A building global recovery

With the world’s two major economies both gaining traction, global monetary conditions loosening and energy prices remaining weak, a broader and increasingly synchronised global recovery can be anticipated – absent unanticipated shocks.

We expect a continuation of the key trends of last year, when equity markets climbed the proverbial ‘wall of worry’ emanating from concerns about the impact on growth of high interest rates. The US economy, boosted by extremely loose fiscal policy, defied bearish expectations and posted strong growth in real terms. In China, on the other hand, growth disappointed. Although the final figure is likely to meet the official target of 5%, confidence among consumers and entrepreneurs remained stubbornly negative, the result of a continuing property bust. For a second year, Chinese growth was heavily dependent on government-directed capital investment and booming exports. Internationally, despite pervasive ‘higher for longer’ concerns in the first half of the year, inflation finally receded, giving central banks room to reduce official interest rates.

In 2025, the US is likely to again deliver above-trend growth. Although government debt is uncomfortably high at c.126% of GDP and fiscal spending ultimately unsustainable at 6.4% of GDP, consumer and corporate balance sheets are in good shape. Consumer spending has not been ‘juiced’ with debt and low interest rates, which has often been the case in the past; it has relied on income growth and is thus more sustainable. This, and a better export performance, have compensated for a weaker manufacturing sector. Companies have responded to labour shortages by raising capital investment and productivity has rebounded strongly from the low levels in the period following the Global Financial Crisis (GFC). Again, supply-driven growth tends to be qualitatively better and more sustainable. Although higher inflation can be expected over the medium to long term, it should continue receding this year. It is too early to say what impact, positive or negative, the new Trump administration’s policies will have. But we do know that it will be a government of businesspeople, rather than career politicians, who are likely to be pro-business and pro-growth.

In China, the policy actions announced last September reflect how seriously President Xi is taking bolstering growth. Anecdotal evidence suggests that consumer and business sentiment is finally turning a corner. Meanwhile, China’s ‘new economy’ sectors, such as electric vehicles and renewable energy infrastructure, have continued to expand rapidly, demonstrating that the country is succeeding in rising up the value chain. But this has been obscured by a property sector bust and associated deleveraging in what was hitherto one of China’s largest contributors to growth. Particularly impressive has been China’s emergence as an automation superpower. We anticipate a steady improvement in China’s economy in 2025 as local authority financing is unblocked and sentiment improves further.