A Year of Uncertainty: 5 Macro Themes for 2025

It’s Macro Themes that will matter in 2025, as tariffs, policy responses, changes in growth paths will keep anxiety high and markets pivoting between dueling narratives. The year will be about stop‑start across rates, inflation, the USD, and regional performance (rather than straight‑lined), and hence linking big‑picture Macro Themes to actionable portfolio implications is key.

In our opinion, the macro environment in 2025 will be dominated by uncertainty – concentrated on the extent and effect of US tariffs and how Europe and China respond to them. We don’t anticipate the macroeconomic route to be linear and markets will likely continue to swing between alternative macro narratives since the range of possible outcomes remains quite broad and depends on the pace, magnitude, breadth and possibility of tariffs. To yet, all of these remain unknown, but within this environment, there are several important trends and threats at play that we have better knowledge about.

1. The soft‑landing scenario loses momentum

We are certain that 2025 will be the year the market abandons the “soft-landing” scenario it was hoping for. While tariffs are capturing the market’s attention due to the possibility for a stagflationary shock, it is crucial to emphasise how remarkable the larger economic backdrop is currently. We are approaching 2025 with practically every nation implementing policy stimulus at a time when inflation is over goal and there is little slack in the global economy.

In other words, this looser policy mix is not intended to confront weakness; rather, it is being implemented prior to the imposition of tariffs. We have seldom seen such pro-cyclical policy at this point of the cycle: lower interest rates, easing credit conditions, a strengthening money multiplier, and looser fiscal policy, all while the global unemployment rate remains around its lowest level in at least 35 years.

2. Interest rates, fiscal policy, and inflation could all surprise on the upside.

At this point, we notice three critical lessons that are still frequently overlooked.Despite central banks’ insistence, interest rates are not exceptionally restrictive, and policy rates have been substantially higher than the norm over the last 20 years.

What makes this cycle unique is that the private sector has delevered into a recovery with dropping unemployment rates. This implies that families and corporations are less responsive to rate increases. That is why global growth has only dropped slightly below the average pace over the last two decades. The result is that the neutral interest rate in big industrialised countries may be higher than often assumed.

• We’ve seen greater fiscal stimulus after each election and subsequent government budget. Governments believe, as does the market, that central banks have their back. As a result, fiscal deficits deepen during downturns to compensate for the slack, but growing nominal growth is not utilised to close those deficits during good times. Because policymakers are hesitant to tolerate growing unemployment, we think bond rates should be far higher than they are now.

• China has once again given developed markets a free pass, lowering commodity prices and goods inflation, as it did between 1995 and 2007, but this is unlikely to last. A weak China has obscured strong core inflation in most developed nations, allowing central banks to slash interest rates while remaining tight labour markets. However, this might change when China reacts to internal economic weakness and the US declares that it will not allow China exporting its disinflation, with other nations potentially following suit. As a result, goods inflation has most certainly struck a floor.

3. Higher nominal growth tends to be supportive for risk assets.

With lax policy, tight labour markets, and rising neutral rates, the consequences are clear, even before tariffs are considered. Real growth, nominal growth, and inflation are expected to be greater in 2025 than in 2024 in both established and developing countries. Central banks should decrease interest rates less than the market expects, but this repricing will likely result in higher nominal growth. Normally, a stronger nominal growth projection is a favourable indication for risk assets, which should continue to climb. Regionally, risk assets in the eurozone and China are the most undervalued given this view and should gain the most.

4. Risk premia make a return

The continuation of government deficits and central banks’ resolve to avoid a downturn pose threats to the “normal” connection of greater nominal GDP translating into higher asset values. Risk assets are expected to appreciate in this scenario until the market realises that policymakers want to drive GDP while accepting the inflationary repercussions — and then demands that greater risk premia be priced into assets. The greatest danger to stocks is that these dynamics cause bond rates to increase due to risk premia rather than growth. If the fear of greater tariffs and protectionism materialises, the chance that the market may undertake the tightening that central banks do not want or can not provide increases. A worse global growth/inflation trade-off would make government deficits seem less sustainable and central bank policy accommodation more “irresponsible”.

The result of the US election has muddled the situation even more, as it has the ability to accelerate the market’s engagement with these findings while also possibly narrowing their advantages. Obviously, much will depend on critical questions about the shape of the new administration and the pace of policy decisions, but the bottom line is that the US will most likely add more demand — through fiscal policy — to the notable negative supply shocks of tariffs and emigration, increasing existing workers’ bargaining power. It aligns with our medium-term structural theme of more turbulent cycles, inflation-driven nominal growth, and fundamentally higher long-term rates. It also threatens to exacerbate regional macroeconomic imbalances. The market understands that exporters, particularly those from Europe and China, would suffer relative losses. However, nations and policies are seldom static, resulting in further unpredictability.

5. Increasing dispersion in performance by country and region.

Another significant topic for 2025 and beyond is growing country distinctiveness, with less market correlation and more policy divergence. As globalisation takes on a new, more limited shape, the importance of knowing local markets grows, as does the opportunity set available to active investors.

China is a wild card. The US adopting hefty tariffs will undoubtedly have a big impact on economy, but how China reacts is as critical. Does it decide to sell its surplus capacity to other economies instead? In this scenario, greater inflation in the US would result in lower inflation abroad. Does China react with a strong fiscal, monetary, and currency response to mitigate the negative risk? Probably. If not, there is a serious danger of triggering a financial disaster.

The euro region is especially susceptible. Germany, the eurozone’s biggest investor, has a shattered economic model since it can no longer export commodities made with cheap, imported energy. The imposition of tariffs by the United States further undermines Germany’s economic model, and the European Central Bank’s expected reaction (more and quicker cuts than the US Federal Reserve) is not a viable long-term answer. The German elections in February will be significant. The last time Germany was a drag on European economy, a centre-left government oversaw a reform program. This time, a centre-right administration will most likely lead the budgetary reaction. Once again, a negative structural shock is likely to elicit a budgetary reaction aimed at stimulating demand. Inflation may once again prove sticky.

The United Kingdom is the poster child for many of our macro themes, since it looks to be moving closer to tolerating greater inflation. The new administration has already eased budgetary policies. Despite the incoming administration’s excellent intentions to boost long-term growth, looser fiscal policy will initially increase demand as the central bank lowers interest rates and credit conditions loosen. Nominal growth might increase more, and markets have already lowered the number of predicted rate cuts by the Bank of England, particularly in comparison to other nations. While it remains a remote possibility, the United Kingdom may begin raising interest rates later next year.

Japanese reflation is still intact, but its bond market is the highest priced for a global slump, since the market expects interest rates in Japan to stay considerably below neutral indefinitely. The Bank of Japan may raise interest rates more than the market anticipates in 2025, but we expect policy to remain growth-friendly. Japan demonstrates how demographics may shift from savings-induced deflation to wage-driven inflation. The most fascinating subject in Japan will be politics. The latest election shown that the average voter is more worried about inflation. Nonetheless, the political reaction seems deaf, with the new government most likely loosening fiscal policy to compensate families for inflation rather than implementing programs to help remove it.