Macroeconomic Outlook 2025 A Soft Landing Beckons

Easing inflationary pressures and continuing policy rate cuts by most of the world’s major central banks set the scene for a soft landing scenario in 2025. But the outlook also carries uncertainty on the fiscal and political fronts, warranting caution.

From the outset of 2024, the economic environment proved more resilient than we had anticipated, with robust growth and inflation moderating at a slower-than-anticipated pace. However, price pressures eventually relented to open the door for major central banks to embark on policy rate cuts. Against this backdrop, equity markets have delivered strong returns for the year to date, with leading indexes hitting multiple record highs along the way. The robust data and delayed start to rate cuts kept fixed income markets in flux, although returns for the period have so far been positive, if relatively modest.

We expect the narrative of rate cuts and resilience to hold in 2025, and for our projected soft landing to materialize. This landscape extends our favorable outlook for equity markets, with US large caps remaining in pole position, although performance should broaden into small caps and emerging markets. Within fixed income, we expect government bonds across most advanced economies to provide attractive returns, but credit seems fully priced at current spreads, albeit with solid fundamentals.

Emerging market debt offers value but investors need to be comfortable with a more volatile policy and currency backdrop. This uncertainty will likely be a constant in 2025, as a new Trump administration takes shape and conflicts in Europe and the Middle East continue. This persistent volatility, coupled with higher equity-bond correlations, means that investors need to broaden out beyond the traditional “60/40” portfolio and focus on risk/return, to deploy a range of approaches, strategies, and alternative asset classes to ensure their portfolios can achieve specific investment objectives.

We explore these themes and more in our latest Global Market Outlook.

2025 Global Economic Outlook

Despite the many twists and turns in the macroeconomic mood over the past year, the underlying global story has remained largely the same. We have traveled further along the road of slowdown and disinflation that was always going to lead us to the interest rate cuts we see being implemented around the globe — Japan being a notable exception. We expect that this will continue for a while longer, although the Trump-led Republican victory in the US elections could result in some change to the narrative in the latter part of 2025 — more clarity on policy outcomes will be required before implementing forecast changes. But it is now not only possible, but even likely, that not all four of the quarterly US rate cuts we anticipate in 2025 will materialize.

Short-Term Outlook: A Lift From Lower Rates

A soft landing has been our long-standing forecast for the United States economy, but that view has at times come under considerable threat. And while plenty of risks to the outlook remain, three recent developments have combined to make us feel better about the economy’s near-term prospects. First and foremost, the US Federal Reserve (Fed) has finally embarked on an easing cycle. Because we viewed the Fed staying “too high for too long” as the number one risk to the soft landing scenario, this is a significant and very positive development. Secondly, the Bureau of Economic Analysis (BEA) announced a big upward revision to US national domestic income such that the savings rate, previously estimated at about 3%, is now close to 5%. This in turn dampens the worries arising from the depletion of excess savings and rise in consumer debt delinquencies that had weighed on the soft landing narrative. These two factors essentially extend the economy’s runway. Thirdly, China has announced considerable monetary stimulus and could add more fiscal supports as well. We do not see these measures as true game changers and question the value of defending a certain growth target, but they reduce downside risks in the world’s second-largest economy and help ease near-term risks more broadly.

So, the economic road ahead looks a little smoother in the near term. The US election outcome may add a further boost to 2025 growth on business expectations of a lighter regulatory burden, but positives could be entirely mitigated should aggressive tariffs or deportation action stoke inflation pressures and keep the Fed on the sidelines. As investors shift from campaign rhetoric to analyzing policy announcements, recurrent volatility episodes should not be surprising. Whether it’s the debt ceiling that comes back into play in January, the 2016 tax cuts that expire at the end of 2025, tariff or immigration policy changes, the triggers for market volatility will remain numerous even after the new president is inaugurated.

In relative terms, the US outperformance of its developed market peers seems poised to continue; the Republicans’ victory in November’s US elections could sustain that for longer. The competitive loss that the euro area suffered following Russia’s invasion of Ukraine continues to weigh on the region’s economy. Despite solid household finances and employment prospects, European consumers appear unwilling to run down their excess savings to boost spending. A meaningful eurozone growth acceleration remains, for now, an unrealized potential.

For Japan, periods of enthusiasm for a clean break from the deflationary forces of the past have given way to more cautious assessments of potential growth prospects in a country where the demographic backdrop worsens year after year. Tight parliamentary arithmetic following October’s elections and ensuing political uncertainty ahead of Upper House elections in 2025 further complicates the outlook. In many ways, the sustainability of Japan’s inflation and growth momentum remain an open question. Yet, international and domestic investors have demonstrated greater confidence in Japan’s economy and markets in recent years, in part attracted by corporate reform efforts.

Medium-Term Outlook: The Drag From Debt

The Covid pandemic unleashed a global tidal wave of fiscal expansion that helped blunt the extent of, and shorten the duration of, the ensuing recession. That fiscal boost was welcome, but it cannot be sustained. Unsurprisingly, the fiscal trajectory has taken a more central role in elections around the globe, including in France, the United Kingdom, Japan, and the United States.

The accompanying sharp increases in global debt service costs are likely to continue as the initial Covid stimulus occurred during extremely low (and even negative) interest rates. Refinancing costs will thus increase even if policy interest rates come down from current levels. This is a particularly relevant dynamic in the United States, where the potential effects of President-elect Trump’s expansionary fiscal plans are as yet unclear but could raise term premia.

Markets can also reflect their assessment of countries’ fiscal and debt sustainability pathways via exchange rates (recall the pound’s plunge during the UK budget drama in October 2022). Yet, in a world where “everyone is doing it,” investors’ ability to differentiate is somewhat diminished. Depending on the fiscal pathway taken in the future, the implications for investors could be starkly different. To further explore different scenarios around rising public debt levels, our recent articles expand on fiscal sustainability themes.