,extensive cash support for firms and the continuation of the furlough scheme through much of 2021 locked workers into existing employment,even as the shape of the economy changed.This led to a severe tightening of the labour market especially in sectors with high churn in normal times and a sharp deterioration in labour market matching overall(Nabarro,2022a).This has also resulted in a period of discretionary labour hoarding as firms grew more uncertain about their ability to hire.As these effects have gradually faded,the reallocation of labour has improved,enhancing underlying capacity.Second,there have been reductions in energy and food prices facing firms.Here,supply losses result from function-specific capital and from belated price adjustments.This can make it more challenging to adjust to sudden,large asymmetric or technology-specific shocks,such as a surge in energy prices.Take the example of a takeaway pizza shop.If gas prices suddenly double,but output prices adjust only slowly,then the firm may choose to reduce capacity temporarily in order to minimise the loss at least until such time as output prices and input costs are in better balance.Capacity utilisation becomes a dimension of capacity adjustment.The PMI data illustrate this shift(see Figure 1.9):during the energy crisis,outstanding business grew very quickly relative to the overall volume of new orders,consistent with firms cutting back on capacity.Since then,the gap between these growth rates has widened again.With energy prices facing many parts of the commercial economy only just beginning to fall,further improvements are expected.Figure 1.9.Percentage point gap between growth in outstanding business and new business Source:IHS Markit.-15-10-5051015Dec 2015Dec 2016Dec 2017Dec 2018Dec 2019Dec 2020Dec 2021Dec 2022Dec 2023Percentage point gapMore outstanding business growthMore new business growthUK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 26 Third,the relative price of labour and non-labour inputs is shifting again.In 2022,as input prices increased sharply,labour became relatively cheap.Alongside discretionary labour hoarding,this is one reason firms did not reduce staffing in 2022 despite cutting back on capacity.Such shifts are particularly important in the UK and,historically,they explain why unemployment fell less than expected after the financial crisis but by more than anticipated in the early 1990s,for example.9 Over the past 18 months,the relative cost of labour initially fell,incentivising labour-intensive production.This trend has since reversed as energy prices fell and wages increased.We expect the relative price of labour to continue to rise in the coming months as costs continue to fall back at least relative to wages.This should drive productivity enhancements as production becomes more capital intensive.But this suggests aggregate demand must grow more strongly if the labour market is to be kept on an even keel.Historically,this has not been the norm.Figure 1.10.Year-on-year growth in potential GDP,UK Note:Grey bars cover periods of several years.Source:ONS,Bank of England,OBR,Citi analysis.Currently,we estimate the UKs long-term potential growth rate at around 1.41.5%.This is consistent with the ONSs latest population estimates,alongside our view of trend productivity growth.In the near term,however,we think capacity can grow somewhat faster than this as 9 The UK is a small open but also services-orientated economy.As a result,the relative price of labour can move around significantly.The production side of the economy is also relatively sensitive to associated changes as labour and capital are more easily substituted.0.0%0.5%1.0%1.5%2.0%2.5%year-on-yearHistoricalBank of England,February 2024OBR,March 2024CitiThe IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 27 these supply shocks wane,as shown in Figure 1.10.Unfortunately,substantial scarring remains likely.But we think modest catchup effects are more likely than not.Compared with the Bank of England,we anticipate stronger potential growth through 2025 and 2026 as these benefits materialise.Monetary and fiscal policy are both likely to depress demand With the supply side improving,we expect the constraint on economic activity to shift to the demand side,primarily due to the legacy of policy during the pandemic.The current challenge is the result of two factors.First was a procyclical fiscal approach during the energy and cost shocks of 202223,with fiscal policy effectively offering sweeping support in response to a supply shock.Second,and associated,was the anti-inflationary insurance taken out by monetary policy over the same period.In both cases,the UK economy faces a period of adjustment ahead with policy headwinds likely continuing to build.The key debate centres on the transmission of monetary policy.One view holds that the overall macroeconomic effects of the rate increases of recent years have been limited.While by no means the collective view of the MPC,Bank staff did note in August that the majority of the impact of previous rate rises on real GDP may already have been felt(Bank of England,2024b).Others have noted the risk that rates may be even less restrictive than the MPC had thought(Greene,2024).While not the intention of policy 18 months ago,that would suggest that in fact policy has not been hugely powerful,with relatively little further effect to come.While this view remains plausible,we think it sits at one(optimistic)end of a wide range of plausible outcomes.Estimates of Bank staff,for example,are based on a 2015 model(Cloyne et al.,2015)which itself is sensitive to modest specification changes(such as the period over which the model is estimated).And this is only one model among many.Other approaches over the same period such as an event study approach(shown in purple on Figure 1.11)would suggest a greater effect to come.And with respect to the recent data which show some signs of life in the housing market and a slight uptick in credit growth these continue to be buffeted by some of the oddities of the recent cycle,in particular the large increase in monetary holdings through the early part of the pandemic.This has sheltered large swathes of the economy from higher capital costs,as households and businesses had accumulated internal liquidity between 2020 and 2022.With holdings now back at trend,credit growth is beginning to increase.But so too are effective interest rates.Indeed,as we see it,the risk around any historical estimate of policy transmission is probably skewed towards a longer lag rather than a shorter one.Five key structural changes are notable and relevant in our view:UK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 28 Figure 1.11.Modelled impact of changes in Bank Rate since 2020 on UK GDP(%of GDP)Note:The Bank of England Baseline here is based on Cloyne et al.(2015),incorporating the changes in rates only.The purple line shows an event study approach based on MPC announcements and speeches by MPC members.The series is then orthogonalised against the subsequent data themselves,as suggested by Bauer and Swanson(2022).The event study series is based on a two-hour window around these announcements.The Citi Baseline estimate is based on a five-variable SVAR model,estimated 19712019.Source:ONS,Bank of England,Cloyne et al.(2015),Bauer and Swanson(2022),Citi analysis.1 The proliferation of fixed-rate lending.Fixed-rate mortgages accounted for 95%of new mortgage lending in 2019,compared with 40%in 2010.This shift has slowed the impact of higher rates on cash flow and provided greater near-term security for households,slowing transmission into the household sector.2 Larger financial asset holdings.Both households and firms are generally carrying more interest-bearing assets.Respectively,this reflects an older population and recent government-backed support for businesses.This meant households and firms enjoyed an up-front boost from stronger interest income as rates rose.3 Improved household equity.Greater equity in the housing market has provided a buffer against deteriorating credit conditions,even as house price growth has stalled.Lower household debt and a concentration of that debt among those with more cash assets has ameliorated any precautionary saving response.4 Declining business creation.The UK has experienced a long-term decline in business dynamism,as discussed in Section 1.2,resulting in lower net new corporate lending for the-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.5Mar 2020Sep 2020Mar 2021Sep 2021Mar 2022Sep 2022Mar 2023Sep 2023Mar 2024Sep 2024Mar 2025Sep 2025Mar 2026Sep 2026Mar 2027Percentage point difference from March 2020Bank of England-baselineCiti-baselineCiti-event studyThe IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 29 same level of activity.This,and the fact that existing firms often have substantial cash reserves,has slowed the impact of rising borrowing costs on activity and employment.5 Increased substitutability between labour and capital.Over the past decade,the UK economy has become more specialised in sectors where the effects of rate changes on employment tend to manifest more slowly,reflecting a greater degree of substitutability between capital and labour.The initial impact of rate hikes may be to lower productivity,with impacts on employment coming later.All of this to us implies lower,slower transmission from rates to activity.The changes here can be roughly grouped into three structural changes.First,in an equilibrium sense,there is less probably demand for new credit at any single point in time.Historically,this has tended to be how most of the demand-destructive effects of policy materialised,and often at a relatively rapid pace(Bernanke and Gertler,1995).We think this mechanism is less powerful now.On the firm side,that reflects the trend reduction in business dynamism we noted above,and the shift towards intangible assets that are more often financed via internal liquidity(Caggese and Prez-Orive,2020).On the household side,that also reflects the shift towards older age groups,who consume fewer durables and have less demand for housing credit(Guerrn-Quintana and Kuester,2019;Wong,2019).Among this group,there may also be more target savings behaviour,which offsets the traditional savings boost from higher rates.Second,the precautionary response associated with higher debt and interest rate volatility also seems truncated.This also reflects the shift towards an older population.We know that historically in the UK,indebted households have tended to have a more violent reaction to changes in debt servicing as binding liquidity constraints loom(Cloyne,Ferreira and Surico,2020).Today,fewer households are in this position,with fewer mortgaged households and a larger offsetting base of financial assets.And similarly,corporate deleveraging over recent years and self-funding of an increasing share of investment leave investment less responsive to changes in rates.Third,just as transmission has grown more dependent on cash-flow effects,changes in mortgage structure and asset holdings have attenuated their impact.Hence initially both households and firms have enjoyed something of an income boost from higher rates as the rate of return on assets accelerated but debt servicing costs were unchanged.In more recent months,that has begun to reverse,implying a growing headwind to income growth in the months ahead.This would suggest policy transmission overall may be a little lower,but crucially also slower.Here we think it is useful to think about policy transmission as reflecting three separate steps:the transmission from Bank Rate to financial conditions,the transmission from financial UK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 30 conditions directly to activity,and then the rebalancing of activity in response to the shock to financial conditions.The second and third steps are likely to take time.Alongside headwinds from monetary policy,fiscal policy is also likely to exert downward pressure on activity.The details will depend on what the new Chancellor does in her inaugural Budget on 30 October,but the fiscal inheritance(discussed more fully in Chapter 2)suggests some fiscal consolidation is to be expected over the coming years.The combination of fading prior support(including energy grants and similar)with a further tax increase of 1520 billion in the autumn even if this was focused in areas with low fiscal multipliers and was accompanied by top-ups to day-to-day spending(5 billion)and investment(10 billion)would still suggest a headwind from fiscal policy into next year.The combined policy impulse is shown on Figure 1.12.Figure 1.12.Combined impact of monetary and fiscal policy on UK GDP level(percentage point deviation from trend)Note:Monetary policy impact here is based on the Bank and associated market rates modelled through a SVAR impulse response.This has been discounted to reflect some of the structural changes listed above.It has also been pushed back by a quarter reflecting the arguments above.The fiscal impulse is based on the cumulative impact of all discretionary changes since the onset of the pandemic.Here we have excluded the Energy Price Guarantee and the Energy Bill Relief Scheme.Some of the public spending during the height of the pandemic has also been discounted,reflecting reported waste.Source:ONS,Bank of England,OBR,Wolf(2020),Citi analysis.-5-4-3-2-101234Dec 2020Jun 2021Dec 2021Jun 2022Dec 2022Jun 2023Dec 2023Jun 2024Dec 2024Jun 2025Dec 2025Jun 2026Dec 2026Percentage pointsFiscal impulse202020212022202320242025Total monetary policyTotal policy(fiscal monetary)The IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 31 Further headwinds to demand,as we note below,increase the risk of a rise in the unemployment rate in the months ahead.This,we think,could have been avoided with policy that was more appropriately calibrated previously and that reflected a better-balanced policy mix.As many of the MPCs more dovish members noted through 2022,hiking rates in the face of recent supply shocks risked weighing on demand just as the effect began to ebb(Tenreyro,2023).Nonetheless,monetary policy was forced to take out an increasing degree of insurance as fiscal policy became more and more stimulative.The resulting drag speaks to the limitations of using an instrument with a long lag to address a near-imminent inflation concern a feature that often requires monetary policy to overshoot,but also risks dragging at precisely the wrong time.Consumption still subdued with households not dissaving yet Household consumption remains the single most important component of UK GDP.It has also been central to the UKs post-COVID economic underperformance.Private consumption is now 8.7low its pre-pandemic trend,well above the shortfall seen in the Euro Area,and 1.3low its pre-pandemic level.The hope for 2024 was that falling inflation and rebounding real incomes would drive a recovery in consumption.This has yet to materialise.Consumers seem to be shifting their spending rather than increasing it.Recent figures show a modest improvement in retail sales as goods prices fell,but offset by slowing momentum in the consumer services sector.This is supported by industry trackers such as the Coffer Peach Index,which remained subdued over the summer,with nominal growth in the low single digits.10 While business-to-business services have continued to grow,growth in consumer-facing services has stalled.Looking ahead,we expect consumer spending to strengthen,particularly retail spending.Consumer confidence has improved,although the upward trend seen through late 2023 and early 2024 has paused as real income growth stabilised.As real income gains feed through,they should begin to boost consumption more noticeably.Some surveys,such as recent PMI data,indicate improving consumer demand at least in the anecdotes and we expect growth to pick up by the end of the year(S&P PMI,2024).However,the scope for a sustained consumer-led economic recovery seems to be narrowing.Most of the recovery in real incomes has already occurred.Annual growth in real household disposable income(RHDI)has hovered at around 34%since 2023 Q2,as faster nominal wage growth has accompanied slower price growth.We anticipate some additional momentum in the fourth quarter as public sector pay deals are finalised.Beyond that,we expect nominal wage 10 Nominal growth across hospitality establishments is estimated to have fallen from 5.2%year-on-year in March to 1.3%now,suggesting further reductions in volumes.UK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 32 growth to slow and interest income to fall.As shown in Figure 1.13,growth in RHDI is expected to steadily decline through 2025 and turn negative in 2026.Figure 1.13.Real household disposable income growth,UK(%year-on-year)Source:ONS,Citi analysis.As consumption has remained subdued,even as household incomes have grown,household saving rates have climbed sharply.The headline saving rate was 9.8%in Q2,compared with 6%on the eve of the pandemic.The cash saving rate i.e.excluding the imputed equity of pension funds,and once the adjustments in the 2024 Blue Book have been accounted for has climbed from 23fore the pandemic to around 8%now.This is shown in Figure 1.15 later.The degree of optimism about consumer spending hinges on how quickly saving rates might fall.We expect only a gradual normalisation of saving rates,driven by three factors.1 A decline in precautionary saving.Households tend to increase savings in the face of inflation uncertainty.In particular,as inflation first surges,households may save more as they are cognisant of the erosion of nominal asset values but may overlook the reduction in nominal liabilities(Schnorpfeil,Weber and Hackethal,2023).This was evident as consumer confidence plummeted in 2022,but this effect seems to have diminished,with consumer confidence now aligned more closely with current real wage,unemployment and inflation figures.-15%-10%-5%0%5 %Mar 2007Mar 2009Mar 2011Mar 2013Mar 2015Mar 2017Mar 2019Mar 2021Mar 2023Mar 2025%year-on-yearWagesMixedTaxesSocial contributionsBenefits and subsidiesInterest incomeDeflatorOverall RHDIForecastThe IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 33 Figure 1.14.Net worth of the private non-financial sector:percentage point change since 2007 Q1(%of GDP)Note:The graph shows the change in net worth of the private non-financial sector since 2007 Q1,measured as a share of GDP.In both the US and UK cases,pension entitlements have been excluded from the calculation on grounds of relevance.In the UKs case,corporate real assets have been calculated by taking the total nominal value of the market sector and multiplying it by the GOS share of non-financial corporates.Housing wealth is calculated via the total number of privately owned dwellings,multiplied by the average house price.UK data are taken from the ONS accumulation accounts;US data are from the Federal Reserve system.Source:BEA,Federal Reserve,ONS.2 Consumption smoothing.Households typically save during income spikes and dissave when incomes fall,so that large swings in real income growth have large but short-lived impacts on inflation.We observed this in 202223,as rising costs led to households dissaving,followed by an increase in saving rates in recent quarters as incomes recovered.This dynamic should stabilise as real income growth slows,pushing the saving rate down somewhat from recent highs.3 Household balance sheets.During past inflationary periods,households typically held real assets financed by nominal liabilities.An older population now holds more financial assets,often in deposits or bond-based investments,and these have performed poorly,impacting household balance sheets.Indeed,household(and firm)balance sheets appear to be weaker as we emerge from the pandemic.Figure 1.14 shows the development of net worth in the private non-financial sector(which includes both households and firms,excluding those in the financial sector),incorporating both real and financial assets and liabilities.In the UK,net worth is now nearly 90%of GDP lower than it was in 2007 falling from 630%to-150%-100%-50%0P00 0%Mar 2007Sep 2008Mar 2010Sep 2011Mar 2013Sep 2014Mar 2016Sep 2017Mar 2019Sep 2020Mar 2022Sep 2023Change since 2007 Q1,%of GDPUSUKUK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 34 542%of GDP.This is in contrast to the experience in the US,for example,where net worth is now nearly 60ove up from 521%to 580%of GDP.One argument holds that as interest rates fall and income drivers shift from interest income to wages in the coming months,the household saving rate will start to come down.We agree with this to some extent.However,as shown in Figure 1.15,our modelling suggests that a sharp drop in the ratio of household net worth to real incomes explains some of the recent rise in saving rates.These effects should be somewhat more persistent.And to the degree real rates fall,we think these will remain higher than on the eve of the pandemic.We expect cash saving rates to fall modestly as real income growth slows,but remaining perhaps 5%of income above the rate in 2019.We see the main upside risk as a significant rally in nominal house prices,which is plausible as interest rates fall.For now,most soft data suggest nominal house price growth remains at or slightly below inflation,and we expect growth to remain in the low single digits.But a stronger recovery could mean a faster consumption recovery in the months ahead.Figure 1.15.Changes in households cash saving rate:percentage point change since 2019 Q1 Note:Model here consists of unemployment,real household income growth,real lending rates,consumer confidence and the income to wealth ratio,and is estimated as a simple OLS model based on data from 1996 to 2019.Source:ONS,Bank of England,GfK,Citi analysis.-10-5051015Mar 2019Sep 2019Mar 2020Sep 2020Mar 2021Sep 2021Mar 2022Sep 2022Mar 2023Sep 2023Mar 2024Sep 2024Mar 2025Sep 2025Mar 2026Sep 2026Mar 2027Sep 2027Percentage point change since 2019 Q1Consumer confidenceIncome to wealth ratioReal lending ratesReal household income growthUnemploymentModelledRealisedForecastThe IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 35 The combination of falling real household disposable income growth and only a slow decline in saving rates suggests that consumption growth is likely to be weak into 2025.We expect private consumption to increase by only 0.6%in 2025,compared with 1.5%in the Bank of Englands baseline estimate.Firm profitability and the prospects for investment The outlook for firms should improve as supply growth picks up and costs decline,though any gains will come from a weak base.Profitability and viability challenges are expected to persist.Business investment has been underwhelming recently.After rebounding in 202223,it has since stagnated,with transport investment stabilising but machinery,construction and intangible investments remaining flat.The reasons for this underperformance primarily relate to uncertainty and the rising cost of capital which,on a weighted average basis,is up about 4 percentage points since interest rate hikes began.This latter increase would historically have reduced business investment by 1015%,all being equal.We think this has now largely passed through.Other challenges,such as higher energy prices and issues with key capital imports,may also have contributed.But these should now be beginning to fade.As costs ease and interest rates fall,we expect business investment to recover gradually.However,rates are still high,and many firms,particularly in the CBI survey,cite the cost of capital as a major barrier to investment.And although investment intentions have risen slightly,the recovery has been weaker than anticipated,especially given the UKs historically low investment levels.While larger firms are more optimistic,smaller businesses remain cautious(Xero,2024).Overall,sentiment remains somewhat defensive.While the sequential picture is improving,we think such benefits will come through only gradually.This is for two reasons.First,firms have been tapping into internal funds,limiting the pool of available capital remaining for intangible investment.To the extent that firms were using internal liquidity often financed at lower rates to stay afloat,they are now facing the expiration of these effective subsidies.Those relying on liquid deposits may face renewed challenges as their capital costs rise.These effects have been material.The government-backed corporate loan schemes left corporate deposits in early 2022 around 80 billion above their pre-COVID trend.These are now around 30 billion below.Second,there continues to be pressure on profit margins.ONS data suggest private non-financial corporate profit shares are about 23%of GDP lower than pre-pandemic.Survey and ONS data suggest that the picture here has stopped getting worse but nonetheless the level has deteriorated.The latest business demography data suggest that roughly the same number of jobs are being lost UK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 36 to firm destruction as are being created by firm formation.This is in contrast to the period prior to the pandemic,where more jobs were created,and suggests some challenges remain.On the private residential side,we are more optimistic,expecting investment growth of 1.8%in 2025 and 6.4%in 2026.This optimism is based on stronger housing market activity and potential support from new government planning reforms.Our forecast assumes the annual construction rate of new dwellings will rise from a current run rate of around 200,000 to 300,000 by the end of the parliamentary term.While lower than Labours manifesto pledge which was for 1.5 million homes over the parliament a more gradual increase seems plausible given the sectors concerns over skill shortages.Since new home construction represents 20%of sector output and 6%of GDP,this would contribute about 0.5%to overall activity over five years,accounting for offsetting increases in imports.Overall,while the UK is expected to converge slightly with G7 investment levels,this recovery will take time,especially until interest rates fall more significantly.Trade underperformance On trade,the UK continues to underperform relative to international benchmarks.Since 1980,the UKs trade intensity(imports and exports,as a share of GDP)has increased by 33%,compared with an average of 57ross other G7 countries.As shown in Figure 1.16,this gap is much wider than in 2019 and comes despite advantages such as a strong UK services trade,which has generally recovered better post-pandemic.The UKs trade dynamics have been heavily buffeted by global developments over recent years.Goods trade,particularly to the EU,initially fared relatively well through 202122.This was likely due in part to global supply chain challenges associated with the end of pandemic lockdowns.In the period since,UK goods exports to both EU and non-EU countries have slumped back,particularly relative to G7 comparators,as shown in Figure 1.17.The symmetrical weakness in exports to both the EU and non-EU may reflect the importance of EU trade as a complement to UK goods exports elsewhere.Turning to services,there have been striking differences in trends by sector particularly when it comes to trade with the EU.Intellectual property exports to the EU have grown by 56%since 2019 Q4.Construction and travel exports to the EU have fallen while increasing strongly to non-EU destinations.Overall,services growth has been marginally stronger to non-EU destinations,but by less than expected.The exception is the financial sector,where exports to the EU have grown at a marginally faster rate than exports elsewhere.11 11 Here the data are somewhat complicated by firm relocations,particularly of US-headquartered entities.The IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 37 Figure 1.16.Trade intensity since 1980,UK and G7 Note:Graph shows trade intensity measured as imports and exports divided by GDP.The level is then indexed back to an average over 1980.Source:National statistical offices.Figure 1.17.Goods exports since 2017 Note:The graph shows four-quarter average levels.The UK series excludes erratics such as non-monetary gold.Source:ONS,national statistical offices.5075100125150175198019851990199520002005201020152020Index(1980=100)G7-rangeG7-averageUK6080100120140160Jan 2017 Jan 2018 Jan 2019 Jan 2020 Jan 2021 Jan 2022 Jan 2023 Jan 2024Index(2017=100)G7-rangeUK-non-EUUK-EUUK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 38 On imports,there is growing evidence that additional UKEU trade frictions have hurt the UK consumer over recent years.The import price deflator on food from the EU has increased by almost 50%since 2019,while the equivalent for food imports from non-EU destinations has increased by around 18%.If EU food import prices had increased at the same rate as their non-EU equivalents,this would amount to a 273 reduction in the annual food bill of the average UK household,if fully passed on by retailers and producers.12 Altogether,the UK does seem to be struggling with international competitiveness.The tradable sector contracted 1.0%in the four quarters to 2024 Q2.13 The UK current account deficit has widened again to around 4%,although we expect this to shrink through 2025 due to lagging domestic demand.For now,we remain less immediately concerned about the capital account deficit than in previous years,with more currently financed via net direct investment.Although risks remain,this somewhat reduces the UKs reliance on potentially volatile portfolio inflows.1.4 Labour market risks The labour market has loosened over the past two years,and labour supply and demand are now broadly in balance.However,the economic outlook suggests the labour market is likely to continue to weaken as labour demand remains subdued.That adds to the risk of a further increase in unemployment ahead.Our concerns stem from three observations.First,as labour demand has fallen back,there are signs of something of a deterioration in labour matching as thick market effects have dissipated.That suggests a faster transmission from further reductions in vacancies into unemployment.Second,high labour costs at least relative to non-labour equivalents increase the risk of a more abrupt period of labour shedding particularly when paired with weak corporate balance sheets.And third is the continued,and prominent,role of public sector employment growth in propping up the employment aggregates.As we move into next year,we are unsure this is likely to last.Indeed,we currently expect the unemployment rate to increase to 4.9%next year and 5.3 26.In this section,we look at the dynamics of labour demand and supply,changes in employment and the degree of slack,and consider the recent role of changes in the National 12 The latest edition of the family spending bulletin from ONS(Office for National Statistics,2024a)shows the average UK household spends 63.50 on food and non-alcoholic beverages per week.This is 3,302 on an annualised basis.Around 40%of all foodstuffs are imported.Assuming a 20.9%reduction in the price of these imports,that would suggest an 8.3%reduction in food costs overall.That equates to 273.13 This figure takes the year-on-year change in tradable sector GDP for 2024 Q2.Here,the tradable sector is defined by the share of imported and exported content in the supply and use tables,a definition that is borrowed from Broadbent et al.(2019).The IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 39 Living Wage.A softer labour market is neither necessary to return inflation to target,nor affordable in the context of a lacklustre recovery.For the Bank of England in particular,that suggests remaining attentive to the risks around the real side of the economy.Further softening of labour demand Labour demand in the UK has fluctuated in recent years.Following a near-total shutdown during COVID-19,hiring rebounded sharply in 202122.In the latter half of 2021,vacancies were increasing by about 280,000 per quarter,even as the furlough scheme worked against labour separation.Since then,much of the hiring backlog has been addressed,but underlying demand has also decreased.Despite increased activity at the start of this year,there are few signs that labour demand is ticking up again.Currently,there are 857,000 open vacancies,down from 1.3 million in mid-2022.The latest three-month change shows a decrease of 39,000 job advertisements per quarter just under half the peak rate of decline during the Great Financial Crisis.Thus,while the rate of decline may have moderated,it remains high.We believe the headline vacancy figure likely overstates labour market strength for two reasons.First,there has been a trend increase in overall job postings in recent years as online recruiting has become more common,lowering advertising costs.Our structural model suggests that a 10%reduction in the cost of advertising a vacancy can lower the equilibrium vacancy rate by 0.20.3 percentage points.14 Since 2018,we estimate that the expansion of online platforms has reduced the average advertising cost by around 15%,implying a 105,000 reduction in the equilibrium vacancy level.Adjusting for this,vacancies are currently below the level seen in 2019,as shown in Figure 1.18.Second,tighter labour market conditions are now mainly a public sector phenomenon.The latest headline vacancy data(not adjusting for the trend discussed above)show 33,000 more overall vacancies than in 2019,but that includes 41,000 more vacancies in public administration,education and healthcare.Given the limited substitution between public and private sectors,this suggests the private sector labour market is already somewhat looser than in 2019.14 This is based on the UKs pre-COVID Beveridge curve and a structural search and matching model.See Yashiv(2007).UK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 40 Figure 1.18.Adjusted vacancy measures,UK Note:The adjusted measure reflects the impact of a 15%drop in the average cost of advertising a vacancy on the headline vacancy rate.Private sector excludes public administration,education and health.Source:ONS.Looking ahead,much of the soft data suggest continued declines in labour demand in the coming months.Daily vacancy data from I have trended down recently,while Adzunas figures have stabilised at a lower rate than the ONS headline numbers indicate.Most survey indicators of labour demand and workforce growth indicate stagnation or further reductions.Established surveys such as the KPMGREC report show ongoing contractions in both temporary and permanent listings.The Decision Maker Panel(DMP)employment growth index has also moderated to 1.1%year-on-year,down from 1.7%at the years start.With aggregate demand likely to remain soft,we expect labour demand to continue to weaken gradually into next year.Labour supply continuing to rise While labour demand appears to be weakening,there are signs that underlying labour supply is continuing to recover.In addition to an improvement in labour matching as post-COVID distortions have eased(as discussed in relation to supply-side improvements in Section 1.3),underlying aggregate labour supply has also continued to normalise.-600-400-2000200400600800Jan 2019Jul 2019Jan 2020Jul 2020Jan 2021Jul 2021Jan 2022Jul 2022Jan 2023Jul 2023Jan 2024Jul 2024Vacancies,thousandsAdjustment to private sectorPublic sectorPrivate sectorTotalTotal private(incl adjustment)The IFS Green Budget:October 2024 The Institute for Fiscal Studies,October 2024 41 There have been two main drivers.The first has been both an increase and a shift in the composition of net immigration.Higher-than-expected overall immigration has resulted in stronger workforce growth.The latest ONS population projections suggest cumulative workforce growth of 5.2tween 2021 and 2026,for example,versus 2.6%in 2023 Q1 estimates.Immigration flows into the UK are also becoming more conducive to supply.For instance,Figure 1.19 shows the net impact of changes in visa applications through the tourist,student,dependant and worker routes weighting each by their propensity to work.In 202122,a strong recovery in tourism alongside large refugee flows likely added more to demand in the first instance.Increasingly,that balance is shifting in favour of supply.Figure 1.19.UK entry visa approvals,weighted by propensity to work Note:Data based on numbers of entry clearance visas.Source:HM Government.Second,on the domestic front,the participation rate seems to have stabilised.It has declined since the onset of the pandemic,with more than 673,000 more people reported by the Labour Force Survey(LFS)as being inactive owing to ill health than in January 2020 and an increase of 311,000 in the number of economically inactive students.15 But the participation rate does seem to have stopped falling,despite some increases in those out of work owing to caring 15 Note these LFS estimates are somewhat dated.The headline LFS aggregates are still based on out-of-date population estimates from late 2023.-600,000-500,000-400,000-300,000-200,000-100,0000100,000200,000300,000400,0002007 Q12008 Q12009 Q12010 Q12011 Q12012 Q12013 Q12014 Q12015 Q12016 Q12017 Q12018 Q12019 Q12020 Q12021 Q12022 Q12023 Q12024 Q1Demand-conduciveSupply-conducive(workers)UK economic outlook:navigating the endgame The Institute for Fiscal Studies,October 2024 42 responsibilities.With the working-age population set to continue growing,that suggests overall labour supply will pick up.Employment levelling off In contrast,much of the employment data suggest that growth is slowing,particularly in the private sector,although different sources conflict somewhat.The Labour Force Survey indicates that employment growth is now picking up,but only after a prolonged period of flat or falling growth.We give more weight to payroll and workforce job estimates given the sampling issues with the LFS.As shown in Figure 1.20,these suggest stronger growth in 2022 and 2023,but weaker growth more recently.Figure 1.20.Measures of UK employee growth(viation since January 2020)Note:In all three cases,the focus is on employee growth.The graph shows the cumulative percentage change since January 2020.Source:ONS.As with the vacancy data,the headline overall trends may paint a rosier picture than the detail.Both the PAYE and LFS data,once adjusted for classification changes,indicate a significant decline in private employment in recent months.As shown in Figure 1.21,the PAYE data show that the three-month rate of private employment growth has fallen to its lowest level since 2020 Q2,with 14 sectors reporting a decrease in PAYE employment the highest number since August 2020.The adjusted LFS data also reflect this decline,showing a quarter-on-quarter drop of 190,000 in private employment again the weakest growth since 2020,matched o
2025-02-19
65页
5星级
Implications of Trump 2.0Quarterly Global Outlook 1Q 2025Executive SummaryImplications of Trump 2.0GDP Growth TrajectoryFX,Interest Rate&Commodities ForecastsKey Events In 1Q 2025Japan FocusSnapshot of Japans political scene post electionFX StrategyWill Trump 2.0 make the USD great again?Rates Strategy10Y UST yield to stay above 4ross 2025 amidst a shallower Fed easing cycleCommodities StrategySafe haven demand for gold to stay strong amidst Trump 2.0 economic uncertaintiesFX TechnicalsCommodities TechnicalsGlossaryGroup Research Team041415161719263253596162CONTENTNew ZealandUnited StatesUnited KingdomOutlook by EconomiesClick on the economy to view insightEurozoneAustraliaJapanChinaVietnamSouth KoreaHong KongTaiwanPhilippinesSingaporeIndiaIndonesiaMalaysiaThailand .sg/researchGlobalEcoMktResearchUOBBloomberg:NH UOB Information as of 28 November 2024Research InsightsExplore moreContact usUOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q20254Implications of Trump 2.0The Tariff Man returns and moreAfter 4 years of absence,Donald Trump is back in the hot seat as the president of the most powerful nation in the world.And with the Republican clean sweep of the control of the US Senate and House of Representatives,this means it will be easier to implement policies for Trump.Our economic outlook for 2025 will now need to put a heavy dose of consideration for the myriad of policies that Trump has planned for US and their implications for the rest of the world.We admit a lot of the Trump policy measures(announcements,threats and/or projections)are highly speculative and unpredictable at this juncture and will be subject to significant changes once Trump officially comes into office on his 20 Jan(2025)inauguration.We broadly highlight a few categories of policy measures Trump campaigned for during the run-up to the Presidential election which,in our view,will have material macro-economic impact to the US and globally,including tax cuts,deregulation,tariffs,immigration(with mass deportation of undocumented migrants&border security),the independence of the US Federal Reserve(Fed),green policy(rollbacks)and foreign policy.Bottom-line,the impact of Trumps various policies are likely to be inflationary with mixed effect on growth.The extension of current tax cuts and introduction of new cuts,coupled with the deregulation drive will likely reignite animal spirits,boost business confidence and investment sentiment for US economy and therefore positive for US growth and productivity,but is likely to add to inflationary pressures and worsen the federal fiscal deficit.That said,fiscal policy issues are likely to take some time and probably be debated in the US Congress only in 2H 2025.Trumps tough immigration policy proposals are another area of concern and may come sooner than fiscal policy issues with the expected negative implications for US GDP growth.The inflationary impact is less clear,as large-scale deportation may lower the workforce numbers and drive demand for the remaining workers and thus lead to higher wages and inflation.But at the same time,the reduced workforce could also lead to lower domestic consumption in the US and create deflationary effects.On green policies,it is expected that Trump will follow his past actions,such as withdrawing from the Paris Agreement,repealing Inflation Reduction Act which supports clean energy projects and electric vehicles,relaxing environmental regulations and enacting policies that favour conventional fossil fuel extraction.This will potentially see higher US output for crude oil&gas,while missing its carbon neutral pledges.On foreign policy,if Trump does see through his promise to end all wars,then one of the impacts could well be lower prices of commodities(excluding gold)for 2025.“Things we lose have a way of coming back to us in the end,if not always in the way we expect.”-Luna LovegoodEXECUTIVE SUMMARYOur economic outlook for 2025 will now need to put a heavy dose of consideration for the myriad of policies that Trump has planned for US and their implications for the rest of the world.Bottomline,the impact of Trumps various policies are likely to be inflationary with mixed effect on growth.Trumps tough immigration policy proposals are another area of concern and may come sooner than fiscal policy issues with the expected negative implications for US GDP growth.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q20255Scenarios for Trumps trade tariff 2.0 Base case:25%tariff rate on China,10%tariff on selected countries that benefited from Chinas trade diversion,no blanket tariffs.Here comes the tariff man(again).To be fair,the Biden administration did not shy away from tariffs as they kept the tariffs imposed during the first Trump administration and added a few targeted tariffs of their own.The stark difference is perhaps Trumps sensational way of delivering news/threats of trade tariffs.Trump brandished his tariff man credentials again on 26 Nov when he pledged to impose 25%tariff on all imports from Canada and Mexico,and 10%tariffs(on top of additional tariffs)on all imports from China in an executive order on his first day in office(20 Jan)for drugs(fentanyl)and border security issues.Using Section 232 or the International Emergency Powers Act(signed into law in 1977),Trump can exercise executive power to impose these tariffs on the basis of an“unusual and extraordinary threat”to national security,foreign policy or the US economy.And he did use this power and threatened countries(including Mexico)during his first term in office.But equally important,he never invoked that power to enact tariffs once countries acceded to his terms.So what can we expect on US trade policy in 2025?The short answer is more tariffs and frictions.That said,it is difficult to say at this point what tariffs will be enacted,to whom,and what will the amount be.The reason is that Trump has floated various tariff proposals since he officially started his bid for the White House in Sep 2023,from baseline 10%-20%tariff rates on all imports,and as much as 60%on imports from China,to 25%or even as much as 100%on Mexican-made goods,to 100%tariffs on countries that want to shift away from using US dollar.Trump has named credible nominees for his economic team(US Treasury secretary,NEC director),which now included Jamieson Greer for the US Trade Representative(as of 27 Nov,subject to Senate confirmation).Greer previously served as the chief of staff for Robert Lighthizer,who was Trumps Trade Representative for the full 4-year term and oversaw the imposition of billions in tariffs.Long seen as a protg of Lighthizer,Greer will be tasked with“reining in the Countrys massive Trade Deficit,defending American Manufacturing,Agriculture,and Services,and opening up Export Markets everywhere.”We also believe that Trump will use tariff threats as a bargaining chip or negotiation ploy to eventually gain concessions from China and key trade partners,rather than being laid out as an immediate policy action.Regarding Trumps tariff implementation,we foresee three scenarios based on the tariff proposals touted so far,and our estimated implementation timelines.These will have their respective impact on the macroeconomic outlook for the US,China and the worlds economy and translate into different outlook for the FX and Interest Rates spaces.TaxesImpact on each of the indicatorsReal GDPPotential impact of Trumps policiesInflationFed fundsOther impactsmild impactSource:UOB Global Economics&Markets Researchmoderate impactmajor impact /- /- /- /- /- -ImmigrationGreen policyTariffUS FedForeign policyWorsen fiscal deficitNegative for domestic spendingGreater output for US oil and gasSubject to retaliation from China&othersUpside risks to UST yields,capital outflowLower commodity pricesSo what can we expect on US trade policy in 2025?The short answer is more tariffs and frictions.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q20256Trump 1.0 trade tariffTrump 2.0 proposed tariff policiesProbability 10%“anti-drug”tariff on all imports from China scrapped if China commits to significantly increase fixed amount of purchases from the US and to clamp down on drugs.Prospect of targeted tariff increases on strategic industries in China which affect a smaller amount of US importsAs early as 2Q25Reduce trade tensions as US reviews progress of its new trade deals.Growth is more positive than previous projection,with trade seeing a robust rebound.10Y UST to settle at around 3.80%at the end of Fed easing cycle.Term risk premiums see modest upside.USD weakens anew as markets unwind tariff-related premium and refocus back to Feds rate-cut plan.Dec 24-25bps 2025-100bps 1Q26-25bps(terminal rate of 3.25%)3.5%2.2%4.6ditional tariffs imposed on China(25%instead of 60ter investigation)and 10%tariffs on economies that increased in trade surplus with US due to trade diversion from China.Tightened measures related to technology transfer and on high tech industries in China.No blanket tariff(of 10%)imposed on all imports.Assume China retaliates by imposing similar tariffs on US goods but limited retaliatory responses from other economies.Staggered implementation from 2Q25.Likely to start with List 4b(mostly consumer goods).Investigations could take 6 months to 1 year.Full implementation by 1H26.Growth still positive but moderates slightly on the measures imposed.Uneven recovery,differences in sectoral outcomes caused by different tariff changes and differentiated between economies.Moderate rise in US CPI inflation(2025: 0.3ppt to 2.4%).10Y UST to settle at around 4.10%(potentially 4.50%if term premiums repricing is front loaded)at the end of Fed easing cycle.Term risk premium see moderate upside from higher uncertainty over Fed path and upside inflation risk.USD to strengthen against most G-10 peers in 1H25 before moderating in 2H25.DXY to rise to 111.1 by mid-2025 before easing off to 107.6 by end-2025.Asia FX to weaken for the first three quarters of 2025 before rebounding in 4Q25.USD/CNY to test key 7.35 level in 1Q25 and trade to as high as 7.60 in 3Q25.USD/SGD to rise modestly to 1.38 in 3Q25 before pulling back to 1.36 in 4Q25.Dec 24-25bps 2025-75bps(terminal rate of 3.75%by 3Q25)3.1%1.8%4.3%“Anti-drug”tariff-10%on all imports from China and 25%on all imports from Mexico&Canada.200%tariff on auto imports from Mexico.Subsequently,10-20%tariffs on all imports,and 60%on China imports.Higher tariffs(20%)on imports from economies(including ASEAN)deemed to have benefitted via trade diversion from China.Tightened measures related to technology transfer&on high tech industries to China.Assumes tit-for-tat(retaliatory)responses from China and other affected economies.To begin“anti-drug”10%tariff on all imports from China as early as Jan 2025,further tariffs in 2Q25 on half of Chinese goods including List 4b and 4a.Intermediate and capital goods likely to reach additional 60%tariff rate first while taking longer for consumer goods.Full implementation by 1H26.Trump may bring forward the implementation.Sub-par global growth for full year,re-emergence of some supply chain disruption and demand destruction.One-time US inflation spike in 2H25 1H26(2025: 0.5ppt to 2.6%).10Y UST to settle at around 4.50%(potentially 4.90%if term premiums repricing is front loaded)at the end of Fed easing cycle.Term risk premium see pronounced upside risk from Fed path uncertainty and bond buyers strike.USD to appreciate sharply against most G-10 peers.DXY to potentially test 2022s high near 115.Asia FX to depreciate sharply against the USD due to potential portfolio outflows.USD/CNY to potentially test the psychological 8.00 level though countercyclical policies to prevent one-sided speculative moves can be expected.USD/SGD to potentially trade above 1.40.Dec 24-25bps Early 2025-25bps rate cuts to resume in 2026 on growth concerns but limited to just two 25bps cuts due to one-time inflation spike&higher inflation expectations(terminal rate of 4%by 1Q26)2.5%1.3%3.5%Tariff measures that may be implemented under different scenariosTariff implementation timelineGlobal economy outlookRates viewCurrency viewChanges in Fed funds rate2025 GrowthGlobal economyUSChinaSource:UOB Global Economics&Markets ResearchBase caseOptimistic PessimisticScenariosScenarios for tariff in 2025Trump 2.040U%5seline 10%-20%tariffs on all imports,and as much as 60%on imports from China 25%or even 100%on Mexican-made goods and 200%or 500%on autos imports from Mexico 100%tariffs on countries that want to shift away from using US dollar 25%“anti-drug”tariff on all imports from Mexico&Canada,10%“anti-drug”tariff(additional)on all imports from China Trade diversion from China to ASEAN to bypass tariffs could be pursued by Trump,although details are lacking at this stage Imposed additional tariffs of up to 25%on about US$370 bn of Chinese imports in 2018-19UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q20257Our Base Case scenario,which we ascribe a 55%probability,calls for more measured imposition of tariffs(Additional 25%tariff on China,instead of the claimed 60%,10%tariffs on economies that recorded increase in trade surplus with US due to trade diversion from China,and no blanket tariff on all US imports),with a staggered implementation pace from as early as 2Q 2025 and fully completed by 1H 2026.Ahead of the tariff implementation,there is a consensus view that growth(especially for exporter economies)may be lifted as US importers may frontload purchases in early 2025.That early lift is expected to be short-lived and the global economy will eventually see a slight growth moderation to 3.1%in 2025(versus IMF forecast of 3.2%),albeit with an uneven recovery differentiated across sectors and countries that are targeted by the tariffs.The rise in tariffs could weigh on US GDP growth which is expected to be lower at 1.8%for 2025(versus a projected 2.7%for 2024)while tariffs are also likely to push US inflation higher above the Feds 2%target in 2025 and 2026.A revised Fed policy trajectory:lesser cuts in 2025 with a higher terminal rateWe continue to hold the view the Fed will reduce the Fed Funds Target Rate(FFTR)by another 25-bps to 4.25-4.50%in the Dec 2024 FOMC.However,we are revising our 2025 rate cut trajectory to a total 75 bps of cuts(i.e.three 25-bps cuts,one in each quarter of 1Q,2Q and 3Q 2025)and end the rate cycle to bring the terminal rate to 3.75%(upper bound of FFTR).Prior to Trumps election victory,we had projected 100bps of cuts in 2025 and one last 25-bps cut in 1Q 2026 to bring the terminal rate to 3.25%.The reduced number of cuts reflect the higher inflation pressures from the projected tariff implementation during the latter part of 2025.It should be noted that for our pessimistic scenario which we ascribe a significant probability of 40%,reflects our view that the risk for US trade policy this time round is tilted towards a more negative outcome of higher tariffs(60%tariff rate for China as claimed),coupled with the imposition of a blanket tariff for all US imports(10-20%)and an earlier and shorter implementation timeline,starting on Trumps Day 1(20 Jan)and fully implemented by 1H 2026.The impact of this scenario will be weaker growth outlook accompanied by higher inflation outturns,which implies even fewer Fed rate cuts in 2025.Though we include an optimistic scenario(with an ascribed 5%probability),we see a very low likelihood of such a benign outcome where Trump will change his mind,and decide to only impose targeted tariffs and result in a significant de-risking of the trade friction between US and China.How would China respond?Similar to the 2018 episode,China is unlikely to take pre-emptive actions against US before actual tariffs are implemented.At the same time,China could retaliate with corresponding measures,potentially escalating trade tensions as seen in the earlier trade war(2018).We also note that since the trade war of 2018,US exports to China has risen significantly(23%increase to US$148 bn in 2023 from US$120.3 bn).This increase in dependence implies that more US industries may be vulnerable to Chinese retaliation in the event of a tit-for-tat trade conflict.Ahead of the tariff implementation,there is a consensus view that growth(especially for exporter economies)may be lifted as US importers may frontload purchases in early 2025.We are revising our 2025 rate cut trajectory to a total 75 bps of cuts and end the rate cycle to bring the terminal rate to 3.75%(upper bound of FFTR).How would China respond?Similar to the 2018 episode,China is unlikely to take pre-emptive actions against US before actual tariffs are implemented.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q2025806 Jul 201823 Aug 201824 Sep 201801 Sep 201925%(raised to 25%from 10 May 2019)15%(cut to 7.5%from 14 Feb 2020)25%(raised to 10-25%from 01 Jun 2019)5-10%(halved from 14 Feb 2020)US$34bn(List 1*)US$16bn(List 2*)US$200bn(List 3*)US$120bn(List 4a*)US$160bn(List 4b*initially scheduled from 15 Dec 2020 was scrapped)US$34bn(some were rolled back in Sep 2019-2020)US$16bn(some were rolled back in Dec 2019-2020)US$60bn(some were rolled back in 2020)US$75bn machinery,cars,hard disks and aircraft partssemiconductors,iron and steel products,electrical machinery,railway equipment,instruments and apparatustelecom equipment,computers&parts,furniture,electric appliances,metals,plastics,travel bags and agricultural&food productsSome consumer goods such as footwear,textiles,clothing,food products,smart watches,dishwashers,and flat-panel televisionstoys,cell phones,laptop computers,video game consoles,computer monitorsList 4a&4b excludes some pharmaceuticals and medical goods,rare earth and critical minerals*Details can be found at https:/ustr.gov/issue-areas/enforcement/section-301-investigations/tariff-actionsSource:USTR,UOB Global Economics&Markets Research545 goods including agricultural products,automobiles and aquatic products114 goods including motorcycles,bourbon,orange juice,chemicals,medical equipment and energy products such as coal and crude oil5,207 goods including food stuff,industrial minerals and chemicals,textiles and clothing,jewelry,metal products,machinery parts,and a wide range of consumer products5,078 goods ranging from agricultural products to crude oilAmountAmountAdditional tariff rateAdditional tariff rateGoods involvedGoods involvedEffective dateImplemented by USImplemented by ChinaA lookback in history-Tariff size and timeline 2018-2020Trump 1.0UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q20259US exports to China rose by 22.8tween 2018 and 2023Source:Macrobond,UOB Global Economics&Markets ResearchChina Stimulus measures insufficient for meaningful turnaround while Trump adds downside challenges to growthOne key difference for China when comparing the 2018 trade war(Trump 1.0)and upcoming Trump 2.0,was that China was coming into Trump 1.0 from a position of strength.However,China is now facing significant domestic headwinds and weak domestic demand.Looking back at September 2024,the stimulus measures announced by Chinese authorities involved minimal“new and actual spending.”,and mostly through monetary measures such as interest rate reductions,loosening of home purchase restrictions,and swap of local government debt,among others.While the announced quantum appears substantial,it is relatively small,amounting to about 8%of GDP compared to the 2008 stimulus package which,amounted to the 12.5%of GDP at that time.Notably,there has been no fresh direct stimulus spending aimed at boosting consumption,while the amount earmarked to resolve the local government debt looked woefully inadequate.Housing market in China remains a big challenge and the current stock of housing inventory will likely take some years to clear.The missing growth contribution from real estate activities,will likely cap Chinas GDP growth to well below 5%in the next few years.(Moodys estimated real estate activities contributed about 25%of Chinas GDP in 2022,and the direct contribution could languish at around 18%by 2030).While the developed economies have brought inflation back under control,China faces the opposite problem as deflation remains a key threat as consumer and business confidence has remained weak.Based on the above,we are lowering Chinas GDP growth forecast to 4.3%for 2025(previous:4.6%)on the extra burden imposed by Trumps tariffs on top of the soft domestic fundamentals.In terms of monetary policy response,PBOC focus in the coming months is likely to be on RRR(reserve requirement ratio)as the main tool for easing instead of interest rate cuts.There is ample room for PBOC to ease RRR further in 2025(as the US Fed progressively cuts rates while Chinas domestic deflation worsens).PBOC already signalled another 25-50 bps RRR cuts in 4Q 2024,and we expect further RRR cuts in 2025.In our view,further LPR cuts will be less likely if the CNY comes under increasing depreciation pressure.One key difference for China when comparing the 2018 trade war(Trump 1.0)and upcoming Trump 2.0,was that China was coming into Trump 1.0 from a position of strength.However,China is now facing significant domestic headwinds and weak domestic demand.In our view,further LPR cuts will be less likely if the CNY comes under increasing depreciation pressure.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202510Hereafter is a brief synopsis of key Focus pieces as well as key FX and Rates views.We wish our readers a peaceful end to the year,a happy new year in 2025!FX STRATEGYWill Trump 2.0 make the USD great again?Our base case for incoming trade tariff outlook under Trump 2.0-at 55%probability sees additional 25%tariffs imposed on China and 10%tariffs imposed on economies that increased in trade surplus with US due to trade diversion from China.We also assume China will retaliate by imposing similar tariffs on US goods but limited retaliatory responses from other economies.The clear consequence of trade tariffs is higher US inflation of 0.3ppt in 2025 for this base case.As such,the Fed will be on guard against any sign of building up of price pressures.We think this will translate to lesser Fed rate cuts,at just 75bps of cuts across 2025 and a higher terminal rate of 3.75%by 3Q25 for base case.As compared to our previous outlook before the elections of cumulative 125 bps of cuts to come and a terminal rate of 3.25%by 1Q26.As a result of this base case for trade tariff outlook,we now expect USD to strengthen further against most Major FX peers in 1H25 as tariff uncertainties dominate.In 2H25,USD strength may start to moderate and as most of the repricing for Trumps tariffs(base case)may have already been done and our downward trajectory in US rates could start to exert downward pressure on the USD.Overall,we expect the DXY to rise to 111.1 by mid-2025 before easing off to 107.6 by end-2025.We also expect FX volatility to stay elevated as investors digest incoming tariff headlines and the ensuing Fed response.Consequently,we turn negative in our outlook for EUR,GBP and AUD as we see more weakness to come in 1H25,before stabilizing somewhat in 2H25.Risk is for EUR/USD,GBP/USD and AUD/USD to drop further to 0.99,1.21 and 0.61 respectively by 2Q25 before modest recovery thereafter to 1.03,1.25 and 0.64 by 4Q25.Similarly,we see potentially higher USD/JPY at 157 by 2Q25 before pulling back to 152 by 4Q25.As a result of the incoming trade tariffs,we expect most Asia FX to weaken alongside the CNY for the first three quarters of 2025 before rebounding in 4Q25.In the event that the pessimistic scenario comes to pass where a maximum of 60%tariffs(instead of 25%tariffs in base case)are imposed on the Chinese goods,the fallout on Asia FX is likely to be considerably stronger and more enduring compared to the base case.The key message is that Asia FX are more sensitive to the tariffs and may have to endure a slightly longer period of weakness compared to Major FX.It is teeing up to be yet another difficult year for both Chinas economy and the CNY in 2025.Trumps tariffs are likely to exacerbate the existing concerns about Chinas economic slowdown.As a result,our macroeconomic team have downgraded 2025 GDP growth forecast to 4.3%from 4.6%as we factor in some tariffs on Chinese goods to become effective in 4Q25.On top of a weaker domestic growth outlook,the CNY is likely to fall further against the USD as a shorter and shallower Fed rate-cut cycle helps support the USD.Overall,we now see upside risk to USD/CNY in the coming few quarters and our updated USD/CNY forecasts are 7.35 in 1Q25,7.50 in 2Q25,7.60 in 3Q25 and 7.45 in 4Q25.Asian currencies are expected to weaken in tandem with the CNY across 2025.As such,we see potential highs in 3Q25 for USD/SGD,USD/MYR,USD/THB,USD/IDR,USD/VND at 1.38,4.65,35.7,16,400,26,200 respectively.As a result of this base case for trade tariff outlook,we now expect USD to strengthen further against most Major FX peers in 1H25 as tariff uncertainties dominate.In 2H25,USD strength may start to moderate.The key message is that Asia FX are more sensitive to the tariffs and may have to endure a slightly longer period of weakness compared to Major FX.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202511RATES STRATEGY10Y UST yield to stay above 4ross 2025 amidst a shallower FED easing cycleCompared to our previous update at the end of Oct,our base case for Fed funds has been adjusted higher.We have removed 50bps of cuts from the previous easing cycle estimates and now project only three cuts in 2025 for an easing cycle bottom in Fed funds of 3.75%.Risk is that Trump 2.0 fiscal policy proposals may skew even more inflationary if enacted in full and we expect the Fed to calibrate its approach as actual policies are made known.In our base case for end 1Q25,we forecast the 3M compounded in arrears Sofr at 4.35%.Thereafter,short term rates are then expected to drift lower across 2025 in tune with our expectations of a further 75bps rate cuts from the Fed.Eventually the 3M compounded in arrears Sofr could drop to 3.61%by 4Q25.As for Sora,in our base case for end 1Q25,we forecast the 3M compounded in arrears Sora at 2.77%and thereafter to 2.23%by 4Q25.Sora can be expected to drop to a lesser extent than declines in US rates.Our base case forecasts for 10Y UST have been marked higher compared to the previous month largely in view of the substantial upward shift in our Fed funds baseline.Contributing to a lesser extent,we have also built in a higher end state term premium estimate as well as incorporated a more front-loaded adjustment path to the end state into our 10Y UST forecast.This is due to the uncertainties surrounding the follow through of fiscal policy proposals,how these ultimately plays out on the inflation front and how deftly the Fed adjusts its policy stance to emerging realities which we expect is likely to play out as higher yields to compensate investors for assuming such risks.In our base case for end 1Q25,we now forecast the 10Y UST at 4.20%(vs our pre-US election forecast of 3.80%for 1Q25).Thereafter,10Y yield is expected to drift slightly lower in tune with our expectations of a further 75bps rate cuts from the Fed.Eventually the 10Y UST could settle at 4.10%by 4Q25.In summary,10Y UST yield post Trumps re-election is now expected to stay above 4ross 2025,albeit with a mild downward sloping bias mainly due to anticipated Fed rate cuts across 2025.As UST goes so goes the SGS.We have marked our forecast for 10Y SGS higher but with a smaller increase compared to that in UST.In our base case for end 1Q25,we forecast the 10Y SGS at 2.80%and thereafter settle at 2.70%by 4Q25.This updated forecast is modestly higher compared to our previous forecast of 2.70%for 1Q25 followed by a mild drift lower towards 2.60ross 2025.Overall,SG yields may see some stickiness from a gentler MAS policy slope.Yield upside potential may be more limited because US term premium risks do not map 1 to 1.As for Sora,in our base case for end 1Q25,we forecast the 3M compounded in arrears Sora at 2.77%and thereafter to 2.23%by 4Q25.Sora can be expected to drop to a lesser extent than declines in US rates.Overall,SG yields may see some stickiness from a gentler MAS policy slope.Yield upside potential may be more limited because US term premium risks do not map 1 to 1.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202512COMMODITIES STRATEGYSafe haven demand for gold to stay strong amidst Trump 2.0 economic uncertaintiesGold:Positive safe haven drivers remain intact ahead of Trump 2.0.From a longer-term perspective,the positive drivers from on-going Emerging Market(EM)and Asian central bank allocation into gold,as well as strong physical gold and jewellery demand from the retail sector remain intact.It is important to note the common thread between both positive long-term demand from central banks and retail sector alike.Both are driven by safe haven needs to diversify away from rising geopolitical concerns and uncertainties around the US Dollar ahead of disruptive trade and fiscal policies from Trump 2.0.Specifically,the strong retail sector demand for gold is driven by on-going substantial depreciation of domestic currencies like INR,CNH and VND,which amplify the gains in gold prices in local currency terms.Overall,we keep our positive view for gold as long-term safe haven demand needs will likely stay strong amidst further rise in geopolitical risks and economic risks from Trump 2.0 policies.Our forecasts for 2025 are USD 2,700/oz for 1Q25,USD 2,800/oz for 2Q25,USD 2,900/oz for 3Q25 and USD 3,000/oz for 4Q25.Brent:Trump 2.0 tariffs to keep oil prices pressured around USD 70/bbl.One major worry overhanging oil price is the much uncertainty over the global growth outlook as well as Chinas economic recovery after the possible large tariff hikes from Trump 2.0 across 2025.This risk of further growth slowdown from renewed tariffs in 2025 appears to be nullifying any rise in geopolitical risk from the on-going Russia-Ukraine war.In short,while most of the negative factors like global demand downgrade are now apparent,we acknowledge the further downside risk from negative impact from Trump 2.0 tariffs on China and global energy demand.As such,we now adopt a negative outlook for Brent crude oil forecasting USD 75/bbl for 1H25 and USD 70/bbl for 2H25.If global trade conflict worsens,the risk of further sell-off below USD 70/bbl cannot be ruled out later in 2025.LME Copper:Downgrading Copper outlook further to negative as Trump 2.0 tariffs loom.Over the longer run,the risk of further supply disruption from aging copper mines remains a key concern.However,this supply risk is now completely overtaken by more immediate concerns of the risk of global trade contraction and manufacturing slowdown due to the incoming Trump 2.0 tariffs later in 2025.As a result of risks from Trump 2.0 tariffs,our macroeconomic team has downgraded the base case estimate of Chinas economic growth in 2025 to 4.3%.Depending on the intensity and pacing of the incoming Trump 2.0 tariffs,it is likely that China,Asia as well as the rest of the world will suffer yet another round of trade and export contraction across 2025 and further into 2026.This will likely weigh down on LME Copper prices.As a result of immediate risks to global trade and production from incoming Trump 2.0 tariffs,we downgrade LME Copper outlook further from neutral to negative.Updated forecasts are USD 8,000/MT for 1H25 and USD 7,500/MT for 2H25.JAPAN FOCUSSnapshot of Japans political scene post election Prime Minister Ishiba and the Liberal Democrat Party(LDP)survived the Oct election drubbing and is now ruling as a minority government.PM Ishiba managed to pass the JPY21.9 trillion stimulus package with the help of opposition DPP in return for including the measure to raise the threshold for tax-free income which may improve labour supply and increase consumption spending but will invariably widen the fiscal burden.Political stability and continuity cannot be assumed,if the loose coalition with DPP breaks down,or the LDP loses ground further in the upper house elections in 2025.Specifically,the strong retail sector demand for gold is driven by on-going substantial depreciation of domestic currencies like INR,CNH and VND,which amplify the gains in gold prices in local currency terms.In short,while most of the negative factors like global demand downgrade are now apparent,we acknowledge the further downside risk from negative impact from Trump 2.0 tariffs on China and global energy demand.As such,we now adopt a negative outlook for Brent crude oil.Political stability and continuity cannot be assumed,if the loose coalition with DPP breaks down,or the LDP loses ground further in the upper house elections in 2025.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202513Global FXUSD/JPY:Despite tariff uncertainties probably anchoring the USD for a while longer,further gains in USD/JPY may be held back by the persistent monetary policy divergence between the Fed(easing bias)and the Bank of Japan(BOJ)which we still forecast a rate hike in the coming Dec meeting.Also,traders may also turn cautious ahead of previous intervention levels near 160.Overall,our updated USD/JPY forecasts are 155 in 1Q25,157 in 2Q25,154 in 3Q25 and 152 in 4Q25.EUR/USD:While markets scale back expectations for Fed rate cuts due to the inflation spillover of Trumps tariff policy,they intensified pricings for more aggressive easing from the ECB to bolster the regions economy after Euro-area business activity unexpectedly shrank in Nov.Political crises in Germany and France and escalating Russia-Ukraine war which now included long-range missile in the warfare also add to the perfect storm against the EUR.An over 50%chance of a half-point ECB rate cut in Dec weighed further on EUR/USD while futures markets have flipped to a net short EUR/USD position since late Oct.With the multitude of headwinds,it seems inevitable that EUR/USD would test the well-watched parity level in the coming months.Overall,our updated EUR/USD forecasts are 1.02 in 1Q25,0.99 in 2Q25,1.01 in 3Q25 and 1.03 in 4Q25.GBP/USD:GBP is likely to face lesser headwinds compared to other Major FX peers such as the EUR.Most importantly,the monetary policy gap between the Fed and the Bank of England(BOE)remains reasonably small.Both central banks are expected to guide rates lower to a similar 3.75%by end-2025.Futures traders also kept to a modest net long GBP/USD position amidst the pullback in spot.Taken together,while the path of least resistance is likely for a lower GBP/USD,further losses from here may be limited.Overall,our updated GBP/USD forecasts are 1.23 in 1Q25,1.21 in 2Q25,1.23 in 3Q25 and 1.25 in 4Q25.AUD/USD:Going forth,AUDs close correlation to the CNY meant that a potential repeat of the 2018-2020 US-China trade war may see AUD underperform within the G-10 FX space,as it did during the first year of trade war in 2018.At the same time,a hawkish RBA rhetoric relative to the Fed may counteract part of the depreciation pressures on the AUD.Overall,our updated AUD/USD forecasts are 0.63 in 1Q25,0.61 in 2Q25,0.62 in 3Q25 and 0.64 in 4Q25.NZD/USD:While New Zealand is unlikely to be in direct crosshair of Trumps upcoming trade tariffs,RBNZ keeping to a slightly faster rate-cut pace relative to the Fed is likely to keep the pressure on the NZD.Like other G-10 peers,we now expect NZD to weaken further against the USD in 1H25 before rebounding in 2H25.Our updated NZD/USD forecasts are 0.57 in 1Q25,0.55 in 2Q25,0.56 in 3Q25 and 0.57 in 4Q25.Asian FXUSD/CNY:Referencing the 2018-2020 trade war,it is likely that USD/CNY will test recent key highs of 7.35 in the coming months as tariff uncertainties build.A pickup of hedging demand upon the breach of 7.35 may lead to USD/CNY beginning a new trading range above that level.To maintain an orderly devaluation,the PBOC may guide markets expectations via the daily CNY fixing and warns against one-sided speculative bets on its currency.Overall,our updated USD/CNY forecasts are 7.35 in 1Q25,7.50 in 2Q25,7.60 in 3Q25 and 7.45 in 4Q25.The risk is skewed to further downside for CNY if larger or sooner tariffs are implemented compared to our base case.USD/SGD:Notwithstanding a“slight”reduction to the slope in the coming Jan 2025 MPS,a still-positive S$NEER slope may underpin SGD-crosses.To this point,the recent dip of S$NEER below the policy midpoint(according to our model)may offer opportunities for investors to reload on selected SGD-crosses to hedge for Trump tariffs.Volatility of USD/SGD is likely to be checked by the SGDs reputation as a regional safe-haven currency.Currently,we do not see USD/SGD rising beyond 1.40 in our base case scenario.Overall,our updated USD/SGD forecasts are 1.36 in 1Q25,1.37 in 2Q25,1.38 in 3Q25 and 1.36 in 4Q25.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202514USD/HKD:Alongside our expectations that USD is likely to stay bid in the coming quarters as Trumps tariff policy takes shape,we expect USD/HKD to normalise further towards the middle of its 7.75 7.85 trading band.As such,we reiterate our USD/HKD forecasts of 7.80 for the next four quarters in 2025.USD/TWD:With the return of Trump and trade tariffs looming,we argue that the path of least resistance is still for TWD to weaken further against the USD,mirroring similar moves in other Asian peers.That said,favourable factors such as the ongoing AI upcycle underpinning demand for Taiwans chips and CBCs stable rate outlook may limit TWDs downside.Overall,our latest USD/TWD forecasts are 32.8 in 1Q25,33.0 in 2Q25,33.2 in 3Q25 and 32.9 in 4Q25.USD/KRW:2025 may continue to be a challenging year for the KRW.Trumps proposed trade tariffs against China is likely to weigh on the CNY and spill over negatively to the KRW.Being a higher beta currency,we accord a higher drawdown of the KRW in 2025 compared to regional peers.The key high of 1,450 in USD/KRW will probably be tested in 2025 as Trumps tariff policy takes shape.Overall,we expect USD/KRW to trade higher across most part of 2025 and our latest forecasts are at 1,420 in 1Q25,1,440 in 2Q25,1,460 in 3Q25 and 1,430 in 4Q25.USD/MYR:Despite sound economic and financial fundamentals,the MYR is vulnerable to external developments,especially the potential upcoming Trump tariffs which is expected to weigh on Asia FX as a whole.The MYR which is closely correlated to the CNY will likely take direction from the latter.We expect the CNY and hence MYR to weaken against the USD for the first three quarters of 2025 as Trumps tariff plan takes shape before rebounding in 4Q25.Overall,our USD/MYR forecasts are now at 4.53 in 1Q25,4.60 in 2Q25,4.65 in 3Q25 and 4.55 in 4Q25.USD/IDR:Going forth,while further USD strength is the likely path of least resistance,BIs emphasis on rupiah stability may slow USD/IDRs ascent.Overall,our updated USD/IDR forecasts are 16,000 in 1Q25,16,200 in 2Q25,16,400 in 3Q25 and 16,200 in 4Q25.USD/THB:It is worth noting that the THB was the most resilient Asia FX in the last trade war(2018-2020)as investors took refuge in the safe-haven currency.This time round,favourable factors similar to 2018 include Thailands current account surplus,low inflation and a stable benchmark rate outlook.Overall,we expect THBs currency fluctuation to be lesser than regional peers in our base case scenario.Our updated USD/THB forecasts are 35.2 in 1Q25,35.5 in 2Q25,35.7 in 3Q25 and 35.2 in 4Q25.USD/PHP:In 2025,the PHP is likely to be on the defensive,taking direction from Trumps tariff policy as it takes shape as well as the CNY.A faster pace of rate cuts by the BSP relative to the Fed in 2025 is likely to weigh on the PHP as well.It appears that the record low of 59.33/USD will be tested in the near term as external headwinds build.Overall,we forecast USD/PHP to be at 59.5 in 1Q25,60.0 in 2Q25,60.5 in 3Q25 and 60.0 in 4Q25.USD/VND:Going forth,the VND is likely to take direction from Trumps tariff policy and the CNY.Currently consolidating near the record low of 25,463/USD,the VND looks set to trade to a new low given the external headwinds.Overall,our updated USD/VND forecasts are 25,800 in 1Q25,26,000 in 2Q25,26,200 in 3Q25 and 26,000 in 4Q25.USD/INR:Going forward,further outflows from the local bond and stock markets may continue to be a drag on the INR.On the other hand,a shallower RBI rate cut cycle this time round may maintain the INRs rate advantage over the Fed,buffering the currency.The RBI may continue to draw upon its big stockpile of forex reserves to limit currency volatility as INR trades to a new record low against the USD.Overall,our updated USD/INR forecasts are at 85.0 in 1Q25,85.5 in 2Q25,86.5 in 3Q25,and 85.5 in 4Q25.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202515y/y%change20232024F2025F1Q242Q243Q244Q24F1Q25F2Q25F3Q25F4Q25FChina5.24.94.35.34.74.65.04.74.54.14.0Hong Kong3.32.52.02.83.21.82.01.01.32.82.8India(FY)7.08.26.88.28.18.67.86.76.37.17.0Indonesia5.15.25.35.15.15.05.55.35.25.45.2Japan1.7-0.31.0-0.8-1.10.20.51.41.30.70.8Malaysia3.65.34.74.25.95.35.84.94.74.64.6Philippines5.55.56.05.86.45.24.75.66.16.26.1Singapore1.13.52.53.03.05.42.73.53.70.62.2South Korea1.42.22.03.32.31.51.81.42.32.22.0Taiwan1.34.33.06.65.14.02.02.53.12.83.3Thailand1.92.72.91.62.23.04.13.43.32.62.4Vietnam5.06.46.65.97.17.45.26.56.56.66.8Australia2.01.12.01.31.01.01.21.62.02.12.2Eurozone0.40.81.20.50.60.91.11.01.21.11.3New Zealand0.70.11.70.5-0.5-0.10.20.61.52.22.5United Kingdom0.41.01.40.30.71.11.81.51.41.41.4United States(q/q SAAR)2.92.71.81.63.02.82.01.11.22.21.5For India,full-year and quarterly growth are based on its fiscal calendar(Apr-Mar)Source:Macrobond,UOB Global Economics&Markets Research ForecastReal GDP growth trajectoryFORECASTUOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202516Source:UOB Global Economics&Markets Research EstimatesFX27 Nov1Q25F2Q25F3Q25F4Q25FUSD/JPY152155157154152EUR/USD1.061.020.991.011.03GBP/USD1.271.231.211.231.25AUD/USD0.650.630.610.620.64NZD/USD0.590.570.550.560.57DXY106.1108.9111.1109.2107.6USD/CNY7.257.357.507.607.45USD/HKD7.787.807.807.807.80USD/TWD32.5432.8033.0033.2032.90USD/KRW1,3931,4201,4401,4601,430USD/PHP58.7259.5060.0060.5060.00USD/MYR4.444.534.604.654.55USD/IDR15,93016,00016,20016,40016,200USD/THB34.5935.2035.5035.7035.20USD/VND25,39425,800 26,000 26,200 26,000USD/INR84.4585.0085.5086.5085.50USD/SGD1.341.361.371.381.36EUR/SGD1.421.391.361.391.40GBP/SGD1.701.671.661.701.70AUD/SGD0.870.860.840.860.87SGD/MYR3.313.333.363.373.35SGD/CNY5.415.405.475.515.48JPY/SGDx1000.890.880.870.900.89POLICY RATES27 Nov1Q25F2Q25F3Q25F4Q25FUS Fed Fund Rate4.754.254.003.753.75JPY Policy Rate0.250.500.500.500.50EUR Refinancing Rate3.402.902.652.402.15GBP Repo Rate4.754.504.254.003.75AUD Official Cash Rate4.354.003.753.503.25NZD Official Cash Rate4.254.003.503.003.00COMMODITIES27 Nov1Q25F2Q25F3Q25F4Q25FGold(USD/oz)2,6382,7002,8002,9003,000Brent Crude Oil(USD/bbl)7375757070LME Copper(USD/mt)9,0208,0008,0007,5007,500CNY 1Y Loan Prime Rate3.103.103.103.103.10HKD Base Rate5.004.504.254.004.00TWD Official Discount Rate2.002.002.002.002.00KRW Base Rate3.252.752.502.502.50PHP O/N Reverse Repo6.005.505.255.004.75MYR O/N Policy Rate3.003.003.003.003.00IDR 7D Reverse Repo6.005.505.004.754.75THB 1D Repo2.252.002.002.002.00VND Refinancing Rate4.504.504.504.504.50INR Repo Rate6.506.005.755.755.75INTEREST RATES27 Nov1Q25F2Q25F3Q25F4Q25FUSD 3M SOFR(compounded)4.934.353.993.743.61SGD 3M SORA(compounded)3.242.772.412.292.23US 10Y Treasuries Yield4.264.204.104.104.10SGD 10Y SGS2.822.802.702.702.70FX,interest rate&commoditiesFORECASTUOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q2025171Q 2025KEY EVENTS02US20US20-24GlobalLikely 01 FebIndiaMarMalaysia23 FebGermanyFebHong KongUS debt ceiling limit-the debt ceiling has been suspended since 3 Jun 2023 and will be reinstated on 2 Jan 2025.This is likely to be a non-event,as the unified government under the Republican party will ensure the suspension will be extended without causing any debt ceiling“tantrum”.Inauguration of the 47th US President,Donald J.Trump.World Economic Forum 2025-The meeting will take place in Davos Klosters,SwitzerlandUnion Budget FY2025-2026-The focus will remain on fiscal consolidation where the government has pledged to reduce the fiscal deficit to 4.5%of GDP by FY26 with a target of 4.9%for FY25.BNM to release its Bank Negara Malaysias Economic&Monetary Review 2024 and Financial Stability Review 2H24.Germany Federal Election to elect the members of the 21st Bundestag.It was originally scheduled for 28 September 2025 but was brought forward following the collapse of Chancellor Olaf Scholzs troubled three-party coalition.Hong Kongs FY2025-26 Budget.The government will unveil support measures for its economic and social priorities along with the official GDP forecast for 2025.Likely mid-FebSingaporeMarChinaBudget 2025-It will be of paramount importance as Singapore marks its 60th year of independence in 2025 and likely the last Budget in the current term of government.In our view,Budget 2025 will continue to build on the previous measures to address the heightened cost-of-living,enhance skills training and improve job security.This budget will serve as a prelude to the General Elections which must be held by 23 Nov 2025.Premier Li Qiang will deliver the annual Government Work Report at the opening of the National Peoples Congress(NPC).The key economic targets for 2025 will be announced with the focus on the growth and fiscal deficits as external headwinds intensify.2025 is a key year for formulating the 15th Five-Year Plan(2026-2030).JANUARYFEBRUARYMARCHUOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202518Snapshot of Japans political scene post electionThe lower house election outcomeLeadership transitionIshiba re-electedChallenges aheadRuling LDP and its coalition partner,Komeito won just 215 seats down from 291 previously-failing to secure a majority for the first time since 2009.In contrast,main opposition-Constitutional Democratic Party(CDP)saw a jump in the seats won to 148 from 96.Shigeru Ishiba was elected as the president of Liberal Democratic Party(LDP)on 27 Sep and took over as the nations prime minister on 1 Oct.Ishiba quickly called for a snap election of the lower house to be held on 27 Oct-a year ahead of the expiration of the current term.Japanese lawmakers voted for PM Ishiba to stay on as leader in a special parliamentary voting session on 11 Nov.Liberal Democratic Party(LDP)Constitutional Democratic Party(CDP)Japan Innovation Party(JIP)Democratic Party For the People(DPP)CDP now controls the chairmanship of the chambers Budget Committee(the first time in 3 decades),known as the main forum for policy debate The opposition CDP and DPP have an increased presence in the lower house raising the bar for Ishiba in seeking parliamentary approval Japan will hold elections for the upper house in Jul 2025 the ruling coalition holds a slim majority.Half of the 248 seats will be up for election,and the potential loss of the Upper House majority will make it even more difficult for Ishiba to govern effectively.A no-confidence motion will be called by then(or even earlier).JAPAN FOCUSUOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202519House of Representatives(lower house-465 seats)House of Councilors(upper house-248 seats)Composition of the National DietEconomic implicationsAbout the chamberNext electionLength of termSource:The National Diet of Japan,newswires,Global Economics&Markets ResearchLDP-191LDP-113Komeito-24Komeito-27BEFORERuling coalitionRuling coalitionOppositionOppositionAFTERCDP-148CDP-42JIP-18JIP-38DPP-12DPP-28Others-20Others-24Independent-8Independent-28Vacant-8 We still expect BOJ to normalize policy further via a 25bps hike in Dec this year which we believe will be the terminal rate.Market probability for a rate hike is at 68%for Dec,a higher 84%for Jan 2025,and fully priced in by Mar 2025 MPM(as of 27 Nov).PM Ishiba may propose an extra budget of JPY13 tln(US$85 bn)to fund a JPY21.9 tln economic stimulus package to help households cope with higher costs of living via energy subsidies and one-off financial aid to low income households.However,as a minority government,Ishiba needed the backing of smaller parties to have enough votes to pass legislation.The DPP,voted together with the LDP coalition to pass the stimulus package after one of their key demands-to raise the tax-free income ceiling from JPY1.03 mn to JPY1.78 mn,was included in the package.This increase in the ceiling may encourage part-time workers to extend their working hours without the fear of higher tax burden(therefore boosting Japans labour supply).It may also increase consumption by households as the income rise is seen to be permanent.But the measure is expected to worsen Japans fiscal outlook,with government estimating the tax revenue losses could amount to JPY7 to 8 tln annually.Political stability and continuity cannot be assumed,if the LDPs loose coalition with DPP breaks down,or the LDP loses ground further in the upper house elections in 2025.USD/JPY grinded higher to a four-month high of about 155 amidst a broad USD resurgence as markets priced in lesser Fed rate cuts in a Trump 2.0 scenario.The above mentioned uncertain political landscape in Japan also added to the JPY weakness.Going forward,traders may also turn cautious on the USD against the JPY ahead of previous intervention levels near 160.In line with expectations of another BOJ rate hike,we see USD/JPY topping out but still staying above 150.Overall,our updated USD/JPY forecasts are 155 in 1Q25,157 in 2Q25,154 in 3Q25 and 152 in 4Q25.Cannot be dissolved,and terms are staggered so that only half of its membership is up for election every 3 years.For treaties,budget,and the selection of the prime minister,the House of Councillors can only delay passage,but not block the legislation.Before 27 Jul 20256 yearsCan be dissolved by the prime minister or the passage of a non-confidence motion.The House of Representatives can override the decision of the House of Councillors by a two-thirds vote in the affirmative.Before 22 Oct 20284 yearsUOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202520Will Trump 2.0 make the USD great again?The USD surged in 4Q24,tracing higher US Treasury yields in the immediate aftermath of the Trumps victory in the US elections.Investors quickly priced in the risk that Trumps potential trade tariffs,expansionary fiscal stance and stricter immigration policy may derail the US disinflation process and the Feds plan to lower interest rates.While it appears clear that the USD may stay bid in the near term as Trumps policy uncertainties linger,the bigger question is whether this USD recovery is sustainable?Asia FX posted steep losses and slipped against the USD in 4Q24 on worries of a repeat of the 2018-2020 US-China trade war.The Asia Dollar Index reversed strong gains from the prior quarter and now nears the key support level which has held during previous stress periods such as steep Fed rate hikes(2022)and China slowdown concerns(2023-2024).Would the level hold again this time round?Or would trade war 2.0 trigger an extended period of Asia FX weakness?Major FX StrategyUSD to strengthen further in 1H25 before moderating in 2H25Market expectations of Trumps trade tariffs will be the predominant driver for USD in 2025,at least in the first half of the year.Since Trumps victory in early Nov,the US Dollar Index(DXY)has rallied about 4%to 107.6,the highest level in two years.The move reflected market expectations that some form of trade tariffs will be threatened or imposed on US trade partners in 2025.While it appears clear that the USD may stay bid in the near term as Trumps policy uncertainties linger,the bigger question is whether this USD recovery is sustainable?The Asia Dollar Index reversed strong gains from the prior quarter and now nears the key support level which has held during previous stress periods such as steep Fed rate hikes(2022)and China slowdown concerns(2023-2024).Would the level hold again this time round?Or would trade war 2.0 trigger an extended period of Asia FX weakness?FX STRATEGYChart 1:Most Major and Asia FX fell against the USD across Oct Nov as markets repriced for less Fed rate cuts in Trump 2.0 eraSource:Bloomberg,UOB Global Economics&Markets Research-10-5051015NZDJPYGBPAUDEURMajor FX performance in 4Q24 vs 3Q243Q24(%)4Q24 to date(%)-10-5051015MYRTHBKRWPHPIDRSGDVNDCNYTWDINRHKDAsia FX performance in 4Q24 vs 3Q243Q24(%)4Q24 to date(%)UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202521Our base case-at 55%probability sees additional 25%tariffs imposed on China and 10%tariffs imposed on economies that increased in trade surplus with US due to trade diversion from China.We also assume China will retaliate by imposing similar tariffs on US goods but limited retaliatory responses from other economies.In addition,we accord a significant 40%probability for a pessimistic scenario whereby the Trump administration imposes additional 10%“anti-drug”tariff imposed on all imports from China,additional 25%“anti-drug”tariff on all imports from Mexico and Canada with effect from Jan 2025 on executive order.Subsequently,the administration will also make good of its election pledge to impose 10-20%tariffs on all imports,and 60%on China imports.The clear consequence of trade tariffs is higher US inflation of between 0.3ppt(base case)and 0.5ppt(pessimistic case)in 2025.As such,the Fed will be on guard against any sign price pressures are again building.We think this will translate to lesser Fed rate cuts in 2025(75bps for base case,25 bps for pessimistic)and a higher terminal rate(3.75%by 3Q25 for base case,4%by 1Q26 for pessimistic)as compared to our previous outlook before the elections.In our base case,we now expect USD to strengthen further against most Major FX peers in 1H25 as tariff uncertainties dominate.In 2H25,USD strength may start to moderate as most of the repricing for Trumps tariffs(base case)may have already been done and our downward trajectory in US rates could start to exert downward pressure on the USD.Overall,we expect the DXY to rise to 111.1 by mid-2025 before easing off to 107.6 by end-2025.We also expect FX volatility to stay elevated as investors digest incoming tariff headlines and the ensuing Fed response.EUR was one of the biggest casualties within G-10 FX due to the US elections,falling about 4%from 1.08 to 1.04 across Nov,the lowest level in two years.Underscoring the sharp move was the stark monetary policy divergence between the Fed and the European Central Bank(ECB).While markets scaled back expectations for Fed rate cuts due to the inflation spillover of Trumps tariff policy,they intensified pricings for more aggressive easing from the ECB to bolster the regions economy after Euro-area business activity unexpectedly shrank in Nov.Political crises in Germany and France and the escalating Russia-Ukraine war which now included long-range missiles in the warfare also add to the perfect storm against the EUR.Interest rate swaps now indicate 138 bps(as of 22 Nov)of additional ECB rate by Jun 2025 compared to 115 bps at the start of Nov.An over 50%chance of a half-point ECB rate cut in Dec weighed further on EUR/USD while futures markets have flipped to a net short EUR/USD position since late Oct.With the multitude of headwinds,it seems inevitable that EUR/USD would test the well-watched parity level in the coming months.Overall,we now turn negative in our outlook for the EUR and our updated EUR/USD forecasts are 1.02 in 1Q25,0.99 in 2Q25,1.01 in 3Q25 and 1.03 in 4Q25.Overall,we expect the DXY to rise to 111.1 by mid-2025 before easing off to 107.6 by end-2025.We also expect FX volatility to stay elevated as investors digest incoming tariff headlines and the ensuing Fed response.With the multitude of headwinds,it seems inevitable that EUR/USD would test the well-watched parity level in the coming months.Overall,we now turn negative in our outlook for the EUR.Chart 2:DXY to rise in first half of 2025 before pulling backSource:Macrobond,UOB Global Economics&Markets ResearchUOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202522Chart 3:Futures positioning in EUR/USD flipped to a net short since late OctSource:Bloomberg,UOB Global Economics&Markets Research1.021.041.061.081.101.12-10-50510152025Dec 23Feb 24Apr 24Jun 24Aug 24Oct 24CFTC EUR/USD non-comm positioning(USDbn)EUR/USD-RHSWeighed by broad USD strength,GBP/USD dipped below 1.25 in late Nov,the lowest level in six months.That said,the GBP is likely to face lesser headwinds compared to other Major FX peers such as the EUR.Most importantly,the monetary policy gap between the Fed and the Bank of England(BOE)remains reasonably small.While we have pared expectations of Feds easing from 100 bps to 75 bps in 2025,we kept to expectations of 100 bps from the BOE as a result of still-sticky wage growth.Both central banks are expected to guide rates lower to a similar 3.75%by end-2025.Futures traders also kept to a modest net long GBP/USD position amidst the pullback in spot.Taken together,while the path of least resistance is likely for a lower GBP/USD,further losses from here may be limited.Overall,we now view GBP negatively as well and our updated GBP/USD forecasts are 1.23 in 1Q25,1.21 in 2Q25,1.23 in 3Q25 and 1.25 in 4Q25.USD/JPY grinded higher to a four-month high of about 155 amidst a broad USD resurgence as markets priced in lesser Fed rate cuts in a Trump 2.0 scenario.Despite tariff uncertainties probably anchoring the USD for a while longer,further gains in USD/JPY may be held back by the persistent monetary policy divergence between the Fed(easing bias)and the Bank of Japan(BOJ)which we still forecast a rate hike in the coming Dec meeting.Already,the 10-year USD-JPY rate spread has narrowed modestly in Nov,owning to a bigger rise in the 10-year JGB yield compared to the US equivalent.Traders may also turn cautious ahead of previous intervention levels near 160.Overall,our updated USD/JPY forecasts are 155 in 1Q25,157 in 2Q25,154 in 3Q25 and 152 in 4Q25.Chart 4:USD/JPY feels the drag of a falling rates spreadSource:Bloomberg,UOB Global Economics&Markets Research1051201351501651.001.502.002.503.003.504.004.50Apr 21Dec 21Aug 22Apr 23Dec 23Aug 2410Y US-Japan rates spread(%)USD/JPY-RHSWhile the path of least resistance is likely for a lower GBP/USD,further losses from here may be limited.Despite tariff uncertainties probably anchoring the USD for a while longer,further gains in USD/JPY may be held back by the persistent monetary policy divergence between the Fed(easing bias)and the BOJ which we still forecast a rate hike in the coming Dec meeting.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202523Overall,we expect most Asia FX to weaken alongside the CNY for the first three quarters of 2025 before rebounding in 4Q25.In the event that the pessimistic scenario comes to pass where 60%(instead of 25%in base case)tariffs are imposed on the Chinese goods,the fallout on Asia FX is likely to be considerably stronger and more enduring compared to the base case.It was a roller-coaster ride for AUD/USD in the past couple of months.Soaring to 0.69 in late Sep after China announced its latest monetary stimulus package,the pair has since reversed all its gains in the 3Q24 as the USD strengthened anew across Oct Nov.Going forth,AUDs close correlation to the CNY meant that a potential repeat of the 2018-2020 US-China trade war may see AUD underperform within the G-10 FX space,as it did during the first year of trade war in 2018.At the same time,a hawkish Reserve Bank of Australia(RBA)rhetoric relative to the Fed may counteract part of the depreciation pressures on the AUD.Overall,it will be difficult for AUD to counter the USDs renewed strength as well and our updated AUD/USD forecasts are 0.63 in 1Q25,0.61 in 2Q25,0.62 in 3Q25 and 0.64 in 4Q25.Asia FX StrategyAsia FX to weaken further for the first three quarters of 2025 before rebounding in 4Q25Asia FX posted steep losses and slipped against the USD in 4Q24 as market sentiment soured in the face of looming trade tariffs imposed on Chinese goods next year.Losses in the region were largely led by currencies which rose the most in 3Q24,namely MYR(-7.5%in 4Q24-to-date)and THB(-6.8%).A Trump 2.0 scenario is a key risk to our sanguine outlook on Asia FX,as we highlighted in the latest FX&Rates Monthly published 29 Oct(For more details,pls refer to report here).A potential repeat of the 2018-2020 US-China trade war would undermine Asias exports,growth outlook,sentiment and eventually Asia FX.The 2018 playbook saw Asia FX start to depreciate about three months into the first tariffs imposed on Chinese goods in Jul 2018 and continue to stay weak for couple of months after which.Having a precedent probably means that much of the expected Asia FX weakness may be front-loaded this time round,as compared to 2018.A nuance this time is that the Fed is in the midst of an easing cycle now as opposed to a tightening cycle previously which may translate to lesser headwinds on Asia FX in the current episode.Chart 5:USD/CNY and USD/SGD both rose before and after the first tariffs were imposed on China in Jul 2018Source:Macrobond,UOB Global Economics&Markets ResearchAUDs close correlation to the CNY meant that a potential repeat of the 2018-2020 US-China trade war may see AUD underperform within the G-10 FX space,as it did during the first year of trade war in 2018.Having a precedent probably means that much of the expected Asia FX weakness may be front-loaded this time round,as compared to 2018.A nuance this time is that the Fed is in the midst of an easing cycle now as opposed to a tightening cycle previously which may translate to lesser headwinds on Asia FX in the current episode.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202524It is teeing up to be yet another difficult year for the CNY in 2025.Trumps tariffs are likely to exacerbate the existing concerns about Chinas economic slowdown.As a result,our macroeconomic team have downgraded 2025 GDP growth forecast to 4.3%from 4.6%as we factor in some tariffs on Chinese goods to become effective in 4Q25.On top of a weaker domestic growth outlook,the CNY is likely to fall further against the USD as a shorter and shallower Fed rate-cut cycle helps support the USD.Referencing the 2018-2020 trade war,it is likely that USD/CNY will test recent key highs of 7.35 in the coming months as tariffs uncertainties build.A pickup of USD hedging demand upon the breach of 7.35 may lead to USD/CNY beginning a new trading range above that level.At the same time,it is worth noting that the USD/CNY strength back in 2018 was more pronounced as it was the first time a trade conflict was waged between the two countries and that USD was also drawing strength from a Fed rate hike cycle at that time.In comparison,this time round the Fed is expected to keep to its rate cuts plan even as tariffs loom.To maintain an orderly devaluation,the Peoples Bank of China(PBOC)may guide markets expectations via the daily CNY fixing and warns against one-sided speculative bets on its currency.Overall,we now see upside risk to USD/CNY in the coming few quarters and our updated USD/CNY forecasts are 7.35 in 1Q25,7.50 in 2Q25,7.60 in 3Q25 and 7.45 in 4Q25.The risk is skewed to further downside of CNY if the larger or sooner tariffs are implemented compared to our base case.In the last trade war,a positive-sloping S$NEER helped buffer the SGD against external headwinds and underscored gains against most of its regional trading peers.In the first year(2018),the SGD fell a modest 2%against the resurgent USD,one of the most resilient Asia FX.This time round,history may repeat again.Notwithstanding a“slight”reduction to the slope in the coming Jan 2025 MPS,a still-positive S$NEER slope may underpin SGD-crosses.To this point,the recent dip of S$NEER below the policy midpoint(according to our model)may offer opportunities for investors to reload on selected SGD-crosses to hedge for Trump tariffs.Volatility of USD/SGD is likely to be checked by the SGDs reputation as a regional safe-haven currency.Currently,while we see more upside risk to USD/SGD,we do not see USD/SGD rising beyond 1.40 in our base case scenario.Overall,our updated USD/SGD forecasts are 1.36 in 1Q25,1.37 in 2Q25,1.38 in 3Q25 and 1.36 in 4Q25.Chart 6:S$NEER rarely trade below the policy midpoint in recent years whilst having a positive slopeSource:Bloomberg,UOB Global Economics&Markets Research122127132137142Jul 21Nov 21Mar 22Jul 22Nov 22Mar 23Jul 23Nov 23Mar 24Jul 24Nov 24UOB S$NEERMid-pointUpper bandLower bandIt is worth noting that the USD/CNY strength back in 2018 was more pronounced as it was the first time a trade conflict was waged between the two countries and that USD was also drawing strength from a Fed rate hike cycle at that time.Notwithstanding a“slight”reduction to the slope in the coming Jan 2025 MPS,a still-positive S$NEER slope may underpin SGD-crosses.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202525Chart 7:Will investors take refuge in the THB again,like they did in the 2018 trade war?Source:Bloomberg,UOB Global Economics&Markets Research29.530.531.532.533.56.26.36.46.56.66.76.86.97.07.17.2Jan 18Jul 18Jan 19Jul 19USD/CNY-InverseUSD/THB-Inverse,RHSWe expect the CNY and hence MYR to weaken against the USD for the first three quarters of 2025 as Trumps tariff plan takes shape before rebounding in 4Q25.While we see further THB weakness ahead,we expect THBs currency fluctuation to be lesser than regional peers in our base case scenario.Reversing a large part of its outsized 12.6%gain against the USD in 3Q24,the MYR weakened back to 4.45(as at late Nov)as a second Trump presidency fueled concerns over protectionist trade measures and fewer Fed rate cuts,as well as escalating military conflict in Russia-Ukraine pushed the USD higher.The broad USD strength has prompted foreign investors to readjust their MYR portfolio funds through hedging activities since early Oct.Despite sound economic and financial fundamentals,the MYR is vulnerable to external developments,especially Trump tariffs which is expected to weigh on Asia FX as a whole.The MYR which is closely correlated to the CNY will likely take direction from the latter.We expect the CNY and hence MYR to weaken against the USD for the first three quarters of 2025 as Trumps tariff plan takes shape before rebounding in 4Q25.Overall,in line with our expectations for higher USD/Asia in first three quarters of next year,our USD/MYR forecasts are now at 4.53 in 1Q25,4.60 in 2Q25,4.65 in 3Q25 and 4.55 in 4Q25.After jumping 12%in 3Q24,the biggest quarterly gain since 1998,the THB has pared about half of the gains across Oct Nov.A confluence of factors contributed to the THBs slump,including a surprise 25 bps Bank of Thailand(BOT)rate cut by in Oct,broad USD strength and an outsized bond outflow(USD 2bn across Oct Nov,on track for largest quarterly outflow since 1Q20).Going forward,the THB is likely to weaken alongside the CNY and regional peers as Trumps tariff policy takes shape in the coming months.It worth noting that the THB was the most resilient Asia FX in the last trade war(2018-2020)as investors took refuge in the safe-haven currency.This time round,favourable factors similar to 2018 include Thailands current account surplus,low inflation and a stable benchmark rate outlook.Overall,while we see further THB weakness ahead,we expect THBs currency fluctuation to be lesser than regional peers in our base case scenario.Our updated USD/THB forecasts are 35.2 in 1Q25,35.5 in 2Q25,35.7 in 3Q25 and 35.2 in 4Q25.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202526USD/IDR rebounded from a low of near to 15,000 in late Sep to 15,800 in late Nov alongside higher US Treasury yields which dent the appeal of local government bonds.Uncertainties are also building up on Trumps tariff policy which had investors turn cautious about Emerging Market(EM)exposure.Inflows to Indonesias government bonds have grinded to a standstill in 4Q24 after registering the biggest inflow since 2019 in the prior quarter(USD 4bn).To temper with the depreciation pressures,Bank Indonesia(BI)has intervened in the spot and domestic non-deliverable forwards in the last month.Going forth,while further USD strength is the likely path of least resistance,BIs emphasis on rupiah stability may slow USD/IDRs ascent.Overall,our updated USD/IDR forecasts are higher at 16,000 in 1Q25,16,200 in 2Q25,16,400 in 3Q25 and 16,200 in 4Q25.It was a roller coaster ride for the VND in the last couple of months.After registering the largest quarterly gain(3.5%)on record dating back 1993 in 3Q24,the VND has since reversed all its gains across Oct Nov.Despite resilient fundamentals,the VND is held hostage by external factors such as a resurgent USD as markets repriced for fewer Fed rate cuts in a Trump 2.0 era.Going forth,the VND is likely to take direction from Trumps tariff policy and the CNY.Currently consolidating near the record low of 25,463/USD,the VND looks set to trade to a new low given the external headwinds.Overall,our updated USD/VND forecasts point to a stronger USD over the coming quarters and are 25,800 in 1Q25,26,000 in 2Q25,26,200 in 3Q25 and 26,000 in 4Q25.Going forth,while further USD strength is the likely path of least resistance,BIs emphasis on rupiah stability may slow USD/IDRs ascent.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q20252710Y UST yield to stay above 4ross 2025 amidst a shallower Fed easing cycleYields further out on the curve will have to contend with uncertainties over the impact on US bond demand either from the fraying of international relationships quickening diversification out of US Treasuries,or from indigestion in response to expected higher coupon supply.RATES STRATEGYChart 1:Fed funds forecastsSource:Bloomberg,UOB Global Economics&Markets Research3.751.002.003.004.005.006.00Jun 22Mar 23Dec 23Sep 24Jun 25Mar 26Dec 26%UOBConsensusFF FuturesTis the season for casting our sights into the new year,and it appears to us that the conduct of monetary policy will be driven by answers to a couple of big questions.Will US economic exceptionalism continue in 2025?To what degree will actual fiscal policies resemble proposed policies?In addition,yields further out on the curve will also have to contend with uncertainties over the impact on US bond demand either from the fraying of international relationships quickening diversification out of US Treasuries,or from indigestion in response to expected higher coupon supply.At the same time,we inherit financial asset valuations which are on the rich end of history.A confidence shock will elicit a significant price response,which is something that we have already experienced on multiple occasions in 2024.Accounting for the above and marrying our macro-economic teams forecasts,our base case outlook can be described as cautiously optimistic on the extension of goldilocks conditions into 2025.Specifically,our base case assumes that the“worst of”scenarios will be managed such that a soft landing to growth remains a plausible outcome.Our FOMC viewCompared to our previous update at the end of Oct,our base case for Fed funds has been adjusted higher.We have removed 50bps of cuts from the previous easing cycle estimates and now project only three cuts in 2025 for an easing cycle bottom in Fed funds of 3.75%.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202528Underlying our Fed funds base case is an assumption that the policy rate still has some room to adjust lower towards more neutral settings.We are not alone in adjusting our Fed funds expectations higher.Measured from 9 Oct when prediction markets flipped in favour of Trump,US yields have moved higher largely due to investors repricing for a less aggressive easing stance from the Fed going forward.To be clear,even after easing,we have the SG$NEER policy slope still staying positive in 2025.This means that divergence scenarios(i.e.US rates down but SG rates up)are primarily consigned to tail events and are not our base case.Chart 2:Repricing measured from 9 Oct Trump flip in prediction marketsSource:Bloomberg,UOB Global Economics&Markets Research-0.070.260.12-0.100.19-0.09-0.30-0.20-0.100.000.100.200.300.400.50Inflation expectationsMonetary policyTerm premiumfore election dayAfter election dayWe are not alone in adjusting our Fed funds expectations higher.Measured from 9 Oct when prediction markets flipped in favour of Trump,US yields have moved higher largely due to investors repricing for a less aggressive easing stance from the Fed going forward.At this point,we think that it is premature to advocate for leaning against the crowd despite prices being more hawkish than our projection.Our foremost concern lies with fiscal policy uncertainty which renders risk reward assessments particularly amorphous.In our base case for end 1Q25,we forecast the 3M compounded in arrears Sofr at 4.35%.Thereafter,short term rates are then expected to drift lower across 2025 in tune with our expectations of a further 75bps rate cuts from the US Federal Reserve.Eventually the 3M compounded in arrears Sofr could drop to 3.61%by 4Q25.Our MAS viewWe have the MAS easing monetary policy via a slope reduction in early 2025.Our base case sees Singapores economic growth,measured via the output gap,hugging to its potential next year thus offering room for a gentler currency appreciation path.In our base case,short term SG yields will track lower alongside an expected decline in the US Fed funds rate.However,the pass through into SG yields may be smaller when we account for a more modest appreciation path in the SG$NEEER.To be clear,even after easing,we have the SG$NEER policy slope still staying positive in 2025.This means that divergence scenarios(i.e.US rates down but SG rates up)are primarily consigned to tail events and are not our base case.Underlying our Fed funds base case is an assumption that the policy rate still has some room to adjust lower towards more neutral settings.This move towards neutral is warranted on the basis on our expectation that US economic growth may continue to soften in the near term.We also acknowledge that upside risk to inflation has firmed on the back of fiscal and trade policy proposals by the incoming US administration.The Fed will not be able to ignore this which accounts for our truncated easing cycle and higher cycle bottom in the Fed funds rate.Our current Fed funds forecasts tracks in line with Bloombergs analyst consensus for rate cuts over the first 3 quarters of 2025.Thereafter,we hold a more hawkish end cycle Fed funds projection of 3.75%compared to the consensus take of between 3.25%to 3.50%.That said,the Fed funds futures market(as of 26 Nov close)is even more hawkishly placed,pricing in a monetary policy easing profile that is around 25bps shallower.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202529Chart 3:SGD weakened against NEER basketSource:Bloomberg,UOB Global Economics&Markets Research-1.00-0.80-0.60-0.40-0.200.0009 Oct16 Oct23 Oct30 Oct06 Nov13 Nov20 Nov%US ElectionsUOB S$NEERAmongst the policy proposals by the new US administration,those pertaining to trade and tariffs are of the most relevance here.Aside from the impact on the volume of trade activity,which is widely regarded as being negative in aggregate,there is also the question of how currency markets will adjust to the new realities.The markets assessment thus far has been to mark down the SG$NEER(measured from 9 Oct when prediction markets flipped in favour of Trump).It follows that the risk scenario for SG yields is that they could experience more pronounced underperformance versus US yields if the SG$NEER decline was to accelerate and extend towards the weak side of the policy band.In our base case for end 1Q25,we forecast the 3M compounded in arrears Sora at 2.77%.Thereafter,short term rates are then expected to drift lower across 2025 but to a lesser extent than declines in US yields.Eventually the 3M compounded in arrears Sora could drop to 2.23%by 4Q25.Our wider monetary policy viewsOur monetary policy views on major developed markets(DM)sees central bankers there positioned to continue cutting their own policy rates led by the RBNZ.In 2025,both the ECB and the BOE are expected to cut interest rates,albeit for slightly different reasons and at potentially different paces.The ECB is likely to continue its rate-cutting cycle due to a favorable inflation outlook,with projections showing inflation moving closer to its 2%target,modest economic growth forecasts,and a well-progressing disinflationary process.Global economic uncertainties,including potential protectionist policies from a new U.S.administration and weak eurozone growth,may further prompt the ECB to maintain an accommodative stance.The BOE,while also expected to cut rates,may adopt a more cautious approach due to persistent inflation concerns,with expectations of inflation rising to 2.8%by the third quarter of 2025 before easing.However,factors such as moderating wage growth,and global economic considerations could still support rate cuts.On the other end,BOJ was the exception to the easing trend in 2024 but we have penciled in a pause next year alongside a downgrade to our Japan 2025 GDP forecast.In our base case for end 1Q25,we forecast the 3M compounded in arrears Sora at 2.77%.Thereafter,short term rates are then expected to drift lower across 2025 but to a lesser extent than declines in US yields.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202530Chart 4:Year to date policy rate changesSource:Bloomberg,UOB Global Economics&Markets Research-1.50-1.25-1.00-0.75-0.50-0.250.000.250.50NZEUUSHKSI*PHUKSKCNTHAUINMYVNIDTWJP%Change in past mthTable 1:Further changes in policy rates(UOB forecast%)Developed marketsAsiaEconomy30 Nov 2024-31 Dec 20252026Economy30 Nov 2024-31 Dec 20252026New Zealand-1.25-Philippines-1.25-0.25Eurozone-1.25-Indonesia-1.25-Australia-1.10-Hong Kong-1.00-United Kingdom-1.00-0.75India-0.75-United States-1.00-Singapore*-0.670.02Japan0.25-South Korea-0.50-Thailand-0.25-China-Taiwan-Malaysia-Vietnam-*Represented by the change in 3M OIS rateSource:UOB Global Economics&Markets ResearchIn the Asian region,the brief virtuous cycle of currency appreciation and foreign inflows in 3Q24 came to a halt as we approached the US elections.Weve seen a few central banks utilizing this window to lower their policy rate.Although further easing from selected Asian central banks in 2025 remains our base case.We are cognizant that faced with the prospect of less cuts in Fed funds rates as well as the uncertainties around trade and tariff policies,Asian currencies have an increased potential to become more volatile.As such,Asian central banks may decide to tread more cautiously when it comes to future monetary policy easing.Our 10Y UST viewOur base case forecasts for 10Y UST have been marked higher compared to the previous month largely in view of the substantial upward shift in our Fed funds baseline.Contributing to a lesser extent,we have also built in a higher end state term premium estimate as well as incorporated a more front-loaded adjustment path to the end state into our 10Y UST forecast.This is due to the uncertainties surrounding the follow through of fiscal policy proposals,how these ultimately plays out on the inflation front and how deftly the Fed adjusts its policy stance to emerging realities which we expect is likely to play out as higher yields to compensate investors for assuming such risks.Our base case forecasts for 10Y UST have been marked higher compared to the previous month largely in view of the substantial upward shift in our Fed funds baseline.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202531Chart 5:UOB vs concensus forecast(10Y UST)Source:Bloomberg,UOB Global Economics&Markets Research4.204.104.104.104.104.204.204.204.302.503.003.504.004.505.005.506.00Q1 25Q2 25Q3 25Q4 25Q1 26Q2 26Q3 26Q4 26Q1 27%Forecast QuartersAverage Analyst ForecastHigh/Low Analyst ForecastUOBChart 6:US term premiumSource:Bloomberg,UOB Global Economics&Markets Research-2-1012345620406080100120140196819731978198319881993199820032008201320182023%US Debt%GDP10Y ACM TP-RHSLong Term TrendAnother commonly cited reason for higher term premiums is rising deficit concerns.On this point we lean towards its impact being cyclical in nature rather than structural.From a big picture perspective the increases in the term premium has been on a declining trend since the 1970s,albeit with large historical oscillations around this long term trend line.In the background,US debt has continued to grow ever larger as a percentage of GDP.If we assume markets to be efficient,then the ebb and flow of deficit concerns over time maps better to the oscillations in term premium rather than having a permanent impact on the long term trend.As such,we do not think that the current Trump fiscal deficit concerns are any different.In our base case for end 1Q25,we now forecast the 10Y UST at 4.20%(vs our pre-US election forecast of 3.80%for 1Q25).Thereafter,10Y yield is expected to drift slightly lower in tune with our expectations of a further 75bps rate cuts from the US Federal Reserve.Eventually the 10Y UST could settle at 4.10%by 4Q25.In summary,10Y UST yield post Trumps re-election is now expected to stay above 4ross 2025,albeit with a mild downward sloping bias mainly due to anticipated Fed rate cuts across 2025.In our base case for end 1Q25,we now forecast the 10Y UST at 4.20%(vs our pre-US election forecast of 3.80%for 1Q25).Thereafter,10Y yield is expected to drift slightly lower.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202532Our 10Y SGS viewAs UST goes so goes the SGS.Weve marked our forecast for 10Y SGS higher but with a smaller increase compared to that in UST.The smaller yield upside for 10Y SGS stems from two reasons.Firstly,part of the uplift in 10Y UST is due to cyclical fiscal deficit fears.This feature does not apply to the SGS market.Secondly,demand for SGS overall in 2024 has been healthy.SGS auction bid-to-cover ratios this year has been above their five-year average(except for the 50Y tenor).Given that we still expect a Fed easing cycle in 2025,demand for SGS should remain supportive which will help keep a lid on domestic yields.In our base case for end 1Q25,we forecast the 10Y SGS at 2.80%.Thereafter,10Y yield is expected to drift slightly lower to settle at 2.70%by 4Q25.This updated forecast is modestly higher compared to our previous forecast of 2.70%for 1Q25 followed by a mild drift lower towards 2.60ross 2025.Chart 7:2024 SGS auction bid-to-cover vs past 5YSource:Bloomberg,UOB Global Economics&Markets Research-0.50.00.51.01.52.02.53.0251015203050Z-scoreTenorTable 2:Summary table of rates forecastsRates27 Nov 24Forecast1Q25F2Q25F3Q25F4Q25FUS Fed Funds Target4.75Current4.254.003.753.75Previous4.254.003.753.503M Compounded SOFR4.93Current4.353.993.743.61Previous4.233.983.733.4810Y UST 4.26Current4.204.104.104.10Previous3.803.703.603.603M Compounded SORA3.24Current2.772.412.292.23Previous2.622.442.282.2010Y SGS2.82Current2.802.702.702.70Previous2.702.602.602.60Source:UOB Global Economics&Markets Research forecasts Weve marked our forecast for 10Y SGS higher but with a smaller increase compared to that in UST.UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202533Safe haven demand for gold to stay strong amidst Trump 2.0 economic uncertaintiesThe commodities complex encountered very interesting divergent price action over the past month around the US Presidential election.Following Trumps successful re-election,gold saw elevated volatility.Brent crude oil strengthened instead while LME Copper weakened further.Gold endured a heavy sell-off in early November,tumbling from USD 2,750/oz to USD 2,550/oz in the immediate aftermath of the US Presidential election.That sell-off made sense as both the USD and long-term Treasuries yield surged after Trump won his re-election and investors start to price in renewed inflation risk from higher trade tariffs and stickier Treasuries yield from higher deficits.After this latest round of volatility across November,are the long-term prospects of gold still positive?As for Brent crude oil,after repeatedly testing the key USD 70/bbl support across Sep,Oct and early Nov,prices rebounded by late Nov as futures climbed back up towards the USD 75/bbl level.Some argued that most of the weak demand news has been digested while rising conflict between Russia and Ukraine,with both parties now expanding warfare to include long range cruise missiles have pushed oil prices back up.In addition,there are initial signs of stabilizing of Chinas economy after the massive round of stimulus across Sep and Oct.Is this counter trend rebound in Brent crude oil price sustainable?Finally,LME Copper prices continued to head south.From its pre-election level of USD 9,500/MT in early Nov,LME Copper price fell further to just under USD 9,000/MT by end Nov.What is interesting is that the downshift in LME Copper price is contrary to the relatively better performance in Brent crude oil and this was despite various news of renewed supply disruption from key copper mines.Will LME Copper price suffer further sell-off once the Trump 2.0 tariffs materialize?Following Trumps successful re-election,gold saw elevated volatility.Brent crude oil strengthened instead while LME Copper weakened further.After this latest round of volatility across November,are the long-term prospects of gold still positive?There are initial signs of stabilizing of Chinas economy after the massive round of stimulus across Sep and Oct.Is this counter trend rebound in Brent crude oil price sustainable?COMMODITIES STRATEGYGold outshines Brent and Copper with its strong 32%rally for the yearSource:Bloomberg,UOB Global Economics&Markets Research90100110120130140Jan 24Mar 24May 24Jul 24Sep 24Nov 24Gold YTD normalized return(%)Brent YTD normalized return(%)LME Copper YTD normalized return(%)UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202534Gold endured renewed selling across Nov.Following the surge in the USD after Trumps renewed election win,gold was sold off from USD 2,750/oz in early Nov,to a low of about USD 2,550/oz by mid Nov.Thereafter,gold rebounded equally swiftly to trade back near USD 2,700/oz by end Nov.This month end rebound in gold was remarkable given that the USD continued its strong rally with the USD Index(DXY)breaking higher to a new high for the year of 107.50.It would appear that despite the near-term volatility,gold had shaken off the negative spillover from a stronger USD and rising US Treasuries yield as well.From a longer-term perspective,the positive drivers from on-going Emerging Market(EM)and Asian central bank allocation into gold,as well as strong physical gold and jewellery demand from the retail sector remain intact.It is important to note the common thread between both positive long-term demand from central banks and retail sector alike.Both are driven by safe haven needs to diversify away from rising geopolitical concerns and uncertainties around the US Dollar ahead of disruptive trade and fiscal policies from Trump 2.0.Specifically,the strong retail sector demand for gold is driven by on-going substantial depreciation of domestic currencies like INR,CNY and VND,which amplify the gains in gold prices in local currency terms.Overall,we keep our positive view for gold as long term safe haven demand needs will likely stay strong amidst further rise in geopolitical risks and economic risks from Trump 2.0 policies.Our forecasts for 2025 are USD 2,700/oz for 1Q25,USD 2,800/oz for 2Q25,USD 2,900/oz for 3Q25 and USD 3,000/oz for 4Q25.Worth noting that gold futures trading on Comex are pricing in further gold strength to about USD 2,800/oz by mid-2025.UOBs Forecast1Q252Q253Q25 4Q25Gold(USD/oz)2,700 2,800 2,900 3,000Gold manage to recover from post US election sell-offSource:Bloomberg,UOB Global Economics&Markets Research1001011021031041051061071082,4002,4502,5002,5502,6002,6502,7002,7502,8002,850Aug 24Sep 24Oct 24Gold Spot(USD/oz)USD Index(DXY)-RHSNormalized gain in gold price magnified by domestic currency depreciationSource:Bloomberg,UOB Global Economics&Markets Research100120140160180200220240Jan 20Sep 20May 21Jan 22Sep 22May 23Jan 24Sep 24XAU spot(USD/oz)XAUINR spot(INR/oz)XAUCNH spot(CNH/oz)XAUVND spot(VND/oz)Gold futures are pricing in USD 2,800/oz by mid 2025Source:Bloomberg,UOB Global Economics&Markets Research607080901001,9002,1002,3002,5002,7002,900Jan 24Apr 24Jul 24Oct 24Generic 1st Gold Futures(USD/oz)Generic 5th Gold Futures(USD/oz)Spread between 5th and 1st Gold Futures(USD/oz)GoldPositive safe haven drivers remain intact ahead of Trump 2.0UOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202535Crude oil bulls would argue that all the bad news against oil price are now apparent.Over the past few months,OPEC has repeatedly cut its global oil demand outlook.At its latest Nov update,OPEC has further cut its global oil demand growth outlook for 2025 to 1.54 mio bpd from 1.64 mio bpd at the previous monthly estimate.In addition,there remains skepticism as to how much further can the returning Trump administration expand on US oil production and fracking.This is because under Trump 1.0 and the Biden administration as well,the US has vastly expanded its oil production.US is now the worlds largest producer of crude oil,pumping about 13.5 mio bpd,almost 50%higher than the 9.0 mio bpd from Saudi Arabia.And with the weak oil price,it is likely that Saudi Arabia will continue to exercise restrain and further extend its production cuts deeper into early 2025.Another positive sign of note is that amidst the on-going strength in the US economy,both US and OECD oil inventory have been drawn down further.And there are initial hopeful signs that Chinas implied oil demand may be stabilizing after the massive round of stimulus from Sep.However,one major worry overhanging oil price is the much uncertainty over the global growth outlook as well as Chinas economic recovery after the potential large tariff hikes from Trump 2.0 across 2025.This risk of further growth slowdown from renewed tariffs in 2025 appears to be nullifying any rise in geopolitical risk from the on-going Russia-Ukraine war.Overall,while most of the negative factors are now apparent,we acknowledge the further downside risk from negative impact from Trump 2.0 tariffs on China and global energy demand.As such,we now adopt a negative outlook for Brent crude oil forecasting USD 75/bbl for 1H25 and USD 70/bbl for 2H25.If global trade conflict worsens,the risk of further sell-off below USD 70/bbl cannot be ruled out later in 2025.UOBs Forecast1Q252Q253Q25 4Q25Brent crude oil(USD/bbl)75757070US now produces almost 50%more crude oil than Saudi ArabiaSource:Bloomberg,UOB Global Economics&Markets Research891011121314Nov 14May 16Nov 17May 19Nov 20May 22Nov 23US crude oil production(mio bpd)Saudi Arabia crude oil production(mio bpd)Trump 1.0BidenOil prices yet to response positively to draw down in global inventorySource:Bloomberg,UOB Global Economics&Markets Research0204060801001201409009501,0001,0501,1001,1501,2001,250Nov 19Jul 20Mar 21Nov 21Jul 22Mar 23Nov 23Jul 24OECD Total Crude Oil Stock(inverse,mio bbl)Brent crude oil(USD/bbl)-RHSHas Chinas oil demand stabilized after the latest round of stimulus?Source:Bloomberg,UOB Global Economics&Markets Research10111213141516-20-100102030Aug 18Feb 20Aug 21Feb 23Aug 24China implied oil demand(y/y)China implied oil demand(mio bbl)-RHSBrent Crude OilTrump 2.0 tariffs to keep oil prices pressured around USD 70/bblUOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202536In the previous quarterly report,we downgraded our LME Copper outlook from positive to neutral and lowered the forecasts from USD 10,000/MT to USD 9,000/MT by 4Q24.That proved to be the prudent approach given that LME Copper price did weaken further in the final few months of 2024.After a brief China stimulus inspired surge to USD 10,000/MT in late Sep,prices fell back to USD 9,500/MT by late Oct.Thereafter,prices fell further after the US election and has now dipped below USD 9,000/MT by end Nov.Over the longer run,the risk of further supply disruption from aging copper mines remains a key concern.However,this supply risk is now completely overtaken by more immediate concerns of the risk of global trade contraction and manufacturing slowdown due to the incoming Trump 2.0 tariffs later in 2025.As a result of risks from Trump 2.0 tariffs,our macroeconomic team has downgraded the base case estimate of Chinas economic growth in 2025 to 4.3%.Depending on the intensity and pacing of the incoming Trump 2.0 tariffs,it is likely that China,Asia as well as the rest of the world will suffer yet another round of trade and export contraction across 2025 and further into 2026.This will likely weigh down on LME Copper prices.Amidst worries from incoming Trump 2.0 tariffs,inventory level of LME Copper,as well as other industrial metals like Nickel and Lead have risen over the past few months.The LME Copper cash vs 3 month spread,a key proxy of near-term demand has yet to recover and remains at a significant discount of USD 120/MT.As a result of immediate risks to global trade and production from incoming Trump 2.0 tariffs,we downgrade LME Copper outlook further from neutral to negative.Updated forecasts are USD 8,000/MT for 1H25 and USD 7,500/MT for 2H25.UOBs Forecast1Q252Q253Q25 4Q25LME Copper(USD/mt)8,0008,0007,5007,500Asian and Global trade risk another round of contraction under Trump 2.0 tariffsSource:Bloomberg,UOB Global Economics&Markets Research-100-50050100150200-40-20020406080Nov 14May 16Nov 17May 19Nov 20May 22Nov 23TaiwanSouth KoreaSingaporeIndonesiaMalaysiaChina-RHSmonthly export growth(y/y)Trump 1.0Copper and other industrial metals inventory on the LME continue to rise across 2024Source:Bloomberg,UOB Global Economics&Markets Research050,000100,000150,000200,000250,000300,000350,000Nov 14May 16Nov 17May 19Nov 20May 22Nov 23LME On-Warrant NickelLME On-Warrant CopperLME On-Warrant LeadDiscount in spot vs 3M Copper price now signfiicantly worse than during Trump 1.0Source:Bloomberg,UOB Global Economics&Markets Research-200-1000100200300400Nov 14May 16Nov 17May 19Nov 20May 22Nov 23Trump 1.0CopperDowngrading Copper outlook further to negative as Trump 2.0 tariffs loomUOB Global Economics&Markets ResearchQuarterly Global Outlook 1Q202537ECONOMY Stimulus stabilized near-term outlook but looming trade war poses significant downside risks Chinas economy stabilized in Oct following the strong dose of policy support.This was the first full-month of data after the governments stimulus package announced in late-Sep.The rebound in retail sales and drop in the unemployment rate signalled an improvement in private consumption while industrial production growth held up.The real estate outlook remained weak as prices continued to fall albeit at a smaller pace and recovery continued to be led by tier-1 cities.New medium/long-term household loans,which indicate mortgage demand,have eased from Sep.The prospects of yet another trade war with the US are dampening Chinas outlook in 2025 and beyond.However,frontloading of exports to the US will be positive in the near-term,offset somewhat by cuts in Chinas export levy rebates for some commodities to ease the industrial overcapacity.The acceleration in investments diversification offshore will remain negative for Chinas economy.Trump has already threatened additional 10%“anti-drug”tariff on China and previously called for 60%tariff on all Chinese goods.It is too early to assess the impact with the specifics still unknown and the timing of implementation depends on the course of legal actions needed.To maximise the leverage for negotiations,Trump is unlikely to implement the maximum tariffs at the onset of his presidency even if he could.As such,the uncertainties will keep markets on edge,at least in 1Q25.The National Peoples Congress(NPC)Standing Committee in Nov approved a CNY10 tn package to refinance local governments off-balance-sheet debt over 2024-2028.This came short of expectation as there was no new direct stimulus spending to raise consumption demand and the long period of debt resolution suggest that the fiscal boost will be very limited in the near-term.Looking ahead,the Politburo meeting and Central Economic Work Conference in Dec will map out the economic work and set key targets which will then be announced at the annual NPC in Mar where the focus is also on additional stimulus measures,particularly for consumption and the housing market to cushion the negative impact of a trade war and promote household consumption as an engine of growth.Next year will be important as China formulates the 15th Five-Year Plan(2026-2030)and it will also be the last year of the 14th Five-Year Plan(2021-2025).The focus will stay on mitigating risks,stabilising growth and the promotion of new growth engines.FX&Rates1Q25F2Q25F3Q25F4Q25FUSD/CNY7.357.507.607.45CNY 1Y Loan Prime Rate3.103.103.103.10Economic Indicator202220232024F2025FGDP(%)3.05.24.94.3CPI(avg y/y%)2.00.20.40.9Unemployment Rate(%)5.55.15.25.3Current Account(%of GDP)2.51.41.81.5Fiscal Balance(%of GDP)-4.7-4.6-4.9-5.2CHINAWe maintain our GDP growth forecast for China at 4.9%this year,factoring in an uptick in the growth rate to 5.0%y/y in 4Q24 from 4.6%in 3Q24 as the recent stimulus stabilizes outlook in the near-term.Our concerns for the looming trade conflict ahead has led us to downgrade our 2025 GDP growth forecast to 4.3%(from 4.6%)as we factor in staggered increase in additional tariff to 25%on Chinese goods starting from 2Q25.Risk is to the downside if tariffs are more punitive than our base case.CENTRAL BANK Monetary policy to focus on RRR cuts Weak demand and trade tensions will be deflationary for China.In Jan-Oct,the headline and core inflation averaged only 0.3%y/y and 0.5%y/y respectively.Chinas Producer Price Index(PPI)deflation entered into its 25th consecutive month,worsening to-2.9%y/y in Oct.We expect the headline CPI to average 0.4%and 0.9%in 2024 and 2025 respectively.Our forecast for PPI is at-2.2%for 2024 and-1.2%for 2025.This will keep the PBOC on its easing bias although anticipated depreciation pressure on the CNY due to the trade war may limit room for rate cuts.Chinese banks have lowered their LPR by a larger-than-expected 25 bps in Oct and PBOC indicated another 25-50 bps reduction to banks reserve requirement ratio(RRR)by year-end.The lower interest rates will also support higher government debt issuances ahead.Keeping in mind the limits of progressively lower interest rates,the PBOC is likely to stay focused on reducing the RRR instead which releases long term liquidity and may also replace the large amount of maturing 1Y medium-term lending facility(MLF)in the next few months.As such we see another 50-100 bps cut to the RRR in 2025.CURRENCY USD/CNY to trade above 7.35 Trumps tariffs are likely to exacerbate the existing concerns about Chinas economic slowdown.On top of a weaker domestic growth outlook,the CNY is likely to fall further against the USD as a slower and shallower Fed rate-cut cycle helps suppor
2025-02-18
65页
5星级
OECD Economic Surveys:Ireland 2025February 2025Volume 2025/3versionlaunchversionlaunchOECD Economic .
2025-02-17
123页
5星级
FEBRUARY 2025SUPPORTING THE U.S.ECONOMY THE ECONOMIC IMPACT OF RECKITT IN THE U.S.The economic impac.
2025-02-14
38页
5星级
December 2024By Torsten SlkApollo Chief Economist2025 Economic Outlook:Firing on All Cylinders 2024 Apollo Global Management,Inc.All Rights Reserved.The information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.KEY TAKEAWAYS The outlook for the US economy remains strong with no signs of a major slowdown going into 2025.We continue to see interest rates staying higher for longer on a relative basis,regardless of the Federal Reserves ongoing monetary easing campaign.It is too early to assess the impact of potential new policies following Donald Trumps election as US president.That said,if implemented,his key policy objectiveslower taxes,higher tariffs,and reduced immigrationcould increase rates,boost asset prices,drive inflation,and strengthen the dollar.The US economy has charted its own path in the post-pandemic world,and it is diverging from both its own historical performance in a context of higher rates as well as its historical correlation to other developed economies,especially Europe and Japan.Why?Because:The US economy has proven to be much less sensitive to the Feds interest rates hikes than in years past due to key idiosyncrasies(i.e.,large,liquid,and long-duration fixed-rate markets for mortgages and corporate bonds),which have allowed both individuals and corporations to“lock in”rock-bottom interest rates for periods of up to 30 years.The US is experiencing a surge in corporate and research spending on the back of the Artificial Intelligence(AI)revolutiona dynamic not seen in other developing nations or even China.This“AI boom”is structural,widespread and pervasive,ranging from investments by tech giants in the development of AI itself to the infrastructure supporting it,from semiconductor design and manufacturing to the building of data centers,increased energy generation needs,and further automation of supply chains.The US was unique on its way out of the Covid pandemic in terms of fiscal support to the economy.It has outspent other developed nations by a large margin,providing strong tailwinds to economic growth through the enactment of key pieces of legislation,such as the CHIPS and Science Act(2022),the Inflation Reduction Act(2022),the Infrastructure Investment and Jobs Act(2021),and others.The Federal governments investments in green energy and infrastructure,along with private-sector investments in AI,have been crucial to the nations economic resilience.Fiscal policy is easy with a current 6%budget deficit.(continued on next page)ATLWAA-20250103-4129350-1304567622025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.What can this divergence mean for key economic indicatorsand Fed policygoing forward?Our baseline scenario is as follows:GDP growth:Gross domestic product continues to grow at a steady,above-historical average pace in the USGDP expanded 2.8%in Q3 2024,well above the Congress Budget Offices(CBO)2%estimate for long-run growth.We believe GDP growth will end 2024 at 2.8%.We see real GDP growth at 2.3%in 2025,mostly in line with consensus estimates as of this writing.Employment:Employment remains strong.The labor market added 227,000 jobs in November,a big rebound from October,when two destructive hurricanes and a strike at Boeing hampered job growth.The unemployment rate rose just slightly,to 4.2%.We expect the unemployment rate to edge higher in 2025,to 4.4%.Inflation:Price increases have been mostly tamed compared to the peak levels of 9.1%seen in 2022.But inflation remains above the Feds 2%annual targetit was up 2.6%for the year through Octoberand,due to reasons we explain in this paper,we believe it will take longer than expected for the Fed to travel the last mile toward its goal.We expect the Consumer Price Index(CPI)and Core Personal Consumption Expenditure Price Index(PCE)to come in at 2.4%and 2.3%,respectively,in 2025.Monetary policy:We believe the Fed will continue to lower the fed funds rate beyond its current range of 4.5%to 4.75%,but at a slower pace than the market expects.As of this writing,the market is pricing in four 25-basis-point cuts in 2025.We think we will get fewer cuts than that.We see a fed funds rate of 4.0%by year-end 2025.Consumer spending:Consumer spending remains robust in the aggregate,growing at 3.7%in Q3.The Conference Boards Consumer Confidence Index hit 111.7 in November,up from 109.6 in October.The Expectations Indexwhich reflects consumers short-term outlook for income,business,and labor market conditionsrose to 92.3,well above the recession-signaling threshold of 80.We expect consumer spending to moderate in 2025,with 2.0%growth for the year.Corporate spending:Businesses stepped up investments in equipment and intellectual property in Q3,a sign of demand for chips and software that run AI.Bankruptcies,as well as defaults for levered loans,are down.The combination of locked-in low interest rates and strong corporate earnings has meant that net interest payments as a share of operating surplus have also been declining.That said,we see important risks to our baseline scenario that could lead to a substantial economic slowdown and alter the inflation outlook in the US.As of this writing,financial markets are placing the odds of a recession in 2025 at 25%,a declining but still meaningful chance.Chief among these risks are:Ongoing geopolitical challenges around the world,such as the wars in Ukraine and the Middle East,and rising US trade tensions with China and other nations.The large and expanding size of the government deficits and overall debt in the US,which could force interest rates to stay higher for much longer,especially at the long end of the curve.A too-hasty easing of monetary policy and conditions by the Fed,which could re-ignite price pressures and push inflation back up again.(continued on next page)ATLWAA-20250103-4129350-1304567632025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.In light of a benign yet not riskless outlook,we see a number of implications for capital markets.In a nutshell:Public equities:Too lofty valuations.High concentration remains.Risk premia is virtually nil.Looking at the historical relationship between the S&P 500 forward P/E ratio and subsequent three-year returns in the benchmark index shows that the current forward P/E ratio at almost 22 implies a 3%annualized return over the coming three years.1 In other words,when stocks are overvalued like they are today,lower future returns can be expected.Public fixed income:Spreads are super tight,mostly because the long end of the curve is seeing higher rates(despite Fed easing),a potential sign of market concern regarding large deficits and debt.Spreads are tight not because interest rates have fallen on corporate bonds but because government rates have gone up on the long end of the curve.The tightening in credit spreads has been driven by a combination of robust economic growth,strong fixed income technical demand,and the US election outcome.Private equity:Lower rates could spark a new wave of deals as,on the one hand,sponsors seek to deploy capital raised in the past three years and,on the other,managers may be willing to part with existing investments as cheaper borrowing costs may bolster valuations.Secondaries remain attractive.Structured finance,including hybrid strategies,is particularly attractive as well.Private credit:Higher rates for longer can translate into higher yields in private credit,especially for newer vintages as investors seek potential substitution for on-the-run bonds(which,given tight spreads,are expensive).We see better value in private credit with the private-public spread still elevated,and find more attractive opportunities high in the capital structure,with first-lien,first-dollar opportunities.Middle-market opportunities are still plentiful.We also see opportunity in direct lending and origination,especially in the asset-backed finance world.Portfolio allocation:Ongoing worries about the future long-term success of traditional allocation strategies(i.e.,60%stocks/40%bonds)are unlikely to dissipate.We see potential for depressed long-run returns in the public markets(both equity and bonds)and,taking into consideration current expectations,future real returns of the 60/40 portfolio may be disappointing in the coming years.We believe the potential for long-term alpha generation remains more attractive via further diversification of portfolios with the inclusion of private markets(both equity and credit).We believe the potential for long-term alpha generation remains more attractive via further diversification of portfolios with the inclusion of private markets.1 Sources:Bloomberg,Apollo Chief EconomistATLWAA-20250103-4129350-1304567642025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.The US economy remains strongWe see continued strength in the US economy in 2025,primarily because:The economy has been less sensitive to the Fed raising rates in this cycle,Strong demand for data centers and AI has generated a strong corporate spending wave,and Fiscal policy is stimulative.Largely as a result of the above three factors,US economic data has been very solid,and we would expect that to continue to be the case for the next several months.It is,you might say,quite an unusual situation compared to years past.Your economist cut his teeth at the International Monetary Fund(IMF),where we learned over the course of several decades that when the US economy was good,the European economy would be likewise good.When the US economy was sluggish,the same would be the case for Europe.In other words,there seemed to be one global business cycle.But times have changed.As we enter 2025,the US economy is benefitting from not just one or two but three unique tailwinds.We have disconnected from the rest of the global economy,at least for now.As a result,we are seeing very strong growth in the US but relatively weak growth elsewhere.The European economy did not prove insensitive to the European Central Bank(ECB)rate hikes.There is no AI boom in Europe.And fiscal policy is not easy in Europe.On top of all that,Europe is also facing headwinds to growth from geopolitical risks occurring in its own backyard.In the remainder of this section,we take a deep dive on the three tailwinds propelling the US economy today.1.The US economy is less sensitive to rate hikesWhen the Fed started raising interest rates in March 2022,a lot of Fed speeches and market conversations focused on the long and variable lags of monetary policy,i.e.,the time it takes before Fed hikes begin to slow down the economy.Historically,it has taken 12 to 18 months before tighter monetary policy begins to slow the economy down.However,as Exhibit 1 shows,it has been 30 months since the Fed started raising interest rates(as of this writing),and we have still not seen any sign of a slowdown.Car purchases have not slowed down.Home sales and home prices didnt crash when interest rates rose.Nor did capex spending by firms.THE TRUMP EFFECTWhile its still early days to fully assess the potential macro-economic impact of the policies of President-Elect Donald Trumps incoming administration,the election brought three key areas into focus,namely tariffs,taxes,and immigration.Trumps stated policy goals on those fronts are higher tariffs,lower taxes,and restrictions on immigration up to and including deportations.At the end of November,Trump announced that upon taking office,he would immediately impose a 20%tariff on imports from Canada and Mexico,unless they clamped down on illegal drugs(particularly fentanyl)and migrants crossing the US border.At the same time,he outlined an additional 10%tariff“above any additional tariffs”on imports from China.These tariffs,if implemented,would mark a reversal in the liberalization of trade that began following World War II.Higher tariffs present risks to large importers(e.g.,retailers)as well as large exporters due to the prospect of retaliation from trading partners.Higher tariffs also risk derailing the Feds fight against inflation,as some of the cost of higher tariffs will be borne by consumers in the form of higher prices.Overall,the net result of raising tariffs would likely be higher inflation and lower GDP growth.At the same time,the net result of lowering taxes tends to be higher inflation and higher GDP growth.Restrictions on immigration would point to higher wage inflation and lower GDP growth.While the above outcomes are split between being stimulative and restrictive to GDP growth,all three point to more upside pressure on inflation.Our preliminary forecast,then,of the effect of Trumps election is to reaffirm the outlook we had before the election:We see higher rates for longer.In the days following the election,two key components of this“Trump trade”played out in the markets:higher ratesboth on the long-and short-end of the curveand a higher dollar,which posted its best day since 2022.The implication for the Fed is that the market expects it to cut rates a little slower relative to what was priced-in before the election.And while two-year rates serve as a reflection of Fed expectations,10-year rates reflect a wider discussion,one that includes fiscal sustainability and investors appetite to buy long-duration government bonds.ATLWAA-20250103-4129350-1304567652025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.We believe one of the key reasons why we havent seen a slowdown relates to the US economys low sensitivity to lower rates in this cycle.How so?Home buyers in the US,for example,locked in low long-term mortgage rates during the period of rock-bottom interest rates.In fact,some 95%of mortgages in the US today have a 30-year fixed rate.2 So when the Federal Reserve began to raise interest rates in 2022,it didnt have much of an impact on the cost consumers face to service their existing mortgages(which is traditionally the largest loan US households hold).Consider Exhibit 2,which shows both the current mortgage rate and the“effective”mortgage rate on debt already Exhibit 2:The effective rate on all outstanding mortgages is lower than youd thinkData as of October 2024.Note:The effective interest rate(%)reflects the amortization of initial fees and charges over a 10-year period,which is the historical assumption of the average life of a mortgage loan.Sources:Freddie Mac,BEA,Bloomberg,Apollo Chief Economist0246810121986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 20240-YR CONVENTIONAL MORTGAGE RATEEFFECTIVE RATE ON MORTGAGE DEBT OUTSTANDINGExhibit 1:What happened to the long and variable lags?Data as of September 2024.Sources:BEA,Haver Analytics,Apollo Chief Economist-1.0%0.3%2.7%3.4%2.8%2.5%4.4%3.2%1.6%3.0%2.8%Mar-22Jun-22Sep-22Dec-22Mar-23Jun-23Sep-23Dec-23Mar-24Jun-24Sep-24%QoQ SAAR5431-20-12March 2022:Fed startshikingUS REAL GDP GROWTH2 Source:IMF World Economic Outlook(https:/www.imf.org/en/Publications/WEO/Issues/2024/04/16/world-economic-outlook-april-2024.html)outstanding.It is true that if you were to apply for a mortgage today,you would have to pay about 7%.But that is only for new borrowers.For those already holding mortgage debt,the effective rate is 3.9%or 4%.The Fed raised interest rates,but it didnt have much impact on the vast majority of people who already had a mortgage and have locked in low interest rates.Similarly,corporate borrowing is now dominated by fixed-rate debt.Companies locked in low interest rates during the pandemic,so the Fed hikes did not have much of a negative consequence for firms either.ATLWAA-20250103-4129350-1304567662025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Exhibit 3 shows the total value of investment grade bonds outstanding.This chart is crucial for understanding the weaker transmission mechanism of the Fed rate cuts.There is about$9 trillion in investment grade debt outstanding today.In 2015,there was only$3 trillion.Why is that important?Because both investment grade and high-yield debt are almost always fixed rate.Loans are floating rate.So when the Fed started raising rates,it affected a much smaller fraction of the overall market for corporate credit than it did in previous cycles.Another way to see that is in Exhibit 4,which shows that Fed hikes have not had the desired effect on firms.One would normally expect that when interest rates go up,corporates would see an increase in debt-servicing costs.But the combination of locked-in low interest rates along with strong corporate earnings has meant that net interest payments as a share of operating surplus have been going down.In short,the transmission mechanism of monetary policy has been much weaker this cycle than the economics textbook would have predicted.This is because both consumers and firms locked in low interest rates during the pandemic.As a result,the economy never slowed down when the Fed raised rates.Its interesting to note that the effect has also been a lot weaker than what we see in Canada,Australia,France,or the UK.Consider the UK:When the Bank of England raises interest rates,it has an immediate impact because mortgage payments by households go up.But we just dont see that in the US,where the vast majority of rates are fixed.Exhibit 4:Nonfinancial corporate business net interest payments are near record lowsData as of June 2024.Sources:Federal Reserve Board,Haver Analytics,Apollo Chief Economist1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022%of operating surplus4035302050151025Fed startshikingUS NONFINANCIAL CORPORATE BUSINESS NET INTEREST PAYMENTSExhibit 3:The public investment grade market has exploded in sizeData as of October 31,2024.Note:Ticker used for HY is H0A0 Index,for IG it is C0A0 Index,for Loans it is SPBDALB Index.Sources:ICE BofA,Bloomberg,PitchBook LCD,Apollo Chief Economist01234567891019911993199519971999200120032005200720092011201320152017201920212023$trillionHY BONDSIG BONDSLEVERAGED LOANSMARKET VALUE OUTSTANDINGATLWAA-20250103-4129350-1304567672025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.2.The US is experiencing an AI boomLets now turn to investment in AI,another idiosyncratic dynamic that is keeping the US economy afloat.There is no AI boom in Europe,Canada,Australia,or Japan.This is a very unique tailwind to the US economic outlook.The US is spending a lot on AI,on data centers,and on energy transition(to help power this revolution).To exemplify the dimension of current investments in this field,consider capital expenditures by the Magnificent Seven(Apple,Microsoft,Alphabet,NVIDIA,Amazon,Meta,and Tesla),companies that are the forefront of the AI revolution.As shown in Exhibit 5,their combined capex is rapidly approaching a combined$50 billion a year,an incredibly strong number.We believe this spending is relatively inelastic,as investments in new,productivity-enhancing technologies have not traditionally been hampered by higher rates.(And AI is certainly seen by many as the future of computing,with large 05101520253035GW1Hyperscaledata center 6New York City power demand(2022)Data center power demand(2030)18Capacity thatneeds to be added:17Current Capacity:Exhibit 6:We need to add the equivalent of three NYCs to the power grid by 2030Note:Current capacity as of 2022,Investing in the Rising Data Center Economy|McKinsey,Systems NYC Mayors Office of Climate and Environmental Justice,Data Center Power:Fueling the Digital Revolution,US data center power consumption to double by 2030 DCD.Sources:NYISO 2022,McKinsey,Nextgen,Apollo Chief EconomistExhibit 5:The Magnificent Seven are approaching$50 billion in combined capital spendingData as of June 2024.Sources:Bloomberg,Apollo Chief Economist AMAZONNVIDIAALPHABETMETAMICROSOFTAPPLETESLA05101520253035404550$billionMar-20Jun-20Sep-20Dec-20Mar-21Jun-21Sep-21Dec-21Mar-22Jun-22Sep-22Dec-22Mar-23Jun-23Sep-23Dec-23Mar-24Jun-24CAPITAL SPENDING OF THE MAGNIFICENT SEVENpotential beneficial impacts on productivity.)That future isnt going to come cheap,either.As shown in Exhibit 6,data center energy demand is going straight up,and fast.This is again very unique to the US and different from what can be seen in the rest of the world.There is no AI boom in other developed countries.As shown in Exhibit 7,there are more data centers in the US than in all other major countries combined.3.US fiscal policy is very supportivePolicies such as the CHIPS Act,the Inflation Reduction Act,and the Infrastructure Act have been extremely supportive for the US economy,as they have created a boom in the construction of everything from semiconductors to electric vehicles,batteries,solar panels,and windmills.Producing all this domestically has had an effect on the economy that is also very unique.Just as with the first two reasons above,these conditions do not really exist outside the US,leaving us with another unique economic tailwind.ATLWAA-20250103-4129350-1304567682025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Exhibit 8 shows US construction spending on manufacturing.For a long time,the trend line in manufacturing spending was fairly boring to watch,because manufacturing had all been outsourced to China,Mexico,and the like.But that changed when the US decided to implement the CHIPS act,the Inflation Reduction Act,and the Infrastructure Act.As a result,we saw a major rise in construction spendingindeed,the largest surge in manufacturing-related construction spending on record.This marked quite a significant change in US policy making and has been a very important source of the industrial renaissance in the US,the final significant tailwind to the US economy.In other words,when monetary policy(i.e.,the Fed)stepped on the brakes and started raising rates,fiscal policy stepped on the accelerator.The winner of this tug-of-war?Fiscal policy.Consider,finally,the size of the post-Covid stimulus programs as compared to those implemented as countercyclical measures during the Great Recession.In 2008,the US government passed the Economic Stimulus Act,a$153 billion injection designed to stave off a recession.It followed that with the$787 billion American Recovery and Reinvestment Act of 2009.The fiscal policy response to the pandemic,which included,among other provisions,enhanced unemployment benefits,direct assistance to local governments,health care spending,direct payments to households,and the Paycheck Protection Program(PPP)amounted to some$5.2 trillion.3 It is no wonder that the US finds itself off on its own economic island as we enter 2025.3 Source:https:/www.brookings.edu/articles/the-fiscal-policy-response-to-the-pandemic/Exhibit 8:The positive effects of fiscal policy are dominating the negative effects of Fed hikesData as of April 2024.Sources:Census Bureau,Haver Analytics,Apollo Chief Economist05010015020025020022003200420052006200720082009201020112012201320142015201620172018201920202021202220232024$bn,SAARFiscal boost beginsCHIPS Act,IRA,Infrastructure ActFed startshikingUS CONSTRUCTION SPENDING ON MANUFACTURINGExhibit 7:No one even comes closeData as of March 2024.Sources:Statista,Cloudscene,Apollo Chief Economist53815215144493363153073072972510100020003000400050006000UnitedKingdomGermanyChinaCanadaFranceAustraliaNetherlandsRussiaJapanUnitedStatesNUMBER OF DATA CENTERSATLWAA-20250103-4129350-1304567692025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.2025 Outlook:No signs of a slowdown What does this divergence mean for key economic indicatorsand Fed policygoing forward?No matter which way you look at the economy,the outlook is much the same:There is no slowdown on the horizon.In the remainder of this section,we dissect the outlook for consumer and corporate spending,and provide our expectations for Fed action,economic growth,inflation,and employment.How strong is the US consumer?The US consumer continues to defy predictions and remains a powerful source of economic strength.To grasp the importance of the consumer to the economy,we need look no further than the contribution of personal consumption expenditures to GDP(Exhibit 9).As we can see in Exhibit 10,consumer spending is also strong and broad-based across most categories.Exhibit 9:The Feds hikes have not slowed down the US consumerExhibit 10:Consumer spending remains strong and broad-basedData as of September 2024.Sources:BEA,Haver Analytics,Apollo Chief EconomistData as of September 2024.Sources:Census Bureau,Haver Analytics,Apollo Chief Economist0.6%Mar-221.7%Jun-221.0%Sep-220.8c-223.3%Mar-230.7%Jun-231.7%Sep-232.3c-231.3%Mar-241.9%Jun-242.5%Sep-24%pt,SAAR3.53.02.52.00.50.01.51.0March 2022:Fed startshiking4.01.51.11.01.00.50.40.40.40.30.30.20.0-1.4-1.6-3.3Miscellaneous Stores RetailersClothing&Accessory StoresHealth&Personal Care StoresFood Services&Drinking PlacesFood&Beverage StoresGeneral Merchandise StoresNonstore RetailersRetail Sales&Food ServicesRetail Sales:Total Excl Motor Vehicle&Parts DealersRetail Sales:TotalSporting Goods,Hobby,Book&Music StoresBuilding Materials,Garden Equipment&Supply DealersMotor Vehicle&Parts DealersFurniture&Home Furnishing StoresGasoline StationsElectronics&Appliance StoresCONTRIBUTION OF PERSONAL CONSUMPTION EXPENDITURES TO GDPSEPTEMBER RETAIL SALES BY CATEGORY(%MoM)ATLWAA-20250103-4129350-13045676102025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.To further understand the breadth of consumer spending,let us consider some high-frequency databoth daily and weekly indicatorsthat provide a nearly real-time window into the health of the economy,particularly regarding discretionary spending(weakness in which is traditionally a harbinger of a slowdown).Are people eating out?Yes,they are.Exhibit 11,using data from restaurant reservation site OpenTable,shows that people are still going out to restaurants.There is no sign of a slowdown in this daily data.Are people still traveling on airplanes?Yes,they are.While the red line for 2024 in Exhibit 12 shows a decline from the peak of summer,this follows a seasonal pattern.There are no signs in the daily data that there are fewer people flying on airplanes.Rather,air travel data is still looking quite strong.Exhibit 11:Were still going out to restaurantsExhibit 12:Were still flying to placesData as of November 2024.Sources:TSA,Bloomberg,Apollo Chief EconomistData as of November 6,2024.Sources:OpenTable,Apollo Chief Economist20202021202220232024 19,7-day MA-100-80-60-40-200200.00.51.01.52.02.53.0JanFebMarAprMayJunJulAugSepOctNovDecmn,7-day MA201920202021202220232024UNITED STATES SEATED DINERSUS TSA CHECKPOINT NUMBERS TOTAL TRAVELER THROUGHPUTATLWAA-20250103-4129350-13045676112025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Are people still spending cash?Yes,they are.Exhibit 13 shows how many people use their debit card every day.While there is some discussion that this could be a sign of distress that people are using debit cards because they cannot get a credit cardthe daily volume of debit card transactions remains healthy.Lets now turn to the weekly indicators.Exhibit 14 offers a window into retail sales,courtesy of Redbook,a research firm that asks Walmart,Target,TJ Maxx,big sporting goods stores,and other retailers about their sales each week relative to the same week a year previous.Same story here:The US consumer is doing fine.Exhibit 13:Were still pulling out our debit cardsExhibit 14:We still love retailData as of October 30,2024.Note:Consists largely of debit card transactions.Sources:Bloomberg,Apollo Chief EconomistData as of November 2,2024.Sources:Redbook,Haver Analytics,Apollo Chief Economist-2-101234Mar-24Apr-24May-24Jun-24Jul-24Aug-24Sep-24Oct-24%YoY,28-day MA-15-10-50510152025201920202021202220232024%YoYBLOOMBERG CONSUMER SPENDINGREDBOOK RESEARCH:SAME-STORE,RETAIL SALES AVERAGEATLWAA-20250103-4129350-13045676122025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Exhibit 15 shows weekly data of hotel demand.The occupancy rate for hotels,revenue per available room,and average daily rates are all trending upward.Exhibit 16 looks at attendance of Broadway shows in New York City.Tickets to a show can easily exceed$200,and the latest data shows that consumers are still happy to pay this discretionary expense.If the economy were weakening,we would expect to see these lines trend downward.If anything,they are doing the opposite.Again:no signs of a slowdown.Exhibit 15:Were still staying at hotelsExhibit 16:Were still going to showsData as of November 3,2024.Sources:Internet Broadway Database,Apollo Chief EconomistREVENUE PER AVAILABLE ROOM(US$)AVERAGE DAILY RATEOCCUPANCY RATE(%)02040608010012014016018020172018201920202021202220232024Data as of November 2,2024.Sources:STR,Haver Analytics,Apollo Chief Economist201920202021202220232024050000100000150000200000250000300000350000400000JanFebMarAprMayJunJulAugSepOctNovDecNumberBROADWAY ATTENDANCEATLWAA-20250103-4129350-13045676132025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Finally,Exhibit 17 shows weekly data of movie theater visits.From this perspective,the economy appears to be moving at“Cruise velocity,”as in as fast as Tom Cruise can sprint in many of his famous blockbusters.How has the consumer remained so healthy during this period of higher interest rates?The“wealth effect”offers one explanation:US households have experienced significant gains in stock prices and home prices over the past 15 years,and the Fed hikes have actually generated significantly higher cash flows to owners of fixed income.As a result,the debt-to-income ratio of US households looks much better than their Canadian and Australian counterparts(Exhibit 18).Exhibit 17:Were still going to the moviesExhibit 18:Household finances look great,relatively speakingData as of November 2024.Sources:B,Apollo Chief EconomistData as of June 2024.Sources:Statistics Canada,Reserve Bank of Australia,Bloomberg,Apollo Chief Economist202420192023202020212022WEEK01002003004005006001 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53$millionUSCANADAAUSTRALIA801001201401601802002000200220042006200820102012201420162018202020222024%BOX OFFICE OVERALL WEEKLY GROSSESHOUSEHOLD DEBT TO DISPOSABLE INCOMEATLWAA-20250103-4129350-13045676142025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Whats more,the ratio of credit card debt to disposable income is also at very low levels for US households(Exhibit 19).In other words,US household balance sheets are in excellent shape.Combine that with strong job growth,solid wage growth,rising asset prices,and lower inflation,and it becomes difficult to see a recession on the horizon.Although the aggregate numbers continue to paint a bright picture for consumption going forward,we do see some weak spots.As we discussed in previous Economic Outlooks,younger households have indeed been negatively affected by higher rates.That remains true today.Exhibit 20 shows credit card delinquency rates across age cohorts.The hardest hit have been consumers in their 20s.Why is that?Because when youre young,you have more debtdebt on your car,debt on your credit card,debt on your house.When interest rates go up,you get hit harder.See also Exhibit 21,for similar dynamics in auto loans.Those in their 20s have been hit the hardest.Exhibit 19:Were not stretched too thin,credit-wiseData as of June 2024.Sources:Federal Reserve Board,BEA,Haver Analytics,Apollo Chief Economist2002200120002003200420052006200720082009201020112012201320142015201620172018201920202021202220232024Ratio(%)78910654US:REVOLVING CONSUMER CREDIT OWNED AND SECURITIZED SHARE OF DISPOSABLE PERSONAL INCOMEExhibit 20:Younger households are feeling the pinch in their credit cardsData as of June 2024.Sources:New York Fed Consumer Credit Panel/Equifax,Apollo Chief Economist02468101214162002200120002003200420052006200720082009201020112012201320142015201620172018201920202021202220232024lance,4Q moving sumFed startsraising rates70 50-5930-3918-2960-6940-49CREDIT CARD TRANSITIONS TO SERIOUS DELINQUENCY(90 ),BY AGEATLWAA-20250103-4129350-13045676152025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Its interesting to note that delinquencies for borrowers in their 20s are now higher than they were in 2020,and nearly as bad as they were in 2008.Why is that important?Because in 2008,the unemployment rate was 10%.Today,it is 4.2%,and still more and more people are falling behind on paying their bills.We can see a similar dynamic playing out when it comes to savings across the income distribution.As shown in Exhibit 22,low-income households have aggregate savings that are lower than where they were in 2019.On the other hand,those households at the top of the income distribution are benefiting from increases in both stock prices and home prices.On top of that,high-income households that own fixed income instrumentsboth public and privateare also benefitting from rising cash flows due to high interest rates.Considering that the top 20%of incomes account for 40%of consumer spending,its no surprise that the economy is holding up well.So we continue to have a very bifurcated outlook for the consumer:Folks to the right in Exhibit 22 have a lot of assets,while those on the left have a lot of debt.Both high income and older households are benefiting from rising prices and rising rates,while lower income and younger households are experiencing distress with delinquency rates on the rise.Exhibit 21:as well as their auto loansExhibit 22:Household savings are concentrated at the top of the income spectrumData as of June 2024.Sources:FRBNY Consumer Credit Panel,Equifax,Haver Analytics,Apollo Chief EconomistData as of June 2024.Sources:FRB,Haver Analytics,Apollo Chief Economist01234562002200120002003200420052006200720082009201020112012201320142015201620172018201920202021202220232024lance,4Q moving sumFed startsraising rates70 50-5930-3918-2960-6940-490.01.02.03.04.05.06.07.00-20 percentile20-40 percentile40-60 percentile60-80 percentile80-99 percentiletop 1 percentile$trnQ419Q122Q222Q322Q422Q123Q223Q323Q423Q124Q224AUTO LOAN TRANSITIONS TO SERIOUS DELINQUENCY(90 ),BY AGEDEPOSITS HELD BY INCOME PERCENTILEATLWAA-20250103-4129350-13045676162025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.As we continue to watch the incoming data,we see that households to the right are still dominating in the economy,outweighing the negative distress that youre seeing for the households to the left.All-told,consumer spending grew 3.7%in the third quarter of 2024,consumer confidence remains healthy,and expectations remain well above levels that typically point to recession.We expect consumer spending to moderate in 2025,with 2.0%growth for the year.How strong are corporates?If we were only given space for one chart to answer this question,it would be Exhibit 23.American businesses are in the midst of an historic profit boom.As is the case with the aggregate consumer picture,corporate profits,as a whole,have not felt the pinch of Fed rate hikes to any remarkable degree.To be sure,firms with weak earnings,weak revenue,and weak cash flows have been hit by Fed hikes.But from a macro perspective,the effects of Fed hikes on corporates have been small.Exhibit 24 shows four-and 12-week moving averages of bankruptcy filings.When the Fed started raising rates in March of 2022,bankruptcy filings went up because there were a lot of companies that didnt have any earnings.Venture capital companies,by definition,have no earnings.Biotech,fintech,enterprise software,and mid-and small-cap companies generally have weaker earnings than their large-cap Exhibit 24:Weekly bankruptcies dont point to a recessionData as of November 2024.Sources:Bloomberg,Apollo Chief Economist0.02.55.07.510.012.515.017.520.022.501234567892004200520062007200820092010201120122013201420152016201720182019202020212022202320252024%NumberBANKRUPTCY FILINGS(12-W MA)(LS)HY CREDIT SPREAD(3-M LEAD)(RS)Exhibit 23:Corporate profits are near all-time highs as a share of GDPData as of June 2024.Note:Corporate profits are before tax and after inventory valuation adjustment(IVA)and capital consumption adjustment(CCAdj).Sources:BEA,Haver Analytics,Apollo Chief Economist71086591112131415199019921994199619982000200220042006200820102012201420162018202020222024%GDPCORPORATE PROFITSATLWAA-20250103-4129350-13045676172025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.counterparts.In recent weeks,however,bankruptcies have been declining.Likewise,Exhibit 25,which shows that the default rate for levered loans has also been declining.If we were truly knocking on the door of a recession,bankruptcies and loan defaults would not be going down,they would be going up.Exhibit 26 shows the maturity wall for corporate debt.Many commercial real estate(CRE)loans are five-year maturities,which means that CRE loans that were underwritten when the fed funds rate was zero in 2020 and 2021 will need to be refinanced in 2025 and 2026.This gives the maturity wall a downward sloping shape for CRE,with a lot of refinancings over the next few years.This is different from investment grade(IG),high yield(HY),and leveraged loans,where the maturity walls are spread over time;most companies that refinanced in 2020 and 2021 at very low interest rates do not need to refinancein the near future.Exhibit 25:default rates for levered loans dont eitherExhibit 26:The maturity wall doesnt show cause for concernData as of July 2024.Sources:PitchBook LCD,Apollo Chief EconomistData as of October 2024,except CRE,which is December 2023.Sources:ICE BofA,Bloomberg,PitchBook LCD,MBA,Apollo Chief Economist20172018201920202021202220232024%LTM$OF DEFAULTS/TOTAL OUTSTANDINGLTM#OF DEFAULTS/TOTAL ISSUERS5432100200400600800100020242025202620272028202920302031$bnUS HYLEVERAGED LOANSUS IGCREMORNINGSTAR/LSTA LEVERAGED LOAN INDEX DEFAULT RATESMATURITY WALLATLWAA-20250103-4129350-13045676182025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.With rates higher for longer,what matters for markets is the profile of the maturity wallthat is,is it downward sloping,upward sloping,or flat?What we see here is that the maturity wall is front-loaded for CRE,back-loaded for HY and loans,and flat for IG.(The IG bars are taller in the chart because,as explained above,IG is a much bigger asset class.)The chart makes clear the fact that while interest rates going up did have an impact,it was concentrated among those balance sheets that are more sensitive to interest rates going up,such as commercial real estate.Why did the models get it wrong?One hallmark of the post-pandemic economy in the US is how wrong economic models,including the Feds,have been in forecasting future performance.Akin to Samuel Becketts play“Waiting for Godot,”members of the Federal Open Market Committee(FOMC),the Feds policy setting arm,kept expecting a recession that never arrived(Exhibit 27).They were not alone.Exhibit 28 shows the survey of Wall Street economists and their forecasts for the probability of recession in the US,UK,Europe,and China.Exhibit 27:How many times can the same models be wrong?Exhibit 28:Theres still a non-zero chance of a recessionSources:Federal Reserve Board,Bureau of Economic Analysis,Haver Analytics,Apollo Chief EconomistData as of November 2024.Sources:Bloomberg,Apollo Chief Economist0.00.51.01.52.02.53.03.54.04.5Mar-22Jun-22Sep-22Dec-22Mar-23Jun-23Sep-23Dec-23Mar-24Jun-24Sep-24Dec-24%y/yACTUAL GDPFOMC PROJECTIONFed startsraisinginterest rates20CNEUUSUK040608010020202021202220232024%PROBABILITY OF RECESSIONATLWAA-20250103-4129350-13045676192025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.When the Fed started raising interest rates in March of 2022,the prediction of the likelihood of recession shot up immediately.And it stayed at 65%or so for most of 2023.Those forecasts were all wrong.As it turns out,the Fed was able to raise policy rates to curtail inflation without prompting a recession for the first time in 60 years.The percentage likelihood of a recession in the US in 2024 has come down significantly,but still sits at 25%,a not-insignificant proportion.It seems like many economists are still waiting for Godot.We believe there will be no recession in 2025(more on that and the risks associated with this forecast later).This time is different,at least in the US,for the strikingly powerful idiosyncratic reasons outlined previously in this paper.In our view,the reason why the models failed is because they didnt capture the profound post-pandemic shifts in the US economic situation.Outlook for Inflation,Employment,and GDPPrice increases have been mostly tamed compared to the peak levels of 9.1%seen in 2022.But as shown in Exhibit 29,inflation remains stubbornly above the Feds 2%annual target.Is 2.3%the same as 2%?Can the Fed declare victory because inflation has fallen from 9.1%in the summer of 2022 to 2.3%today?Were not so sure about that.We believe it will take longer than expected for the Fed to travel the last mile toward its goal.In fact,we may even see inflation head in the other direction.Additionally,housing inflation has been hard to tame,a situation that might be made more difficult as the Fed maintains its easing cycle and mortgage rates decline in tandem.We still see lower mortgage rates despite the fact that the long end of the Treasury yield curve has remained resilient(more on that later).Exhibit 29:Inflation has been sticky above the Feds 2%targetData as of October 2024.Sources:BLS,Haver Analytics,Apollo Chief Economist-20246810201020112012201320142015201620172018201920202021202220232024%YoYHEADLINE CPIFeds 2%inflation targetATLWAA-20250103-4129350-13045676202025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.In fact,we have begun to see upticks in housing already.Big-city rents have started to increase relative to small-city rents.Home builder sentiment has been moving higher.4 We still see very low inventory,as well.When there are imbalances in the economy,something usually corrects.But when it comes to housing inventory,we are reminded of the joke:If Im already lying on the floor,I cant fall any further.If we consider the fact that housing has a weight of roughly 35%to 40%in the CPI index,what were talking about here is the biggest component of the CPI basket staying sticky.Combine the historical supply situation with immigration of five and a half million people since January 2020,and you have a lot of people that are demanding housing.We think the Fed is going to have a difficult time running the last mile toward 2%(Exhibit 30)and runs the risk of making a policy mistake in the interim.We expect CPI and Core PCE to come in at 2.4%and 2.3%,respectively,in 2025.Employment also remains strong.Job growth bounced back in November,with employers adding 227,000 jobs,and the unemployment rate rose just slightly,to 4.2%.We expect the unemployment rate to edge higher in 2025,to 4.3%.Add together all of the above,and one can easily appreciate why US gross domestic product continues to grow at a steady,above-historical average pace.GDP grew at 2.8%in the third quarter,down just slightly from 3%in the second quarter.The Atlanta Feds GDP estimate for the fourth quarter is 3.3%,well above the CBOs 2%estimate for long-run growth.Consensus estimates have the economy growing at 2.1%in 2025.We agree,and think that after 2.8%growth in 2024,real GDP will grow 2.3%in 2025.We expect to see strong GDP growth for the next several years.We see a soft landing ahead.Outlook for Monetary PolicyOur outlook for monetary policy is not in line with the consensus.Given the pronouncedand uniquestrength in the US economy,both on an absolute basis and relative to the rest of the global economy,we believe the Fed will continue to lower rates,but at a slower pace than the market expects.The market is currently pricing in four more cuts in addition to the 50-basis point cut in September and the 25-basis point cut in November.We think we will get fewer cuts than that.We see a fed funds rate of 4.0%by year-end 2025 and reaffirm our long-held prediction that US rates are going to stay high for longer.Exhibit 30:Is core inflation stabilizing at 2%or starting to move higher again?Data as of September 2024.Sources:BEA,Haver Analytics,Apollo Chief Economist201920202021202220232024%,annualizedYOY6-MONTH ANNUALIZED CHANGE3-MONTH ANNUALIZED CHANGE1-MONTH ANNUALIZED CHANGE86420-2-4CORE PCE4 As measured by NAHB/Wells Fargo Housing Market Index.ATLWAA-20250103-4129350-13045676212025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Exhibit 31 shows the historical and forecasted fed funds rate.The right-hand side of the chart shows the markets expectation of where the fed funds rate will be going forward.The current consensus is that it will remain in the 3.5%to 4%range for the next five to seven years.The election of Donald Trump is another key factor weighing on monetary policy going forward.As of this writing,it is too early to assess the impact of potential new policies to be enacted by the President-elect.However,if implemented,his key policy objectiveslower taxes,higher tariffs,and reduced immigrationcould increase rates and drive inflation.In that comes to pass,there is the potential that the Fed may have to hike rates again to ward off inflation.That being said,there are those who see a recession on the horizon and the possibility that rates will actually have to come down more,and faster.We will keep a close eye on those developments.What are the risks to our outlook?We see a handful of important risks to our baseline scenario that could lead to a substantial economic slowdown and alter the inflation outlook in the US.As of this writing,financial markets are placing the odds of a recession in 2025 at 25%,a declining but still meaningful chance.Chief among these risks are:1.GeopoliticsWhile we hesitate to prognosticate on things geopoliticalour expertise is economics,not geopoliticswe are concerned about three pressing issues:China/Taiwan,Russia/Ukraine,and Israel/Hezbollah/Iran/Middle East.We also see rising US trade tensions with China as a potential source of economic instability.Any or all could be the source of a further dramatic shock to the global economy and,by extension,our outlook.2.Large budget deficit and ballooning debtThe large and expanding size of the government deficits and overall debt in the United States could force interest rates to stay higher for much longer,especially at the long end of the curve.In 2024,interest payments on the federal debt in the US exceeded defense spending for the first time in history:Net interest payments hit$870 billion,compared to$822 billion spent on defense.The overall federal debt has more than doubled over the past decade,to nearly$36 trillion.Starting in 2025,net interest costs will be greater in relation to GDP than at any time since at least 1940.Exhibit 31:Interest rates are expected to remain permanently higherData as of November 2024.Sources:Bloomberg,Apollo Chief Economist-101234567200020022004200620082010201220142016201820202022202420262028D FUNDS RATESOFR FUTURESECB POLICY RATEEURIBOR FUTURESMarkets pricingFed funds tobottom at 3.5%ATLWAA-20250103-4129350-13045676222025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Indeed,as of early November,US long rates were disconnecting from Fed expectations and oil prices.Despite a decline in oil prices alongside the market still expecting four Fed cuts over the coming 12 months,long rates have begun moving higher.This suggests that long rates are rising because of emerging worries about fiscal sustainability.And it seems that there will be higher budget deficits and more Treasury issuance in the years ahead.In late October,the Committee for a Responsible Federal Budget estimated5 that President-elect Trumps tax and spending plans would increase US government debt by anywhere from$1.65 trillion to$15.55 trillion from FY2026 through 2035,with a central estimate of a$7.75 trillion increase.If these estimates are correct,they raise the risk of even more upward pressure on long-term interest rates because of a looming supply-demand imbalance that will eclipse even the short-term pressures detailed in Exhibit 32.A central question:Who is going to buy all that debt?Exhibit 33 shows that foreign holdings of US Treasuries as a share of total outstanding debt have been falling,especially after China slowed its purchases due to several reasons,but mainly because their economy is weak.5 Source:https:/www.crfb.org/papers/fiscal-impact-harris-and-trump-campaign-plans/Exhibit 32:Treasury auction sizes have increased on average 29ross the yield curve in 2024Exhibit 33:Foreign ownership of US government bonds has been declining since 2015Note:Estimates from November 2024 to Dec 2024 from the Treasury Borrowing Advisory Committee and 2025 annualized using 1Q data from TBAC.Sources:SIFMA,TBAC,Haver Analytics,Apollo Chief EconomistData as of July 2024.Sources:Treasury,Haver Analytics,Apollo Chief Economist010020030040050060070080090010002s3s5s7s10s20s30s$bn20132018202320242025580W7019731976197919821985198819911994199720002003200620092012201520182021202435302510201550TREASURY ISSUANCE ACROSS TENORSFOREIGN HOLDINGS OF US TREASURY SECURITIES AS A SHARE OF OUTSTANDING PUBLIC DEBTATLWAA-20250103-4129350-13045676232025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.When the Chinese economy was strong,as it was for many years,the potential for a strong RMB led Chinese policymakers to buy dollars and sell RMB,so as to protect global demand for Chinese goods.Up until 2015 or 2016,they intervened in currency markets to limit the appreciation of their own currency.A weak Chinese economy,on the other hand,takes the need to artificially depress the RMB off the table.Today,the Chinese economy is weaker and the exchange rate of the RMB has been falling.So now theyre buying RMB and selling dollars.In short,China has turned from a buyer of Treasuries to a seller of Treasuries.Who has picked up the slack?As we can see in Exhibit 34,its mainly been American households and institutional money,such as pension funds and insurance companies.Both of those buyers are very sensitive to interest ratesthe reason they are buying Treasuries is because interest rates are higher.In other words,we have shifted from a yield-insensitive buyer(China)to yield-sensitive buyers(households,institutional money).That raises an obvious question:What if the Fed insists on interest rates coming down?At what level of yields do these investors stop buying Treasuries or T-bills or even money market funds?Exhibit 34:US households and real money are buying TreasuriesData as of June 2024.Sources:FFUNDS,Haver Analytics,Apollo Chief Economist-1012345678919971999200120032005200720092011201320152017201920212023$trillionFEDERAL RESERVEHOUSEHOLDSREAL MONEYFOREIGNBANKSFed startsraising ratesDo households and institutional money stop buying Treasuries if interest rates come down too much?HOLDERS OF US TREASURIESATLWAA-20250103-4129350-13045676242025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.One notable dynamic of late has been the fact that a great deal of recently issued debt has been T-bills.Governments typically issue short-dated instruments during a recession,but recent issuance has come on the heels of strong economic performance(Exhibit 35).Why has the Treasury issued so many T-bills when it could have issued 10-or 30-year government bonds?We can see two potential reasons:1)The Treasury is concerned about whether there would be enough demand to absorb the supply of bonds,and 2)it might be trying to avoid“locking in”higher fixed interest rates for such long duration.All-told,some 89%of US government debt outstanding is fixed rate22%of which is Bills,50%are Notes,and 17%are Bonds(Exhibit 36).Exhibit 35:The Treasury normally issues a lot of T-bills during recessionsData as of June 2024.Sources:Haver Analytics,Apollo Chief Economist2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024%of GDP,4Q MALONG-TERM ISSUANCEBILL ISSUANCERecessionRecessionNorecession252015100-5-105Exhibit 36:72%of US government debt is bills or notesData as of August 2024.Sources:Fed,Monthly Statement of Public Debt(Monthly Statement of the Public Debt(MSPD)|U.S.Treasury Fiscal Data),US Treasury Department,Apollo Chief EconomistNON-MARKETABLE2.1%MARKETABLE97.9%FIXED RATE88.6%VARIABLE RATE9.3%BILLS21.7%FLOATING RATE NOTES2.1%NOTES50.4%BONDS16.5%US DEBT100%TIPS7.2%ATLWAA-20250103-4129350-13045676252025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Debt service is another key factor influencing the future of interest rates.As shown in Exhibit 37,the US government is now spending$3 billion per day on interest expenses,a result of the combination of higher rates and higher debt levels.That means that total interest expenses on public issues is nearing$1 trillion a year(Exhibit 38).Were now spending more on debt servicing costs than we do on Medicare or defense.It is remarkable to note that interest expenses of roughly$900 billion annually are nearly triple the levels of 2019.While it doesnt always work this way,the more debt one has typically leads to higher interest charges on each new dollar of borrowings.The more we borrow,the more expensive its likely to get.Exhibit 37:The US spends$3 billion a day on interest expensesData as of October 2024.Sources:US Treasury,Haver Analytics,Apollo Chief Economist0.51.01.52.02.53.02004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024$billion,12-M MAMONTHLY INTEREST EXPENSE PER DAY ON PUBLIC DEBTExhibit 38:Total US government interest expenses are nearing$1 trillion a yearData as of July 2024.Sources:US Treasury,Haver Analytics,Apollo Chief Economist300400500600700800900201920202021202220232024$billion,12-month sumTOTAL INTEREST EXPENSE ON PUBLIC ISSUESATLWAA-20250103-4129350-13045676262025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Finally,we consider the most technical chart in this paperthat of the 10-year bond auction tail(Exhibit 39).When upcoming Treasury auctions are announced,the Treasury issues a so-called“when-issued”bond which starts trading immediately.That bond is supposed to tell you where the auction will come in.If the when-issued bond trades at,say,4.10%,but the auction results come in at 4.15%,that means that the when-issued market was wrong in gauging demand.In the parlance,the auction taileddemand was weaker than expected,and yields were higher.That has been happening more often of late,meaning there has been less demand for Treasuries than expected.3.The Fed eases too quicklyPut simply:If the Fed lowers interest rates too much too quickly,it runs the risk of reigniting a run-up in inflation.The Fed wants to achieve a soft landing by calibrating a decline in interest rates at the right pace.The market thinks the Fed needs to cut rates significantly and soon.We disagree.We think well get fewer cuts because the economy will just continue to be fine.Another point to consider:Should the Fed even be cutting rates at all?If you look at consumption,there seems to be no need to do so because we still have strong spending Exhibit 39:Too many tails means not enough demandData as of November 2024.Note:Bloomberg ticker USN10YTL Index.Sources:US Treasury Department,Bloomberg,Apollo Chief Economist-4-3-2-101234Jan-20Mar-20May-20Jul-20Sep-20Nov-20Jan-21Mar-21May-21Jul-21Sep-21Nov-21Jan-22Mar-22May-22Jul-22Sep-22Nov-22Jan-23Mar-23May-23Jul-23Sep-23Nov-23Jan-24Mar-24May-24Jul-24Sep-24Nov-24Auction tail10-YEAR BOND AUCTION TAILATLWAA-20250103-4129350-13045676272025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure ing from households.If youre looking at GDP growth,there also seems no need to do so2.8%growth is quite robust.If youre looking at inflation,on the other hand,it has come down very nicelyfrom 9.1%to 2.3%and offers an argument in support of cuts.Likewise the employment situation.While employment has remained quite strong,it has nevertheless shown a few signs of weakening in recent months.The Fed is tasked with keeping inflation around 2%,along with full employment.Inflation has almost been tamed,and employment is showing a few signs of weakness.In its statement after cutting rates by a quarter percentage point last month,the FOMC stated that it“judges that the risks to achieving its employment and inflation goals are roughly in balance.”That is why the Fed is cutting rates.Heres the issue,though:If the risk in 2022 was that inflation was going to choke the economy to a standstill,the risk today is that lower rates begin to overheat the economy again,and we see continued strong job and wage growth,the key drivers of housing demand.As previously discussed,a rebound in housing prices(Exhibit 40)would push inflation back up,away from the Feds 2%target.Exhibit 40:There may be a rebound coming in housing prices-20-15-10-50510152025-10123456789%YoY%YoYCPI-U:RENT OF PRIMARY RESIDENCECPI-U:OWNERS EQUIVALENT RENT OF RESIDENCESS&P CORELOGIC CASE-SHILLER HOME PRICE INDEX(14-MONTH LEAD)(RHS)20002002200420062008201020122014201620182020202220242026Data as of September 2024.Sources:Haver Analytics,BLS,S&P,Apollo Chief EconomistATLWAA-20250103-4129350-13045676282025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Cutting interest rates always comes along with upside riskthat the cuts may stimulate the economy too much.It would seem to be a particularly acute risk when the economy remains as strong as it has today.Keep in mind,too,that the stock market has been close to its all-time highs for much of 2024.Has the Fed ever cut 50 basis points when the stock market was this close to its all-time highs?As you can see in Exhibit 41,the answer is“no.”We would argue that there is no need to ease financial conditions when the stock market is at all-time highs.But the Fed decided to cut interest rates anyway.Why?Because after spending the last several quarters obsessing over the level of inflation,they have begun,of late,to shift the focus of their concern to the unemployment rate.Exhibit 42 shows the number of FOMC members who think the risk to the unemployment rate is weighted to the upside versus those who see it as weighted to the downside.Its only natural that with inflation falling that policymakers might find themselves wondering about the health of the economy and,by extension,the possibility of rising unemployment.Exhibit 42:Fed officials are much more worried about rising unemployment than falling unemploymentExhibit 41:It is very unusual for the Fed to cut 50 basis points when stocks are at all-time highsData as of October 2024.Sources:FRB,Bloomberg,Apollo Chief Economist-1.00-0.75-0.50-0.250.00S&P 500 RELATIVE TO HIGH IN THE PAST YEAR(%)FED RATE CUT(%)0-5-10-15-20-25-30-35-40-45Sep-18Dec-18Mar-19Jun-19Sep-19Mar-21Dec-19Mar-20Jun-20Sep-20Dec-20Jun-21Sep-21Dec-21Mar-22Jun-22Sep-22Dec-22Mar-23Jun-23Sep-23Dec-23Mar-24Jun-24Sep-24WEIGHTED TO THE UPSIDEWEIGHTED TO THE DOWNSIDE232332120112911311127012122132800131801701601100991414012002468101214161820CountNUMBER OF FOMC MEMBERS WHO THINK THE RISK TO THEIR UNEMPLOYMENT RATE FORECAST IS:Data as of September 2024.Note:No survey was conducted in March 2020.Sources:Federal Reserve,Apollo Chief EconomistATLWAA-20250103-4129350-13045676292025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Whats striking in the chart is the fact that the Fed is almost always more worried that the risk to their unemployment forecast is to the upside rather than to the downside.If youre constantly concerned that unemployment could be about to rise,then of course you will be inclined toward cutting interest rates at the first reasonable opportunity.To be clear:We do not wish to see an increase in unemployment ourselves.But we do find it interesting that FOMC members almost always see an upside risk to their unemployment forecasts,and rarely,if ever,think that they may be too optimistic.Let us also consider the Feds view that interest rates would normalize at around 3%.What would that mean in the Feds own framework for the forecast for GDP?As illustrated in Exhibit 43,it can be 2%higher over the next several quarters.And what would that mean to inflation?As illustrated in Exhibit 44,inflation could be 1%higher over the next several quarters.Exhibit 43:The Fed normalizing interest rates to 3n boost GDP by 2.2%Exhibit 44:The Fed normalizing interest rates to 3n boost inflation by 1ta as of November 2024.Note:Monetary policy shock includes a 150bps decrease in forward guidance and a 100bps decrease in policy rate.Sources:Bloomberg SHOK Model,Apollo Chief EconomistData as of November 2024.Note:Monetary policy shock includes a 150bps decrease in forward guidance and a 100bps decrease in policy rate.Sources:Bloomberg SHOK Model,Apollo Chief Economist0.00.51.01.52.02.53Q244Q241Q252Q253Q254Q251Q262Q263Q264Q261Q272Q273Q274Q27%pts0.00.20.40.60.81.01.23Q244Q241Q252Q253Q254Q251Q262Q263Q264Q261Q272Q273Q274Q27%ptMONETARY POLICY SHOCK TO GDP LEVEL,COMPARED WITH BASELINE FORECASTMONETARY POLICY SHOCK TO INFLATION,COMPARED WITH BASELINE FORECASTATLWAA-20250103-4129350-13045676302025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.We do believe that there may be cause for a serious discussion about the actual level of R*,or the neutral interest ratethat is,the level of interest rates where monetary policy is neither easy,meaning supporting the economy,nor restrictive,meaning slowing down the economy.The Fed thinks R*is about 3%.We think it is closer to around 4.5%.Heres the issue:If R*really is 3%,then the current level of rates of 4.5%should probably strike us as fairly restrictive.If monetary policy is too tight,in other words,we should be seeing data that reflects that imbalancea drop-off in people buying cars and houses and,likewise,a drop-off in corporate investment.The problem with that argument is that we have been seeing nothing of the sort.Inflation is coming down,to be sure,but upward pressure,as previously discussed,remains.This is a quandary that raises an interesting question,namely:Is the estimate of the long-run fed funds rate of 3%too low?Perhaps there have been structural changes in the economy that mean that the long-run fed funds rate will be closer to 4.5%or 5%.If that were the case,then 4.5%would not be overly restrictive.In which case,the danger would be cutting too much,too soon.While we are not suggesting that the Fed has made a policy mistake by lowering rates,we do think that there is an important discussion to be had about the speed and magnitude of further rate cuts from here since there is still a risk that the Fed cutting too much too soon is going to boost both GDP and inflation,thereby starting the clock all over again on the prospect of a soft landing.What are the potential implications for financial markets?In light of a benign yet not riskless outlook,we see a number of implications for capital markets and portfolio allocations.We will wrap up this paper with an overview of our outlook for various asset classes,from public equities to private credit,as well as a discussion about portfolio management in the years ahead.Public equitiesPublic equities are trading at too lofty forward valuations.The historical relationship between the S&P 500 forward P/E ratio and subsequent three-year returns in the benchmark index shows that the current forward P/E ratio of almost 22 implies a 3%inflation-adjusted annualized return over the coming three years(Exhibit 45),way below historical averages of around 6.4%.The risk premium for holding public stocks the difference between the S&P 500 earnings yield minus the 10-year Treasury yieldis currently negative.In other words,investors are paying to take risk as opposed to being paid to do so.Exhibit 45:The forward P/E ratio of 21.8 implies just 2.9%returns over the next three yearsData as of October 2024.Sources:Bloomberg,Apollo Chief Economist101214161820222426FORWARD P/E RATIO3-YEAR SUBSEQUENT ANNUALIZED RETURN(%)403020100-10-20%S&P 500ATLWAA-20250103-4129350-13045676312025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Add to this analysis the fact that concentration remains high and valuations at the top are even higher:As of early November,the average trailing P/E ratio of the 10 largest companies in the S&P 500 in terms of market capitalizationAlphabet,Amazon,Apple,Berkshire Hathaway,Broadcom,EliLilly&Co.,Meta,Microsoft,NVIDIA,Teslawas almost 50(Exhibit 46),basically twice the overall markets ratio.Another area of concern in the public market is the small-and mid-sized market.More than 50%of debt for Russell 2000 companies is floating rate.For the S&P 500,it is 24%(Exhibit 47).With interest rates higher for longer,small-cap companies remain more vulnerable than large-cap companies.More generally,companies and capital structures with no earnings,no revenues,and no cash flows will continue to struggle with high debt servicing costs(Exhibit 48).Exhibit 46:The average P/E ratio of the top 10 companies in the S&P 500 is almost 50Exhibit 47:Russell 2000 companies are more vulnerable when rates stay higher for longerData as of November 4,2024.Sources:Bloomberg,Apollo Chief EconomistData as of October 2024.Note:Includes bonds and loans(tranches)and excludes financials.Sources:Bloomberg SRCH,Apollo Chief Economist118.266.563.462.440.936.733.625.723.522.249.339.026.1020406080100120140TeslaBroadcomNVIDIAAmazonAppleMicrosoftMetaAlphabetBerkshireHathawayTop 10averageTop 4averageS&P 500Eli Lilly&CoTrailing P/E ratioS&P 500Russell 2000%FLOATINGFIXED(MATURITY IN 2024 AND 2025)FIXED(MATURITY 2026 )100908070605040302010024.2R.7i.3E.0%6.5%2.2%TRAILING P/E RATIO OF THE TOP 10 COMPANIES IN S&P 500 BY MARKET CAPDEBT BY MATURITY(EXCLUDING FINANCIALS)ATLWAA-20250103-4129350-13045676322025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Public Fixed IncomeCredit spreads continued to tighten in the wake of the US election,with US investment grade(IG),high yield corporates(HY),emerging market corporates(EM),and CLO A-BBB tranches trading at or near post-Covid tights.The rally has been driven by a combination of robust economic growth,strong fixed income demand technical,and,most recently,the election outcome.We expect credit fundamentals to remain robust.This,combined with elevated all-in yields and steep yield curves,can continue to attract inflows into the asset class.We believe this should support valuations even as the room for further compression is increasingly limited.Given the combination of tight valuations and beta compression,we do not see attractive risk-reward trade-offs in extending spread duration or moving down the rating spectrum.We also see better value in private credit(see next section)with the private-public spread still elevated.A Republican administration can offer a more favorable regulatory backdrop,leading to a pickup in deal-making and M&A activity in the year ahead.At the same time,trade policy and tariffs may have disparate impacts across the credit market.We see elevated single-name dispersion in credit outcomes in the year ahead.Further,most of the recent spread tightening came the heels of rising government rates on the long end of the curve,rather than a substantial drop on corporate bonds yields.As a result,just as there are low risk premia in the public stock markets today,dynamics in public credit can suggest there are fewer and fewer places for investors to hide.We see a muted opportunity in public credit,which has implications for the prognosis of the 60/40 portfolio as well(see last section).In short,liquidity risk premia in public credit markets has declined,especially in high yield,where it is at or near five-year lows.This argues for a reallocation away from illiquid parts of public credit to either liquid public credit or private markets.Exhibit 48:The share of Russell 2000 companies with negative earnings continues to riseData as of June 2024.Sources:Bloomberg,Apollo Chief Economist101520253035404550199519971999200120032005200720092011201320152017201920212023%PERCENTAGE OF COMPANIES IN RUSSELL 2000 WITH NEGATIVE EARNINGS(12-MONTH TRAILING EPS)ATLWAA-20250103-4129350-13045676332025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Private EquityLower rates could spark a new wave of deals as,on one hand,sponsors seek to deploy capital raised in the past three years and,on the other,managers may be willing to part with existing investments as cheaper borrowing costs may bolster valuations.Opportunities in the private equity secondary market remain interesting.Specifically,GP-led dealsthose through which general partners negotiate asset sales directly with secondary buyershave been the fastest growing segment of private equity secondaries since 2018,and accounted for almost half of all secondary transactions in 2022 and 2023.6 This increase is a result of continued innovation as well as a slowdown in traditional exit avenues such as initial public offerings(IPOs)and mergers&acquisitions(M&A)during a period of higher interest rates.We believe that GP-led deal volume will remain strong even in a more normalized environment,as secondary transactions have become a key component of the private market ecosystem.Just as with the broader secondaries market,we see the potential for GP-led deals as a function of a)an investment managers relationships with general partners,b)the size and flexibility of the investment platform,especially as regards innovative capital solutions,and c)the deep industry expertise that accrues to large direct investors.We believe the secondaries market can offer excess return per unit of risk when compared to other private market strategies due to a variety of factors,including a rapidly evolving secondary investment landscape.7Structured finance,including hybrid strategies,remains particularly interesting as well,and we currently see an opportunity to identify hybrid opportunities with credit-like downside protection and equity-like upside.In the heyday of low rates,which were characterized by a low single-digit cost of debt,investors moved up the risk spectrum in search of strong equity returns.In todays more normal rate environment,with high single-digit costs of debt,equity returns are being squeezed and investors are moving down the risk spectrum toward hybrid opportunities.A hybrid approach can fit in between the traditional private credit and private equity portions in a portfolio,with the potential to decrease volatility while increasing downside protection.Hybrid investors have a variety of vehicles at their disposal,including mezzanine debt,preferred equity(with warrants),convertible preferred,and structured common equity.There is plentiful demand for hybrid solutions,including M&A financing and capital for growth,re-equitization of over-levered balance sheets,owner and sponsor liquidity solutions,and financing to support public company growth initiatives.Estimates suggest that companies will require significant capital to fund growth in the years ahead,including$30 trillion to$50 trillion for energy transition,$30 trillion for power and utilities,and$15 trillion to$20 trillion in digital infrastructure.8Market inefficiencies have generated a supply-demand imbalance for hybrid capital,dry powder for which is less than 25%that of private debt and less than 10%that of private equity.As of March 2024,hybrid capital strategies sat on an estimated$78 billion of dry powder,versus$333 billion in the private debt space and$1,055 billion available for buyouts.96 For more on this,see:Expanding the Toolkit:How GP-Led Transactions can Enhance Secondary Strategies,by Steve Lessar,Veena Isaac,and Konnin Tam,Co-Heads of Apollo S3 Sponsor&Secondary Solutions,September 20247 For more on this,see PE Secondaries:Evolving Landscape Can Expand Opportunities,by Steve Lessar,Veena Isaac,and Konnin Tam,Co-Heads of Apollo S3 Sponsor&Secondary Solutions,April 20248 Market sizing reflects the views and opinions of Apollo analysts based on expected aggregate investment/capex demands over the next 10 years.9 Dry powder per Preqin as of March 31,2024.ATLWAA-20250103-4129350-13045676342025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.Private CreditBuoyant equity markets,tighter credit spreads,and a cheaper cost of debt capital can lead to more corporate transactions in coming months.Default rates remain low in most cases.We continue to see a clear delta between credit spreads in the public and private marketsthat is,investors can earn a premium for lending in the private markets(Exhibit 49).We see the most attractive opportunities in lending to businesses with recurring revenue streams that generate a lot of cash flow,that have variable expense structures,and low capex spending-to-revenue ratios.The above attributes lead to stronger leveraged borrower profiles,in our opinion.We point toward one of our primary factors behind the strength of the US economythe data center buildout.Data centers are typically financed using asset-backed securities,project finance,and private credit,and this macro trend can be a significant source of opportunity.While leveraged buyout(LBO)activity has picked up in the public marketsthe third quarter of 2024 saw the highest level of LBO volume since the first quarter of 2022LBO volume in the private markets was 50%greater than in the public markets during the first nine months of 2024.There are a lot of opportunities to lend.A high wall of maturities in 2027-2028 can also provide a fresh source of refinancing opportunities.Higher rates for longer can translate into higher yields in private credit,especially for newer vintages as investors seek potential substitution for on-the-run bonds(which,given tight spreads,are trading at lofty valuations).That said,given the risks we see on the horizon,we believe it is paramount to seek first-lien,first-dollar,senior-secured,good covenants,top of the capital structure opportunities.Middle market opportunities are still plentiful.We also see opportunity in direct lending and origination,especially in the asset-backed finance world.Higher rates have certainly laid bare some of the weaknesses in business models that were dependent on a cheaper cost of debt capital,especially those that are capex intensive.Thats created particular stress in industries that are also seeing increased competition,such as telecom and cable.This has led to individual opportunities to buy secured,downside-protected positions in companies that are going through a change in their business model and an evolution in their cost of capital.We see opportunities to get capital to companies that are good businesses in good competitive positions in their subsectors but are going through a change in their funding models.Exhibit 49:BDC yields are higher than those of high-yield bondsData as of August 2024.Sources:Bloomberg,Apollo Chief Economist35791113151719201920202021202220232024%VANECK BDC INCOME ETF INDICATED DISTRIBUTION YIELDBLOOMBERG US CORPORATE HIGH YIELD INDEX YIELD TO WORSTATLWAA-20250103-4129350-13045676352025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.We also continue to see increased convergence of private and public markets with respect to partnerships between alternative investment managers and banks that are focusing on origination.Although often portrayed as adversaries in the media,the reality is that banks and asset managers are increasingly working together.More than a dozen banks have partnered with private credit firms in the last 12 months,a significant increase from the two partnerships announced the previous year.10 We believe these partnerships should bolster the volumes of private credit origination and expand the breadth of companies accessing the private market.They may also be a source of existential questions:If a deal is originated by a bank but financed by an alternative managers balance sheet,is it is public or a private deal?Does it even matter?We also see more opportunities for direct lending in the year ahead,on the heels of enormous growth in 2024.Companies are pivoting to the private credit markets not so much as a response to the level of rates but more as a reaction to how sponsors and management teams are looking to finance their business.Lastly,if rates do remain higher,as we expect,and the terminal fed funds rate stays higher than where it has been historically,then credit we believe can be an attractive asset class in the near-to medium-term.With opportunities in credit to create attractive return profiles that are downside-protected,we see private credit as an attractive alternative to overvalued public equities.Portfolio allocationOngoing worries about the long-term success of traditional allocations strategies(i.e.,60%stocks/40%bonds)are unlikely to dissipate.Based on our views expressed above,we see potential for depressed long-run returns in the public markets(both equity and fixed income).At the same time,public and private markets are converging.Public markets can be safe and risky,and private markets can be safe and risky.High levels of concentration and still-lofty valuations have combined to narrow the risk premium in public equities.At the same time,still-tight spreads in public fixed income have made it increasingly difficult to find attractive yields at reasonable risk levels.We believe that private markets can offer an alternative to the muted risk premia in public markets and provide potential for long-term alpha generation.11As such,we continue to believe that parts of the 60/40 portfolio invested in public markets can be replaced with private fixed income and private equity.10 Source:Oliver Wyman11 For more on this,see Portfolio Allocation Views:The Search for Risk Premia,Alexander Wright,August 9,2024ATLWAA-20250103-4129350-13045676362025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.ABOUT THE AUTHORTorsten Slk joined Apollo in August 2020 as Chief Economist,and he leads Apollos macroeconomic and market analysis across the platform.He is also an Apollo Partner.Prior to joining,Mr.Slk worked for 15 years as Chief Economist at Deutsche Bank where his team was top ranked in the annual Institutional Investor survey for a decade.Prior to joining Deutsche Bank,Mr.Slk worked at the IMF in Washington,DC and at the OECD in Paris.Mr.Slk has a PhD in Economics and has studied at the University of Copenhagen and Princeton University.Torsten Slk,PhDPartner,Apollo Chief EconomistATLWAA-20250103-4129350-13045676372025 ECONOMIC OUTLOOK:FIRING ON ALL CYLINDERSThe information herein is provided for educational and discussion purposes only and should not be construed as financial or investment advice,nor should any information in this document be relied on when making an investment decision.Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change.Please see the end of this document for important disclosure information.To learn more,visit ApolloA.2024 APOLLO GLOBAL MANAGEMENT,INC.ALL RIGHTS RESERVED.Important Disclosure InformationAll information herein is as of December 2024 unless otherwise indicated.This presentation is for educational and discussion purposes only and should not be treated as research.This presentation may not be distributed,transmitted or otherwise communicated to others,in whole or in part,without the express written consent of Apollo Global Management,Inc.(together with its subsidiaries,“Apollo”).The views and opinions expressed in this presentation are the views and opinions of Apollo Analysts.They do not necessarily reflect the views and opinions of Apollo and are subject to change at any time without notice.Further,Apollo and its affiliates may have positions(long or short)or engage in securities transactions that are not consistent with the information and views expressed in this presentation.There can be no assurance that an investment strategy will be successful.Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially,and should not be relied upon as such.Target allocations contained herein are subject to change.There is no assurance that the target allocations will be achieved,and actual allocations may be significantly different than that shown here.This presentation does not constitute an offer of any service or product of Apollo.It is not an invitation by or on behalf of Apollo to any person to buy or sell any security or to adopt any investment strategy,and shall not form the basis of,nor may it accompany nor form part of,any right or contract to buy or sell any security or to adopt any investment strategy.Nothing herein should be taken as investment advice or a recommendation to enter into any transaction.Hyperlinks to third-party websites in this presentation are provided for reader convenience only.There can be no assurances that any of the trends described herein will continue or will not reverse.Past events and trends do not imply,predict or guarantee,and are not necessarily indicative of future events or results.Unless otherwise noted,information included herein is presented as of the dates indicated.This presentation is not complete and the information contained herein may change at any time without notice.Apollo does not have any responsibility to update the presentation to account for such changes.Apollo has not made any representation or warranty,expressed or implied,with respect to fairness,correctness,accuracy,reasonableness,or completeness of any of the information contained herein,and expressly disclaims any responsibility or liability therefore.The information contained herein is not intended to provide,and should not be relied upon for,accounting,legal or tax advice or investment recommendations.Investors should make an independent investigation of the information contained herein,including consulting their tax,legal,accounting or other advisors about such information.Apollo does not act for you and is not responsible for providing you with the protections afforded to its clients.Certain information contained herein may be“forward-looking”in nature.Due to various risks and uncertainties,actual events or results may differ materially from those reflected or contemplated in such forward-looking information.As such,undue reliance should not be placed on such information.Forward-looking statements may be identified by the use of terminology including,but not limited to,“may”,“will”,“should”,“expect”,“anticipate”,“target”,“project”,“estimate”,“intend”,“continue”or“believe”or the negatives thereof or other variations thereon or comparable terminology.The Standard&Poors 500 Index(S&P 500)is a market-capitalization weighted index of the 500 largest US publicly traded companies and one of the most common benchmarks for the broader US equity markets.Index performance and yield data are shown for illustrative purposes only and have limitations when used for comparison or for other purposes due to,among other matters,volatility,credit or other factors(such as number of investments,recycling or reinvestment of distributions,and types of assets).It may not be possible to directly invest in one or more of these indices and the holdings of any strategy may differ markedly from the holdings of any such index in terms of levels of diversification,types of securities or assets represented and other significant factors.Indices are unmanaged,do not charge any fees or expenses,assume reinvestment of income and do not employ special investment techniques such as leveraging or short selling.No such index is indicative of the future results of any strategy or fund.Additional information may be available upon request.Past performance is not necessarily indicative of future results.ATLWAA-20250103-4129350-13045676
2025-02-14
37页
5星级
University of Michigan,Ann Arbor Department of Economics 611 Tappan Avenue Ann Arbor,MI 48109-1120 lsa.umich.edu/econ/rsqe 734-764-2567 For Release:11/21/2024 The Michigan Model Gabriel M.Ehrlich,Director George A.Fulton&Saul H.Hymans Directors Emeriti The U.S.Economic Outlook for 20252026 Jacob T.Burton,Gabriel M.Ehrlich,Kyle W.Henson,Daniil Manaenkov,Niaoniao You,and Yinuo Zhang University of Michigan Executive Summary All Things Considered As the Fed proceeds with its cutting cycle amid a cooling labor market,we expect real GDP to grow at an annualized pace of 2.3 percent and the unemployment rate to average 4.2 percent in 2024Q4.We project a modest deceleration of economic growth to accompany the less dynamic labor market over the near term.However,the solid momentum of real final sales to private domestic purchasers,helped by growth in real income,is likely to persist,supporting solid real GDP growth.As the stimulative effects of the expected tax cuts dominate the drag from the anticipated new tariffs,we project quarterly GDP growth to accelerate modestly during 2026,reaching a 2.5 percent annualized pace by 2026Q4.Consumption Momentum:Revised and Reinforced The recent large upward revision of personal income data since 2022 explains the resilience of consumption growth in the face of higher interest rates.Higher income and meaningful real wage gains going forward will likely support robust spending growth in the near term.No Halloween Haunt for the Labor Market The labor market is looking less worrisome after some jump scares in the third quarter.The unemployment rate dipped to 4.1 percent in September and held there in October,down from the recent high of 4.3 percent in July.However,the trend pace of job gains is likely still decelerating even after accounting for the negative impacts of recent hurricanes and strikes.Job openings have continued to soften.We expect private sector job gains to decelerate moderately through most of 2025,while government sector employment also grows at a slower pace.Prelude to the Super Bowl of Tax Many previously low-probability fiscal scenarios surfaced following the Republicans trifecta victory in the November elections.We expect an extension of most expiring provisions of the Tax Cuts and Jobs Act of 2017,a lower corporate tax rate of 15 percent for domestic manufacturers,and a higher cap on the state and local tax deduction.We also anticipate sizable but incomplete tax cuts on Social Security benefits,tips,and overtime income.Consumer incentives for purchases of electric vehicles,on the other hand,are likely to be unplugged quickly.Tariffs on China are very likely to surge.We project average tariff rates on Chinese goods to grow eventually to triple the size of those implemented during the first Trump Administration.We expect President-elect Trumps fiscal agenda to come into effect in 2026.With roughly 200 billion dollars in tax cuts against 85 billion dollars in new tariff revenue,the federal deficit climbs from 6.1 percent of GDP in fiscal 2024 to 6.8 percent of GDP by fiscal 2026.That level would be unprecedented outside of wars,the recent pandemic,and severe recessions.Inflation Trends:Very Demure,Very Mindful Progress on bringing inflation trends down has stumbled recently.The 3-month annualized core CPI inflation rate came down from 4.5 percent in March to 1.6 percent in July,but it has re-accelerated to 3.6 percent in October.Although the deceleration in inflation trends has cleared the way for the Fed to start easing,the recent uptick reduces the urgency to cut rates quickly in the forecast.We continue to believe that inflation remains on a path of gradual deceleration toward the Feds target,largely because shelter inflation has plenty of room to decelerate further.2 The Fed Stands Watch The long-awaited Fed pivot to rate cuts has arrived.After sitting in a 23-year high range of 5.255.5 percent for 14 months,the fed funds rate was reduced by 50 basis points in September and by 25 basis points in November,bringing it to the 4.54.75 percent range.The pace of cuts to follow is likely to be data dependent.Provided that labor market conditions remain stable,we project another 25-basis point cut at the FOMCs December meeting before the pace of cuts slows next year.We anticipate four more cuts of 25 basis points in 2025,bringing the fed funds rate to its terminal range of 3.253.5 percent for this cycle by the end of the year.In our view,the temporary uptick of inflation related to tariffs will not prompt the Fed to tighten policy in 2026.We believe that risk management concerns related to the potential negative growth effects of tariffs,which played a role in the 2019 rate cuts,will balance the upside risks from new tax cuts,prompting the Fed to stand pat.The 20252026 Outlook We project that real GDP growth will slow from a Q4-to Q4 pace of 2.4 percent in 2024 to 1.9 percent in 2025.Long-term interest rates have increased meaningfully in recent months,which will limit potential consumption growth in the near term by making financing for big-ticket purchases less affordable.We expect looser monetary policy to work through the economy sufficiently to lift quarterly growth to a 2.1 percent pace in the second half of 2025.As personal income tax cuts kick in,the quarterly pace of growth ramps up during 2026,reaching an annualized rate of 2.5 percent in 2026Q4.Calendar year real GDP growth picks up to 2.2 percent in 2026.The unemployment rate ticks up from 4.2 percent in 2024Q4 to 4.3 percent in 2025Q1 and then stabilizes at 4.4 percent for the remainder of 2025 before declining back to 4.2 percent by 2026Q4.Monthly payroll job gains continue to slow,averaging 108,000 jobs from 2025Q2Q4.As looser monetary policy works its way through the system,job gains ramp up slowly during 2026.The economy adds 1.3 million jobs in 2026.We expect PCE inflation to continue its decline toward the Feds 2.0 percent target,as shelter cost growth decelerates.Year-over-year PCE inflation settles around 2.1 percent in 2025.We expect the price effect of the new import tariffs to be modest,with 12-month PCE inflation ticking up to 2.3 percent by the end of 2026.The reacceleration is a bit larger for core PCE inflation.With plenty of supply already for sale,new single-family home construction remains soft,averaging a pace of 991,000 units from 2024Q4 to 2025Q2 before climbing to a 1,080,000 unit pace by 2026Q4.The annual pace of multi-family starts bottoms at 350,000 in 2024Q4 before recovering to 449,000 units by 2026Q4 as financing costs drop.We expect auto loan rates to step down as long-term rates decline and auto delinquencies drop.As the CPI for new light vehicles continues to decrease,we think vehicle affordability will improve noticeably as measured by monthly payments and transaction prices relative to income.We project that the annualized pace of sales will edge up to 16.1 million in 2025.We expect the anticipated early phase-out of the electric vehicle credits to have minimal impact on total light vehicle sales,as consumers are likely to shift toward vehicles with other drivetrain types.As a result,vehicle sales total 16.2 million in 2026.3 The Current State of the Economy The U.S.economy continues to expand at a solid clip.Real GDP expanded at an annualized pace of 2.8 percent in the third quarter of 2024,a touch below the 3.0 percent pace in the prior quarter.Chart 1 shows the growth rate of real GDP and the growth contributions of its major components over recent quarters.The government sectors contribution rebounded to 0.9 percentage points in the third quarter on the strength of defense-related expenditures.Consumption expenditures contribution to headline growth rose to 2.5 percentage points,benefiting from jumps in purchases of pharmaceutical products and election-related services.However,the contribution of private fixed investment slipped to only 0.2 percentage points.The sum of the latter two componentstogether known as the contribution of real final sales to private domestic purchasersregistered over 2.0 percentage points for the seventh quarter in a row.The recent annual revisions to the National Product and Income Accounts(NIPAs)resulted in considerably higher estimates of Gross Domestic Income growth over the 201923 period,largely stemming from higher estimates of personal income.Chart 2 shows the current and pre-revision personal saving rates.With revised data showing a fairly steady reading of around 5 percent disposable personal income,the recent pace of consumption expenditure growth appears more sustainable than previously thought.4 As of early September,the labor market situation was looking worrisome.The unemployment rate jumped by 0.4 percentage points between April and July to 4.3 percent,then barely edged down to 4.2 percent in August.Payroll job gains as reported on September 6 averaged only 116,000 per month from June to August.It was no wonder the Federal Reserve decided to cut the range for the fed funds rate by 50 basis points(bps)in mid-September.Subsequent data have been far less alarming.The unemployment rate dipped further to 4.1 percent in September and October.September payroll job gains came in initially at 254,000 along with a 72,000 combined upward revision to the JulyAugust job gains.The October payroll job gains were only 12,000,but the job growth count was reduced by about 38,000 striking International Association of Machinists union workers and was further lowered temporarily by the disruptions that Hurricane Milton and Helene caused in parts of Florida and North Carolina.We are expecting a significant rebound in employment growth in November.Still,even factoring in the recent dip,both the headline unemployment rate and the broader measure of labor market slack known as the U6 unemployment rate appear to be following a slow upward trend.1 We also think that payroll job gains are likely to continue slowing gradually.Based on the preliminary data,the annual benchmark revision of payroll employment is likely to lower payroll gains from April 2023 to March 2024 1 In addition to the traditional measure of unemployment known as the U3 rate,the U6 unemployment rate includes people working part-time for economic reasons and those outside of the labor force who are willing and able to work and have looked for work at some point over the prior 12 months.5 by 818,000,making the slowdown during this year look far less dramatic.The continued pace of labor market softening is well illustrated by Chart 5.The private sector job openings rate in the Bureau of Labor Statistics(BLSs)Job Openings and Labor Turnover Survey(JOLTS)has been trending down since early 2022 and,as of the most recent data for September,has fallen back to the level observed at the end of January 2020.While the number of job openings in the I data remains about 10 percent above its level on February 1,2020,the readings in October and early November suggest job openings continue to soften.The 3-month average of private sector weekly hours has also declined from a peak of 35.0 in May 2021 to around its pre-pandemic level of 34.3 in October.As shown on Chart 6,however,aggregate private sector weekly hours have been holding up reasonably well,expanding at a pace of above 1.0 percent year-over-year for most of 2024.The measures of compensation shown in Chart 7 are continuing to moderate but remain high enough to sustain real compensation growth.6 Overall,labor market strength remains reasonable,with total payroll growth conducive of continued consumption growth in the near term.Progress on bringing trend inflation down,very evident between late spring and mid-summer,has sputtered recently.The year-over-year core CPI inflation rate has remained around 3.3 percent since June.The 3-month annualized core inflation came down from 4.5 percent in March to 1.6 percent in July,but has re-accelerated to a 3.6 percent reading as of October.Personal Consumption Expenditures(PCE)price index inflation(only available through September as of the writing of this report)has exhibited a qualitatively similar dynamic.The annualized 3-month inflation rate of the highly-watched supercore metricthe PCE price index for core services excluding housingimproved from 5.3 percent in March to 2.3 percent in July but rebounded to 2.9 percent in September.PCE Housing inflation,however,continues to trend down,albeit slowly.Average PCE shelter costs had risen more than 5.0 percent year over year in September,despite measures of new tenant rent inflation that have long since moderated.Overall,we continue to believe that inflation remains on a path of gradual deceleration toward the Feds target,largely because shelter inflation has plenty of room to decelerate further.The Fed cut the target range for the fed funds rate by 50 bps in mid-September and a further 25 bps in early November.Yet long-term Treasury interest rates have exploded higher since mid-September,returning to levels seen in July.The 10-year note yield rose by 6070 bps through early November.About two-thirds of the run-up can be attributed to the increase in the 10-year Treasury Inflation-Protected 7 Security(TIPS)yield,with the rest due to higher inflation compensation.While it is tempting to attribute the run-up to shifts in election outcome probabilities and the increasingly more costly campaign promises in the lead-up to the November elections,the lack of a sharp bond market reaction upon learning the actual election outcome suggests that other forces are likely to have been at play as well.One possible explanation is the cooling and reheating pattern we have seen in the labor market and inflation data,coupled with the recent NIPA revision to personal income.Yet another explanation is a short-term overreaction to noisy information.We judge that there has been some overreaction,but near-term rate dynamics will largely depend on how markets assess the impact of President-elect Trumps second-term agenda.To briefly summarize our assumptions about the first two years of the second Trump Administration:we expect moderately wider fiscal deficits due to lower tax revenues that stimulate the economy,while higher tariffs undo some of the stimulus.This relatively benign outlook means that we do not anticipate large shifts in long-run neutral policy rate.As a result,we continue to project long-term Treasury yields to moderate.Chart 11 shows the recent dynamics of consumer sentiment in the economy.While the Conference Board metric has generally moved sideways,the University of Michigan Consumer Sentiment index took a large dive in 2022 amid high inflation.Since then,the index has been on an upward trajectory with a few setbacks.Both indices remain far below pre-pandemic levels.It remains unclear whether and how the apparent disconnect between the levels of confidence and growth of consumer spending will be resolved.8 Chart 12 shows the Institute for Supply Managements(ISMs)Purchasing Manager diffusion Indices for manufacturing and services.The services index jumped to 56.0 in October,propped up by the new orders and employment sub-indices,suggesting strong service sector momentum to start the fourth quarter.The manufacturing sector continues to struggle,with the ISM index indicating contraction in all but one of the past 24 months.We are hopeful that this manufacturing downturn will end soon.Most manufacturing outlook surveys conducted by regional Federal Reserve banks show a marked improvement in 6-month ahead expectations.Stagnant light vehicle sales are one reason behind the weakness in manufacturing.The seasonally adjusted annualized pace of light vehicle sales topped 16 million units for the second time this year in October,but the average for this year so far stands at a disappointing 15.6 million.Poor affordability due to high vehicle finance interest rates is likely holding back vehicle sales.Chart 14 shows light truck and car transaction prices relative to average monthly wages on the left axis.Both the maize and blue lines are at or below their 2019 levels.The green and red dashed lines(displayed on the right axis)show hypothetical monthly 9 payments as a share of the monthly average wage for a new car or truck purchased at the respective average transaction price and financed over 48 months at the new vehicle finance interest rate reported by the Wall Street Journal.Both metrics show that affordability has deteriorated noticeably since 2021,to levels more in line with 201415 levels for cars and 2012 for trucks,respectively.The good news is that vehicle loan delinquency rates may peak soon,which could bring about lower risk spreads for vehicle finance and improving affordability.With 30-year fixed mortgage rates pushing up toward the 7.0 percent mark again,the housing market is likely to get another swing of the seesaw.Chart 15 shows the National Association of Home Builders(NAHBs)Housing Market Index alongside the Mortgage Bankers Associations(MBAs)volume index of loan applications for purchases.The NAHBs index,which measures builders sentiment on concurrent and six-month forward single-family sales as well as the traffic of prospective buyers,has barely begun to improve this fall after its summer slump.With mortgage rates shooting up again,we do not expect much optimism from homebuilders.The number of new mortgage applications also appear destined to scrape along the bottom of their historical volumes over the near term.Overall,the state of the economy remains challenging to interpret.We believe that the dynamics of the labor market support continued solid consumption expenditure growth in the current quarter.High interest rates and post-election policy uncertainty could weigh on some sectors.Although we forecast the labor market to continue gradually cooling off through the first half of next year,we believe that the Feds pivot to looser near-term monetary policy will filter through the economy over time,helping to sustain the ongoing business expansion over the next two years.Next,we detail several key policy and economic assumptions underlying the forecast.10 Key Policy Implications of the Federal Elections Donald Trump has won the presidency once more,and the Republican Party has won control of both houses of Congress for 202526.The House majority will remain very narrow,but party discipline could become easier to enforce with a Republican President and Senate.Still,the slim seat margin will likely limit the size and scope of policies Congress can implement,with most legislative action likely centered on tax policy.We now expect an extension of most expiring provisions of the Tax Cuts and Jobs Act of 2017(TCJA),reinstatement of 100-percent bonus depreciation,and a reduction of the corporate income tax rate for domestic manufacturing to 15 percent.We think that a full exemption of tips,overtime pay,and Social Security benefit payment from income taxation is unlikely,but a partial exemption is likely.We also expect the cap on the state and local tax(SALT)deductions to be relaxed,fulfilling a campaign commitment.A large portion of Inflation Reduction Act(IRA)funds devoted to renewable energy has gone to Republican districts,so we do not expect a wholesale early phase-out of green energy provisions.However,the highly visible consumer incentives for purchases of electric vehicles(EVs)are likely to get zapped.It also seems very likely that tariffs on imports from China will rise sharply.We project average tariff rates on Chinese imports to grow to eventually be triple the size of those implemented during the first Trump Administration.We project the new tariffs to come into effect early in 2026 and ramp up over the following year as rounds of mutual retaliation follow.We expect about a 0.2 percent permanent increase in consumer prices due to the new China tariffs.On the other hand,and contrary to many observers,we do not project the lasting imposition of broad tariffs on imports from the rest of the world over the next two years.We instead expect the threat of such tariffs(or a short-lived imposition)to be used as a bargaining chip in negotiations with our trade partners.The path of future population growth is highly uncertain,but it is very relevant for our outlook.We think poor economic conditions in several Central American countries will continue to be the key driving force behind the flow of migrants across the U.S.southern border.Tighter border controls and enforcement under the second Trump Administration will deter some and slow the pace of new arrivals.We have lowered our projections for population growth considerably compared to our recent outlooks,11 which relied on Congressional Budget Office projections released in January 2024.2 The campaign promise of mass deportations of unauthorized immigrants is a major wildcard.The removal of a significant portion of the working-age population could push interest rates and inflation higher,while also slowing the economy.A large-scale deportation program has not been attempted since the Eisenhower Administration in 1953.While it is likely that a deportation program will be put in place,we are skeptical that it will ultimately result in the permanent removal a significant portion of unauthorized immigrants.Monetary Policy The Federal Open Market Committee(FOMC)remains committed to its dual mandate of bringing inflation down to its 2.0 percent objective while maintaining full employment.The FOMC has cut the federal funds rate at each of the last two meetings,by 50 basis points in September and by 25 bps in November,bringing it to the 4.54.75 percent range.Committee members have noted that they are strongly committed to supporting maximum employment and that labor market conditions have generally eased in their recent statements,signaling that they are open to further rate cuts if the labor market shows further signs of weakening.On the other hand,Federal Reserve Chair Jerome Powell stated on November 14,The economy is not sending any signals that we need to be in a hurry to lower rates.The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.We project another 25 bps cut in the Committees December meeting before the pace of cuts moderates next year absent a rapid deterioration of labor market conditions.The median economic projection for the federal funds rate among September FOMC meeting participants envisioned one additional cut in 2024 from the current range and four more in 2025.The Committee maintained its belief that inflation would continue to normalize toward the Feds 2.0 percent target.The median projection foresaw the unemployment rate rising to 4.4 percent in 2024Q4 and staying there in 2025Q4.The actual unemployment rate entered the fourth quarter at 4.1 percent in October,likely allowing the Fed to move gradually toward a more neutral monetary policy.2 Congressional Budget Offices report,The Demographic Outlook:2024 to 2054,Jan 18,2024:https:/www.cbo.gov/publication/59697.12 Core PCE inflation,a key metric for forecasting future inflation,stood at 2.7 percent year over year in September.This metric has been slowing consistently since the September 2022 reading of 5.6 percent,but progress has slowed in 2024.The 3-month average(annualized)rate spiked to 4.4 percent in March and declined to 1.9 percent as of July,but it has since rebounded to 2.3 percent in September.Another hot Core CPI print in October likely means another incoming above-trend PCE Core inflation print.The decline in inflation in the middle of this year cleared the way for the Fed to begin cutting rates,but the recent reacceleration adds credence to a slower path down.Core non-housing services,also known as the supercore(roughly half of private consumption),was one of the final sectors to experience disinflation.As shown on Chart 16,it was a significant driver of the recent spike,the subsequent decline,and the recent firming-up.Its year-over-year level remains stubbornly high as well.The Feds statutory dual mandate requires a balanced approach to promoting maximum employment alongside price stability.The labor market is still near full employment,but it is showing definite signs of further cooling.The topline payroll job gains reading of 12,000 in October came in below expectations,adding to fears that the labor market slowdown has accelerated.While the monthly reading was likely impacted by inclement weather and strikes,the average over the three months before October was 148,000,a meaningful step down from the 2024Q1 monthly average of 267,000(or 196,000 after adjusting for the preliminary estimate of the benchmark revision).The continued slowdown in the labor market alongside close-to-target inflation gives the Fed room to move rates lower.The Fed has been reducing the size of its balance sheet since May 2022.At that time,the Fed announced a 95 billion dollar-per-month redemption cap for its securities holdings,and it has been shrinking its balance sheet by around 80 billion dollars per month since then.On May 1 of this year,the Fed announced that it would slow the pace of decline by establishing a new redemption cap of 60 billion 13 dollars per month beginning on June 1,a small step towards a more accommodative policy.We expect the pace of balance sheet reduction to slow to 30 billion dollars per month by the end of 2025.We believe that our forecast is consistent with a Fed that is preparing to enter a more patient phase of its ongoing rate-cutting cycle.As noted,we project the Fed to cut the target range for the fed funds rate by 25 basis points at the December FOMC meeting.By that time,we expect the unemployment rate to stand at 4.2 percent and the annualized pace of core PCE inflation to be around 2.4 percent,up from 2.2 percent in the third quarter.With the fed funds rate around 4.6 percent,the implied short-term real interest rate of nearly 2.2 percent will still appear slightly restrictive,especially given the softening labor market.We project PCE inflation to reaccelerate from a 2.1 percent annualized rate in 2025Q3Q4 to 2.3 percent by the end of 2026 as President-elect Trumps proposed tariffs make their way through to domestic prices.Even so,we expect four further 25-basis point cuts in 2025,bringing the fed funds rate range to 3.253.5 percent by the end of 2025,the terminal range for this cycle.The inflation related to the tariffs will likely be temporary as markets adjust to the new normal.In addition,the Fed will probably be attentive to the potential adverse effects on output arising from a possible trade war.The Fed referenced economic uncertaintypartially stemming from tariffs on Chinese goodsas supporting evidence for rate cuts in 2019.Although the Fed was not as concerned with inflation then as it is today,we believe that the potential for a retaliatory trade war will encourage the Fed not to raise rates in 2026 in the face of tariff-induced price pressure.Chart 17 shows our projections for selected key interest rates.The 3-month Treasury bill rate steadily falls from 4.5 percent in 2024Q4 to 3.4 percent in 2025Q4 and 3.3 percent in 2026Q1,before holding around that level throughout the rest of the forecast.The 10-year Treasury rate rises to 4.2 percent in 2024Q4 and then declines gradually to 3.9 percent in 2025Q4 and 3.8 percent by the end 14 of 2026.Measured by the quarterly 10-year-to-2-year spread,the yield curve un-inverts this quarter after two years of negative values.Mortgage rates decline more quickly than longer-term government bond yields as the excess spread between them shrinks in the face of subsiding risks related to the paths of the policy rate and inflation.The 30-year conventional fixed-rate mortgage rate falls from 6.5 percent in 2024Q3Q4 to 6.0 percent in 2025Q4 and 5.7 percent by 2026Q4.Fiscal Policy As many provisions in the TCJA are set to expire by the end of 2025,several observers are calling this year the Super Bowl of Tax.Given that the Republicans won undivided control of the federal government in the November elections,they will be calling most of the plays.With the slim majority in the House,significant spending cuts would be very difficult to push through;hence,we expect the 119th Congress to largely focus on reducing taxes.We expect easy agreement on extending several individual components of the TCJA that are currently set to expire.A permanent doubling of the maximum child tax credit(CTC),for instance,is likely to garner bipartisan support.Similarly,we believe that the reinstatement of the immediate write-off on research expenditures and an extension of the 100-percent bonus depreciation will face minimal opposition.On the other hand,the tax incentives on clean energy and EVs introduced by the Inflation Reduction Act(IRA)of 2022 will probably get unplugged sooner than the current end year of 2032.We were already expecting most personal provisions in the TCJA to survive regardless of the election outcome,so the TCJAs personal income tax cuts are virtually guaranteed to stick around.The fiscal cost of extending these cuts is formidable,however.The Joint Committee on Taxation estimated that an extension of the TCJAs personal income tax rates,combined with CTC provisions,would add a cumulative 3.3 trillion dollars to the primary deficit from 2025 to 2034 on top of an estimated baseline in which they expire of 7.4 trillion dollars.3 3 This estimate is available in the Congressional Budget Offices report,Budgetary Outcomes Under Alternative Assumptions About Spending and Revenues,May 8,2024,https:/www.cbo.gov/publication/60114.15 President-elect Trump has also floated several other tax-cutting proposals which could lead to significant further revenue declines if enacted.The SALT deduction cap,currently set at 10,000 dollars,is anticipated to be under scrutiny because it is disfavored by some Republican representatives in deep blue states in addition to most Democrats.President-elect Trump vowed to eliminate the SALT cap less than two months before the election,but the extent of the adjustment could hinge on the size of the Republicans ultimate majority in the House.According to multiple estimates,the full expiration of the SALT cap would reduce revenue by more than 1.1 trillion dollars over a 10-year budget window.4 The size of the SALT cap could become a key battleground for fiscal hawks if the majority ends up slim.We have currently factored in a relaxation of the cap to 15,000 dollars for single taxpayers and 30,000 dollars for couples.Under this assumption,it comes with a yearly price tag of 50 billion dollars.5 In addition,we anticipate that Congress will follow through on President-elect Trumps promise to cut the corporate tax rate to 15 percent for domestic manufacturers,which will lead to an additional annual revenue loss of 20 billion dollars.6 We expect contentious discussions on ending taxation of Social Security benefits and exempting overtime and tip income from tax.Despite being favored by both presidential candidates,tax exemptions for tip income would be challenging to enact because compensation structures would likely be adjusted to take advantage of this policy.The possibility of ending taxation of Social Security benefits,tips,and overtime income also appears uncertain,because the revenue cost could be 3.6 trillion dollars or more over a 10-year budget window.7 If,as expected,the Republicans hold a thin majority in the House,any pushback from GOP fiscal hardliners could pose a serious challenge to the passage of these proposals.We assume a scaled-down version of these policies will take full effect by 2026,with a revenue loss of about 120 billion dollars per year.4 The Penn Wharton Budget Model estimated a 1.1 trillion-dollar revenue decline if the SALT cap were eliminated starting in 2024:https:/budgetmodel.wharton.upenn.edu/issues/2024/2/8/lifting-the-salt-cap-budget-effect.The Committee for a Responsible Federal Budget(CRFB)estimated a 1.2 trillion-dollar revenue loss from 20262035 if cap were eliminated in 2025:https:/www.crfb.org/blogs/salt-cap-expiration-could-be-costly-mistake.5 We calculated this estimate using the CRFBs build your own tax extensions tool:https:/www.crfb.org/build-your-own-tax-extensions.6 The central-cost estimate for corporate tax rate cut for domestic manufacturers is 200 billion-dollar revenue loss from 20262035:https:/www.crfb.org/papers/fiscal-impact-harris-and-trump-campaign-plans.7 The central-cost estimate for ending taxation of Social Security benefits,tips,and overtime income totals 3.6 trillion dollars from 20262035 by CRFB:https:/www.crfb.org/papers/fiscal-impact-harris-and-trump-campaign-plans.16 On the other hand,import tariffs could offer some relief for federal revenues.Tariff revenue accruals surged by 50 billion dollars from 2017Q4 to 2018Q4 at the start of the trade war with China,marking a 37 percent year-over-year increasethe largest jump in 35 years.Throughout the campaign,President-elect Trump frequently proposed imposing tariffs of 60 percent on all goods imported from China and 10 or 20 percent tariffs on goods imported from the rest of the world.If implemented,these tariffs could bring substantially larger revenue than in 201819,when tariffs were levied on about two-thirds of Chinese imports at an average effective rate of about 19 percent.8 However,given the scale of the proposed new tariffs,the subsequent repercussions could pose a drag on near-term growth,reducing the potential tax revenues.For this forecast,we have penciled in higher tariffs duties on Chinas imports coming on over the course of 2026,which will ultimately rise to a level about three times higher than in 202425.While some tariff threats may be used as bargaining tools against some other countries,we do not anticipate any meaningful non-China tariffs to take effect for any significant amount of time through 2026.As a result,we expect to see the annualized tariff-driven revenue increase to ramp up to 85 billion dollars by the end of 2026.The Fiscal Responsibility Act of 2023 suspended the U.S.debt ceiling through January 1,2025,after which the U.S.Treasury will start using extraordinary measures to keep the government open temporarily.With the fiscal 2025 budget unlikely to be finalized during the lame-duck session,we are reminded again that the nation continues to struggle to come up with a clear plan to address both its short-term and long-term fiscal challenges.For a change,we expect this round of debt ceiling theater to go down largely unnoticed given single-party control of the Congress and Presidency.Table 1 shows the data and our projections for the federal budget on a National Income and Product Accounts(NIPA)basis for fiscal years 2023 to 2026,broken down by receipts and major expenditure categories.The pace of revenue growth is set to pick up to 4.5 percent in fiscal 2025.We assume that the projected tax cuts will be working their way through the economy in fiscal 2026,when 8 The Budget Lab at Yale estimated that a 10 percent universal tariff on goods imports with a 60 percent tariff on Chinese imports would raise at least 2 trillion dollars from 2025 through 2034:https:/budgetlab.yale.edu/research/fiscal-macroeconomic-and-price-estimates-tariffs-under-both-non-retaliation-and-retaliation.The Tax Foundation estimated that the trade war with China resulted in a nearly 80 billion dollar tax increase:https:/taxfoundation.org/research/all/federal/trump-tariffs-biden-tariff.The Peterson Institute for International Economics estimates for average China import tariffs can be found here:https:/ higher import tariffs will also be coming online.However,we judge that the revenue increase from tariffs is unlikely to fully offset the cost of the tax reductions we project.Therefore,revenue growth is expected to slow to a 2.7 percent pace in fiscal 2026.We expect federal expenditures growth to outpace receipts growth over the next two years,averaging a 5.2 percent annual pace throughout our forecast window.We estimate that federal consumption growth accelerated to 6.3 percent in fiscal 2024 and will moderate to 4.5 percent in fiscal 2026 but will remain supported by robust defense spending.Transfer payments account for more than 60 percent of the overall expenditure growth,as Social Security and the federal share of Medicaid spending settle into a steady post-pandemic trajectory,while expanded Affordable Care Act(ACA)credits from the IRA expire as scheduled by the end of 2025.Federal subsidies are on track to retreat to near their pre-pandemic levels before resuming growth in fiscal 2026.Interest payments on the federal debt rose by nearly one-third in fiscal 2023 due to sharply higher interest rates.As the Fed continues its rate-cutting cycle,the growth rate of interest payments decelerates from a 21.3 percent pace in fiscal 2024 to a 5.2 percent pace by fiscal 2026.As revenue growth lags expenditure growth,the federal deficit continues to expand,from 6.1 percent of GDP in fiscal 2024 to 6.8 percent of GDP by fiscal 2026.Federal debt held by private investors increases from 79.9 percent of GDP in fiscal 2024 to 87.4 percent of GDP in fiscal 2026.Even as the Fed tapers the pace of its rundown of Treasury security holdings,a large amount of Treasury debt remains on the Feds balance sheet rather than in the hands of the public.18 The Housing Market Affordability in the housing market improved marginally in the third quarter of the year,as the 30-year conventional fixed mortgage rate declined from 7.0 percent in early June to 6.1 percent in late September.However,mortgage rates reversed course early in October,climbing back to 6.8 percent as of mid-November.With listing prices mostly holding up,this falls improvement in housing affordability may prove fleeting,limiting the prospects for recovery in single-family home sales.Inventory of single-family housing available for sale has continued to accumulate as buyers have stayed on the sidelines hoping for lower rates and prices.Our preferred measure of home prices,the seasonally adjusted S&P CoreLogic Case-Shiller National Home Price Index,has decelerated on a year-over-year basis,from above 6.0 percent in JanuaryApril to 4.2 percent in August.Although we expect mortgage rates to resume their decline over the next two years,there is substantial uncertainty around their path stemming from large projected deficits,likely increases in tariffs,the resulting pressure on inflation,and potential changes to the mortgage finance system such as the possible reprivatization of Fannie Mae and Freddie Mac.We project housing affordability to improve gradually over the next two years.The extent of the improvement is projected to be underwhelming,however,due to elevated uncertainty and the lock-in effect of the previous surge in mortgage rates preventing many potential sellers from listing their homes for sale.Measures of housing-related sentiment have been mixed recently.Homebuilders sentiment has improved,likely due to expectations that lower financing costs will return in earnest going forward.In the NAHB housing market index,the component for single family sales in the next six months showed consecutive above-50 readings in September and October,with more builders expecting sales conditions to be good than poor.Still,most builders were pessimistic about the present situation and traffic of prospective buyers.On the homebuyers side,the University of Michigan Survey of Consumers sentiment index of home buying conditions inched lower in November after ticking up slightly in October.It remains near a historic low.19 Existing single-family home sales fell below the 3.5-million-unit pace in August and September,possibly related to expectations of further declines in mortgage rates heading into the Federal Reserves easing cycle.The seasonally adjusted months supply of existing single-family homes climbed to 4.1 in September,compared with an average of 3.6 in the second quarter and 3.2 a year ago.Rising months supply is usually a signal of slower home price appreciation ahead.Chart 18 plots our preferred measure of affordability,the ratio between a mortgage payment on a newly bought home and the average wage income per worker.9 We estimate that this ratio decreased to 43.0 percent in the third quarter of 2024 as mortgage rates fell,the lowest since the first quarter of 2023.Looking ahead,we project the affordability ratio to stay flat in 2024Q4 and then to ease gradually to 40.8 percent in the second half of 2025 and 39.9 percent by the end of 2026.Although this improvement in affordability will bring some relief to prospective homebuyers,housing will remain much less affordable than during the years prior to the pandemic,when our affordability metric generally moved within the range of 2030 percent.Annualized sales of new single-family homes rebounded to 724,000 in the third quarter,up from 693,000 in the second quarter.With somewhat cheaper mortgages ahead and still-rising existing home prices,we expect a slow pick-up in new home sales to continue in the near term.Single-family housing starts saw a large dip in July,potentially due in part to Hurricane Beryl,but recovered to an annualized pace of 1,000,000 units in August.Months supply of new single-family homes for sale moderated to 7.6 in September from 8.7 in February,but still suggests an excess in inventory compared with a balanced market featuring under 6 months worth of supply.Single-family residential construction remains restrained as the market works through the supply overhang that has developed since 2022,but we are 9 The mortgage payment is computed assuming no down payment using the contemporaneous average conventional mortgage rate.As a proxy for mortgage size,we index the median home price in 2012 to cumulative house price growth since that time as measured by the Case-Shiller Home Prices Index.Average wage is computed by dividing total wage income by employment level in the BLS household survey.20 cautiously optimistic about this market in the long term given that it should benefit from the expected decline in mortgage rates.Multi-family housing starts recovered slightly to 363,000 in the third quarter compared with an average pace of 340,700 units in the first half of the year,but the multi-family market remained loose as previously started projects were completed,boosting inventory.However,easing financial conditions in the near term and extra demand from recent immigrants as they ramp up their labor force participation should help sustain demand for multi-family units in 202526.Chart 19 shows the historical and forecast paths of year-over-year and quarterly annualized rates of home price growth,measured by the seasonally adjusted Case-Shiller Home Price Index.The latest release in August showed a continued deceleration of home price appreciation to 4.2 percent year over year.We expect the year-over-year pace of price appreciation to dip below 4.0 percent through 2025Q2 before stabilizing at a 4.0 percent level over the remainder of our forecast period.Energy Markets The price of West Texas Intermediate(WTI)crude oil hovered around 7075 dollars per barrel during the first couple weeks of October,as tensions in the Middle East remained high.On October 26,Israel conducted targeted strikes on military sites in Iran.Its decision to spare oil production facilities alleviated emerging energy market concerns about supply.The price of WTI fell below 70 dollars per barrel shortly after the attack but rebounded to 72 dollars in early November as energy markets shifted focus to the U.S.presidential election and another FOMC meeting,in addition to the ongoing tensions in the Middle East.21 Another major risk to our energy outlook is Chinas demand for oil.Chinese demand has slowed significantly in recent quarters,even contracting in mid-2024.In its October Short-Term Energy Outlook,the Energy Information Administration(EIA)forecasts that Chinas liquid fuel consumption will increase by only 0.1 million barrels per day(bpd)in 2024 and 0.3 million bpd in 2025.These modest increases represent just 10 and 20 percent of the projected global growth in consumptiona significant slowdown from the pre-pandemic pace in 2018 and 2019,when China accounted for 40 and 50 percent of the worlds increase in consumption.The Organization of the Petroleum Exporting Countries and its allies(OPEC )once again decided to delay their planned oil production increase to early next year,citing concerns about weak oil demand and increasing supply from outside of the group.The EIA,however,expects OPEC to ramp up production in mid-2025,though output will likely remain below target for the year.Without a substantial increase in supply from OPEC countries in the near term though,global inventories will likely continue to draw down until production growth ramps up to meet global demand.The EIA estimates that increased production in the United States,Guyana,Brazil,and Canada,along with output from OPEC ,will be sufficient to exceed global demand in the second half of 2025,allowing global inventories to rebuild.Chart 20 shows our forecast for WTI and Brent crude prices in maize and blue as well as the Producer Price Index(PPI)for natural gas fuels in green.We expect the price of WTI to tick down from 78 dollars in mid-2024 to a little under 72 dollars by the end of 2026,as tensions in the Middle East keep oil prices from falling much further.We forecast the BrentWTI spread to remain relatively stable at 4.0 dollars per barrel through 2026,as the inclusion of U.S.WTI-Midland crude in the Brent index appears to have reduced the spreads volatility.Natural gas prices,as measured by the PPI for natural gas fuels,rose by 1.4 percent in the third quarter of 2024.However,prices remain 15.5 percent below year-ago levels due to record U.S.natural 22 gas production in 2023 and a mild winter that reduced demand for space heating.High production and low prices led to inventories being restocked to nearly 40 percent above the five-year average(20192023)by March 2024.As production declined moderately over the year in response to lower prices,inventories were drawn down to just 5 percent above the five-year average by September 2024.Over the next few years,we anticipate heating seasons in our forecast to be slightly warmer than the previous 10-year average,with production remaining flat but at record-high levels.At the same time,we expect domestic consumption to stay relatively stable,placing minimal upward pressure on prices.International demand paints a different picture.We anticipate that liquefied natural gas(LNG)exports will increase due to strong international demand,driving up domestic prices.As a result,we forecast natural gas prices to increase by 11.8 percent from 2023 to 2026,outpacing the cumulative projected CPI inflation of 8.0 percent over the same period.23 The Forecast for 20252026 The recent comprehensive NIPA revision has resolved the apparent disconnect between real GDP and real Gross Domestic Income growth rates over recent years.With a significant upward revision to past personal income,and the still-healthy labor market producing meaningful real wage gains,the average consumers budget appears consistent with continued healthy spending growth.Long-term interest rates have risen meaningfully in recent months,however,limiting potential consumption growth.Recent immigrants will likely continue ramping up their labor force participation,assuming that the anticipated deportation policy is limited in scale.As a result,working-age population and,hence,potential GDP growth will likely remain above trend.By 2026,we project the key policies of President-elect Trumps agenda to take shape.We expect about 200 billion dollars in tax cuts in 2026,split between persons and corporations,to be partly counteracted by about 85 billion dollars in new tariff revenue.We project that the stimulative effects of the tax cuts will dominate the drag from the tariffs over the next two years,as domestic importers and foreign producers share some of the tariff incidence with U.S.consumers.As a result,we project GDP growth to accelerate in 2026,but at the cost of a wider federal fiscal deficit.At 6.8 percent of GDP for fiscal 2026,the level of the federal deficit would be unprecedented outside of wars,the recent pandemic,and severe recessions.We project that real GDP growth will slow from its 2.8 percent annualized pace in 2024Q3 to 2.3 percent in 2024Q4 and 1.8 percent in 2025H1.Consumptions contribution lags in 2025Q1,as the campaign-and election-related boost in 2024H2 wanes.Looser monetary policy filters through the economy over the next few quarters,stabilizing the labor market by 2025H2.Strong labor force growth nudges real GDP growth up.The pace of growth ramps up above 2.4 percent by mid-2026,as personal income tax cuts kick in,overpowering the negative growth impacts of deportations and the new China tariffs that take effect early in 2026.Calendar year GDP growth registers 2.8 percent in 2024,then moderates to 2.1 percent in 2025,and ticks up to 2.2 percent in 2026.After the near-term slowdown,consumption expenditures contribution to growth hovers in the 1.41.7 percentage point range from mid-2025 through 2026,as real earnings growth decelerates in a slightly looser labor market.The forecast growth contribution of nonresidential fixed investment is largely driven by spending on equipment and intellectual property,as nonresidential construction flatlines following a spike driven by the early stages of construction at new microchip factories.Residential investment does not start adding to growth until 2025H2,as mortgage rates remain high and housing affordability improves only marginally.Government purchases contribution to growth drops from its unusually high 2024Q3 level,averaging about 0.3 percentage points over 2024Q426Q4.Net exports are a drag on growth in 2025,as businesses attempt to front-run forthcoming tariffs.In 2026,tariffs and retaliation affect both imports and exports,with no change to their net growth contribution.24 The labor market is staying afloat for now.The headline unemployment rate hovered at 4.1 percent over the past two months after edging down from the recent high of 4.3 percent in July.The decline de-triggered a well-known recession indicatorthe so-called Sahm rule.The labor force participation rate has held relatively steady between 62.5 and 62.8 percent since February 2023,with the October reading at 62.6 percent.We expect it to slip marginally from this level during our forecast window,as the baby boom generation continues to retire while the share of recent immigrants working and seeking employment edges up.As interest rates remain relatively high,the cumulative effects of previous monetary tightening continue to work their way through the labor market.The unemployment rate rises modestly to 4.4 percent in 2025Q2 before sliding back to 4.2 percent in 2026Q4 as monetary policy becomes more accommodative.Hurricanes and strike activity had a significant negative impact on Octobers payroll employment gains of only 12,000.Private job gains were reduced by 38,000 due to Boeings machinists strike.However,the pace of government hiring remains steady.Nevertheless,the trend pace of job gains is clearly decelerating.Despite an upbeat report in September,the three-month average pace of gains registered 148,000 prior to Octobers report,weaker than the 166,000 annual average pace in 2019.Private sector job gains continue to decelerate through 2025Q3.Several years of a tight labor market are likely to spur faster productivity growth over the next two years.We expect job growth to pick up again in 2026.The government sector adds jobs throughout the forecast,albeit at a much slower pace compared to 2023,as local government employment tops its pre-pandemic count.All-items CPI inflation decelerated to 2.6 percent year over year in 2024Q3,as energy prices continued to decline.Core CPI inflation dipped to 3.2 percent with slower price increases in shelter and other services but ticked up to 3.3 percent in October.Core CPI inflation slightly outpaces the headline rate throughout 2024 and 2025,as gasoline price increases remain largely subdued and food inflation slows.Year-over-year core CPI inflation slows to 3.1 percent in 2024Q4,eases further to 2.5 percent in 2025Q4,and then rebounds to 2.7 percent in 2026Q4.We expect inflation in the PCE price index,the Feds preferred measure,to pick up briefly to 2.4 percent year over year in 2024Q4 as energy price decreases slow.PCE inflation then resumes its downward trend toward 2.1 percent in 2025Q4.We expect year-over-year PCE inflation to accelerate to 2.3 percent by 2026Q4 as the projected tariffs work their way through domestic prices.25 With plenty of supply for sale,new single-family home construction remains soft,hovering around an annualized pace of 1,000,000 units in 2024 and early 2025,before picking up gradually to 1,081,000 units by 2026Q4.Multi-family starts edged up to an annualized pace of 363,000 units in 2024Q3 following lower prints earlier in the year.We expect multi-family starts to remain soft in 2025H1 due to elevated inventories and completions,but to climb to a pace of 449,000 by 2026Q4 with cheaper financing options.The annualized pace of total housing starts stands at 1,350,000 in 2024Q4 and recovers to the pre-pandemic level by 2025Q4,reaching 1,529,000 in 2026Q4.We remain optimistic about new construction,despite a delayed rebound due to near-term uncertainty related to mortgage rates and home prices.Housing starts should benefit from lower mortgage rates ahead and the recent influx in new immigrants,assuming no blanket mass deportations.Growth in real investment in equipment accelerated to 5.4 percent year over year in 2024Q3,reflecting a continued ramp-up in information processing equipment investment and a spike in aircraft deliveries.We expect its growth to hold roughly steady through 2025Q1,then decelerate to about 2.4 percent year over year by 2026Q4.Intellectual property investment expanded by 3.5 percent year over year in 2024Q3.We project that robust growth in intellectual property will persist throughout our forecast window,with the year-over-year pace accelerating to 6.6 percent by 2026Q4.Year-over-year growth in nonresidential structure investment slowed from 10.6 percent in 2023Q3 to 2.1 percent in 2024Q3,as the microchip factory construction boom appears to have crested.Even with a potential uptick in mining construction,overall investment in nonresidential structures will likely flatline over the next two years.The annualized pace of light vehicle sales posted a solid 16.0 million units in October,the fastest since April.We also expect interest rates on auto loans to decline amid the Feds cutting cycle and the CPI for new light vehicles to extend its recent declines.Auto sales are expected to continue rising gradually as vehicle purchases become more affordable relative to incomes.The light vehicle sales pace softens from Octobers rate to 15.9 million units in 2024Q4 and climbs slowly to 16.3 million by 2026Q4.The sales gains are mainly in the light truck category,which includes pickups,SUVs,and crossovers.We generally expect robust auto production and sales in the medium term,but uncertainty related to EVs is a substantial risk.We expect the current EV tax credit to be slashed,but with little hit to total light vehicle sales as consumers substitute to vehicles with other drivetrains.26 To forecast demand for U.S.exports,we construct a trade-weighted index of real GDP for five of our major export markets:Canada,Mexico,Japan,the United Kingdom,and the euro area.We also track Chinas economy,but we show it separately because it tends to grow more quickly.Despite recent policy stimulus,Chinas economic growth is projected to slow from 5.5 percent last year to 4.6 percent in 2024,due to geopolitical pressures,challenges in its real estate market,and low consumer confidence.In 202526,we expect further deceleration,as new tariffs on Chinas exports kick in.The five-economy composite calendar-year growth rate is projected to slow to just 0.8 percent in 2024,largely due to weak growth in Japan and Mexico.In 202526,growth accelerates meaningfully in Japan and Canada,pushing the two-year average growth of the five-country aggregate GDP to 1.3 percent.The current account deficit declined from its pandemic-era high point of 4.5 percent to about 3.2 percent of GDP in 2023Q4,as consumption of goods moderated.Strong growth of imports in 2024H2 pushed the current account deficit back up to 4.1 percent of GDP.We project it to dip to 3.8 percent of GDP in 2024Q4.We expect new tariffs on imports from China to take effect starting in 2026,with several rounds of retaliation to follow.During 2025,we expect elevated levels of both imports and exports in anticipation of new tariffs,with the current account deficit holding largely flat relative to nominal GDP.The current account deficit is projected to widen despite new tariffs in 2026,thanks to a large domestic tax cut that is expected to fuel extra demand for goods.In nominal terms,the current account deficit registers an annualized pace of about 1.1 trillion dollars in 2024Q4,then widens by about 50 billion dollars more through 2025Q4 and a further 130 billion dollars through 2026Q4.Risks to the Forecast Economic uncertainty is highly elevated.The outcome of Novembers federal elections,delivering a Republican trifecta,has brought to the forefront many previously low-probability scenarios to the forefront.We will broadly group the risks we see by time horizon:those affecting near-term outcomes and those likely to influence our medium-run outlook.There are also large risks to the longer-run economic outlook,but we will not discuss them in detail here.The most prominent near-term risks comprise noisy data leading to deviations of monetary policy from our assumed path,sudden changes in key economic trends,global commodity price volatility,and 27 the paths of the wars ongoing abroad.Hurricane Helene likely led to a drop in job gains in October,but the magnitude of the drop is currently uncertain.With the initial establishment survey response rate lower than 50 percent for the month,sizeable subsequent revisions are likely.Given the elevated core month-on-month inflation prints over the past three months,a strong November jobs report that brings large revisions to prior data would likely place further fed funds rate cuts on hold at least temporarily.With year-over-year core CPI inflation having held stubbornly flat since June,any further acceleration of inflation trends would likely derail the Feds rate-cutting plans absent a further cooldown in the labor market,sending policy rate expectations and longer-term Treasury yields higher.Consumption expenditure growth,the largest driver of economic growth,has remained resilient in the face of low consumer confidence readings and high interest rates.A sudden deceleration in the face of rising delinquencies and financial strain,however,cannot be ruled out.On the other hand,if wage growth persists at higher levels for longer than we anticipate,consumption growth could lift real GDP growth higher than we project.With the incoming Trump Administrations attitudes towards the wars in Ukraine and the Middle East likely to stand in stark contrast to those of the Biden Administration,the conflicts have a high risk of significant near-term developments with potential implications at least for global commodity prices and near-term U.S.defense spending.A ceasefire and the start of political negotiations in either conflict would likely lower escalation premiums embedded in market prices for global commodities produced around the affected region such as oil,natural gas,grains,metals,etc.,but also reopen the currently curtailed shipping and travel routes.Such developments would help lower global inflation further and likely lift real incomes.Further escalation would likely lead to additional disruption to global commodity markets,spurring further increases in U.S.defense expenditures.The net effects on the U.S.economy would likely be ambiguous,however.The list of medium-term risks is a lot longer.We can group them broadly into several,non-mutually exclusive,categories:those affecting the productive capacity of the economy,fiscal trajectory risks,factors affecting the neutral monetary policy rate,and foreign policy issues.28 Two first-order drivers of the economys productive capacity are the working-age population and total factor productivity(TFP).Population growth could change quite dramatically over the coming years.With immigration accounting for a substantial portion of U.S.population growth,border policies and their enforcement could have a disproportionate impact on GDP growth over the medium term.The range of plausible scenarios for immigration is wide.On one end is the prospect of large-scale deportations of unauthorized immigrants already in the country,coupled with significant curbs to inflows of new immigrants.On the other end is the prospect of policy actions that are largely for show but that do not have a large practical effect;in that scenario,we could even see an acceleration of new immigration due to economic and political disruptions in other parts of the world.The range of possible economic outcomes is equally wide,with several key sectors of the U.S.economy(such as construction and agriculture)currently relying on the labor of unauthorized immigrants most at risk.TFP is hard to measure and even harder to shift via policy.However,another key goal of the incoming Trump Administration,rebuilding the U.S.industrial base through a combination of tax incentives,tariffs,and federal spending,has the potential to alter medium-run TFP.Unfortunately,the TFP effects could go either way,depending on the policys implementation.A reinvigorated industrial base could result in faster productivity growth going forward,while a failed policy would still see massive shifts of capital and labor away from a more efficient allocation,lowering TFP.We project that the federal deficit is set to grow from an already high level over the first two years of the second Trump Administration.The set of fiscal policies we project is largely derived from campaign promises.The narrow House majority and other political calculations may limit their scope and delay their timing.In such an event,deficits would likely be slightly narrower,with a bit slower economic growth over the next two years.On the other hand,with no re-election concerns hanging over him,President Trump may choose to pursue a larger set of fiscal issues,such as attempting once more to repeal the ACA,reforming the immigration system,privatizing government-sponsored enterprises such as Fannie Mae and Freddie Mac,or significantly ramping up defense spending relative to GDP.While some of these policies may raise some revenue,the overall outcome is likely to produce considerably wider deficits,raising the probability of an adverse bond market reaction.29 Many of the potential scenarios outlined above would also have implications for equilibrium medium-run real interest rates,and,hence,for the neutral monetary policy rate.As the neutral rate shifts due to policy action,the real-time effective monetary policy stance may evolve even without explicit action from the Fed.In the event that the neutral policy rate shifts substantially,it will take time for the Fed to observe enough data to correct course,raising the possibility of persistent deviations from its dual mandate over the medium term.Finally,foreign policy is likely to stay in the headlines throughout our forecast window.We have projected a significant jump in import tariffs on Chinese goods during 2026,but no broad tariffs on imports from the rest of the world.We think the latter will likely be used as a threat in negotiations with our other key trading partners but will not actually be implemented.However,these assumptions are tentative,and a broad-based tariff on imports is certainly plausible.Such broad tariffs would probably trigger a significant retaliatory response,leading to a reshuffling of trade flows and realignment of exchange rates.The economic ramifications would likely be orders of magnitude larger than those of tariffs targeting only China.Beyond tariffs,a further escalation of current wars and the breakout of new conflicts is certainly possible given the current state and the trajectory of the geopolitical affairs.Overall,we consider the most prominent risks to the 202526 U.S.economic outlook to be fairly balanced,but the range of potential outcomes to be quite wide,primarily because the Federal Reserve may not be able to react quickly enough to shocks that shift the medium-term neutral policy rate.A list of predominantly downside tail risks,which we do not describe here,also appears larger than usual.Appendix 1:Brief Review of the Previous Years Forecast In line with our longstanding tradition,Table 3 shows RSQEs forecast record for real GDP/GNP growth.10 The final row illustrates the evolution of our real GDP growth forecast for calendar year 2024.Our November 2023 forecast had anticipated a pullback in consumer spending in the first half of 2024,leading us to underestimate the strength of the economy this year.10 Our real GNP level forecast record spanning 1953 to 1990 is available on our webpage.30 Table 3 Review of Past Real GNP/GDP Forecasts(Figures represent%change over the preceding year in real GNP from 1971 through 1991 and in real GDP beginning with 1992.)RSQE Forecast Preceding November February/March August/September Observed*1971 3.3 3.8 2.9 3.3 1972 5.7 5.4 6.3 5.3 1973 7.1 7.2 6.2 5.9 1974 2.3 0.5 1.1 0.4 1975 1.1 2.3 3.5 0.4 1976 5.9 6.7 6.2 5.5 1977 4.3 4.9 5.2 4.7 1978 3.6 4.1 3.5 5.5 1979 2.0 2.8 1.5 3.5 1980 0.3 0.3 1.4 0.3 1981 1.4 1.6 1.8 2.4 1982 1.1 0.1 1.3 1.7 1983 3.4 3.2 3.2 4.5 1984 6.5 6.2 7.2 7.1 1985 3.8 4.6 2.5 3.8 1986 2.9 3.3 2.4 3.2 1987 3.3 3.2 2.5 3.4 1988 2.9 2.3 3.8 4.2 1989 2.9 2.5 2.6 3.7 1990 2.7 2.5 1.1 2.0 1991 1.5 0.4 0.1 0.2 1992 2.2 1.6 1.7 3.5 1993 2.7 3.2 2.3 2.8 1994 2.4 3.9 3.5 4.0 1995 2.4 3.3 3.0 2.7 1996 2.6 1.7 2.2 3.8 1997 2.4 3.2 3.3 4.4 1998 2.6 2.9 3.1 4.5 1999 1.5 3.5 3.7 4.8 2000 3.1 4.1 5.1 4.1 2001 3.6 1.6 1.6 1.0 2002 0.4 2.5 2.2 1.7 2003 2.5 2.4 2.4 2.8 2004 5.1 4.7 4.3 3.8 2005 3.5 3.5 3.7 3.5 2006 3.4 3.6 3.3 2.8 2007 2.4 2.4 1.8 2.0 2008 2.4 1.0 1.4 0.1 2009 1.0 3.7 2.5 2.6 2010 2.3 2.9 2.6 2.7 2011 2.1 3.1 1.6 1.6 2012 2.4 2.2 2.2 2.3 2013 2.0 1.9 1.6 2.1 2014 2.7 2.6 2.1 2.5 2015 3.1 2.9 2.6 2.9 2016 2.6 2.3 1.5 1.8 2017 2.3 2.1 2.2 2.5 2018 2.5 2.6 2.9 3.0 2019 2.7 2.4 2.3 2.6 2020 1.7 2.1 4.9 2.2 2021 4.2 4.8 5.8 6.1 2022 4.0 4.1 1.5 2.5 2023 0.5 1.2 2.1 2.9 2024 1.7 2.5 2.6 2.8*Observed refers to the chained real growth rates as currently published.Forecasts published in June 1976 and April 1980.*Estimated by RSQE as of November 2024.31 Despite uneven progress in controlling inflation in the first quarter and rising signs of weaknesses in the labor market,we judged that broader economic momentum had remained solid,prompting us to raise our forecast in February and again slightly in August.Currently,we have cautiously nudged up our growth projection relative to our August estimate,as the labor market has not deteriorated further while the Fed has recalibrated its policy.The 2.8 percent real GDP growth we now expect for 2024 translates into an absolute forecast error of 1.1 percentage points compared to our previous November forecast.
2025-02-14
31页
5星级
罗兰贝格：预见2026：中国行业趋势报告（90页）.pdf
智源研究院：2026十大AI技术趋势报告（34页）.pdf
中国互联网协会：智能体应用发展报告（2025）（124页）.pdf
三个皮匠报告：2025银发经济生态：中国与全球实践白皮书（150页）.pdf
三个皮匠报告：2025中国商业航天市场洞察报告-中国商业航天新格局全景洞察（25页）.pdf
国声智库：全球AI创造力发展报告2025（77页）.pdf
中国电子技术标准化研究院：2025知识图谱与大模型融合实践案例集（354页）.pdf
三个皮匠报告：2025中国情绪消费市场洞察报告（24页）.pdf
中国银行：2026中国高净值人群财富管理白皮书（66页）.pdf
亿欧智库：2025全球人工智能技术应用洞察报告（43页）.pdf
0731-84720580
商务合作：really158d
友链申请 (QQ)：1737380874
最新报告
中英对照
全文搜索
报告精选
PDF上传翻译
多格式文档互转
入驻&报告售卖
会员权益
机构报告
券商研报
财报库
专题合集
英文报告
数据图表
会议报告
其他资源
研报
新质生产力
DeepSeek
低空经济
大模型
AI Agent
AI Infra
具身智能
自动驾驶
宠物
银发经济
人形机器人
企业出海
算力
微短剧
薪酬
白皮书
创新药
行业分析
个股研究
年报财报
IPO招股书
会议纪要
宏观策略
政策法规
其他
人工智能
信息科技
互联网
消费经济
汽车交通
电商零售
传媒娱乐
医疗健康
投资金融
能源环境
地产建筑
传统产业
英文报告
其它
行业聚焦
芯片产业
热点概念
全球咨询智库
人工智能
500强
新质生产力
会议峰会
新能源汽车
企业年报
互联网
公司研究
行业综观
消费教育
科技通信
医药健康
人力资源
投资金融
汽车产业
物流地产
电子商务
传统产业
传媒营销
其它
十五五规划系列报告合集（共48套打包）
2026低空经济/低空产业报告合集（共47套打包）
AI、科技与通信
广告、传媒与营销
消费、零售与支付
HR、文化与旅游
金融、保险与投资
能源、环境与工业
医疗制药与大健康
物流、地产与建筑
其他行业
AI ▪ 科技 ▪ 通信
数字化
金融财经
智能制造
电商传媒
地产建筑
医疗医学
能源化工
其他行业
收藏
下载
2026-02-02
AI查数
行业数据
政策法规
商业模式
产业链
竞争格局
市场规模
产业概述
其它
2026年
AI读财报
年报
一季报
半年报
三季报
IPO招股书
社会责任报告
A股
IPO申报
港股
美股&全球
新三板
微信扫码登录
手机快捷登录
账号登录
