The big-picture things to watch in 2025

Every year around this time, abrdn's Global Macro Research team shares its thoughts on the most pressing issues investors should keep an eye on in the coming year. They are the things that are most likely to shake up the world’s investments. And for 2025, that means taking a look at the world – one economy and one risk at a time.

The United States

Beginning later this month, the Republican party will control both the White House and Congress, which could lead to significant policy changes. The country is already expected to see continued solid growth in the early part of this year, and as the party adopts new policies, there could be a modest acceleration in US economic activity.

Changes to government spending – including the extension of tax cuts and some possible new business tax giveaways – would likely boost economic growth. However, disruptive trade policies and restrictive immigration could combine to slow it down again. Overall, abrdn’s economists are raising their US growth expectations, at least for a while.

They expect inflation to become stuck around 2.5%, with new government spending and tariff hikes. And that means the Federal Reserve will probably pause its interest rate cuts when the key rate falls to the 3.5%-3.75% range. (It stands at 4.25%-4.5% now.)

The US still faces a ton of uncertainty, with aggressive tariff changes or spending moves potentially affecting growth and inflation, the economists warn. And that’s likely to tie the policymakers’ hands in their attempt to lower interest rates further.

Regional conflict

It’s unclear what impact the new US administration will have on the ongoing war in Ukraine or Middle East stability.

The president-elect has said he will secure a ceasefire in Ukraine within 24 hours of his January 20th inauguration – but the situation is complex and a quick agreement isn’t exactly likely. The main questions are whether Russia and Ukraine will compromise for peace and if any agreement will last. It seems like an unstable ceasefire is perhaps the most likely outcome.

In the Middle East, you could expect a renewed focus on Iran, with potential sanctions and military action. While pressure might push Iran toward a deal, there are doubts about how viable that might be. The durability of any ceasefire agreements between Israel, Lebanon, and Hamas is also a concern.

International trade

The US president-elect has threatened 60% tariffs on Chinese imports, but it's more likely the average two-country tariff rate will rise from 16% to around 35%-40%, based on the existing legislation designed to counter “unfair trade practices”.

China’s currency, the yuan, has already weakened by more than 2% since November’s US election. A further decline of 10%-15% is possible in a bid to make Chinese exports cheaper.

That said, so-called non-tariff action by the US, such as focusing on rules of origin, could have a more damaging effect on China's economy and spill over into APAC's supply chains. This could lead to further Chinese retaliation – recent measures have included export restrictions on critical minerals. China might also target US businesses.

While abrdn’s economists are expecting increased policy stimulus from China, that may not fully offset the economic shock of tariffs or provide much growth impetus to the global economy.

Emerging markets (excluding China)

New US policies will probably lead to market volatility in the short term, affecting emerging market (EM) central banks and possibly stalling efforts to lower interest rates – in Indonesia, for example.

In the meantime, the impact of tariffs, US curbs on immigration, sanctions, and military ties will become clearer – revealing a few EM winners and losers.

Naturally, trade will be a key focus, with some EMs, like Vietnam and Malaysia, potentially struggling because of their close ties to China's supply chain. Others, like India, could benefit.

And though you might expect certain EM central banks to continue to trim interest rates, there are likely to be divergences. Countries with hotter inflation, like Brazil, will find it harder to cut.

Ultimately, as the US reduces its reliance on China, other EMs might benefit over time, with some winners from the president-elect’s previous term continuing to succeed.

Mexico

Mexico is exposed to shifts in US trade and immigration policies, especially with new leaders on both sides of the border.

It has benefited from the US’s recent decoupling strategy from China to become America's biggest source of imports. However, this also means Mexico stands to lose heavily if the US imposes stricter trade restrictions.

The incoming president's tough talk on tariffs and deportations will create waves in financial markets, impacting investment. Despite this uncertainty, Mexico is likely to avoid major trade curbs – with so much of the focus centered on China.

Mexico’s integration into US value chains offers potential gains from nearshoring efforts. That said, the country’s new president may not achieve the rapport the US’s returning president had with her predecessor. Her reform agenda has also worried foreign investors.

Eurozone

The Eurozone faces major political risks next year – primarily in Germany and France.

In Germany, early elections sparked by the breakup of the governing coalition raise uncertainties about the future of the “debt brake” – a fiscal rule limiting deficit spending. Although reforms are expected, details are unclear, and they will likely result in only modest expansion in government spending. Domestic and European Union (EU) constraints would stand in the way of anything more aggressive.

France's fiscal issues are more severe, with the collapse of the prime minister’s government complicating efforts to consolidate the country’s fiscal position. Additionally, there are risks to EU-US trade. Threats of US tariffs may just be a bargaining tool, but a serious risk of recession looms if negotiations falter.

So, we are expecting the European Central Bank to trim interest rates further in response to these challenges.

Japan

Growth in Japan has been resilient, driven by strengthening consumer spending and rising real incomes, supported by fiscal measures.

However, external demand may face challenges next year because of trade tensions – and that’s despite the fact that Japan has previously negotiated tariff exemptions. Political stability will also be crucial, with an upcoming upper house election to watch.

The country’s overall inflation has been slowing, but core services inflation has been holding its pace, and the wage growth outlook is promising with trade unions anticipating a 5% increase.

And weakness in Japan’s currency, the yen, has been pushing up goods prices, giving the Bank of Japan room to maneuver on interest rates. The market broadly expects the central bank to announce a rate hike this month.

Meanwhile, Japanese stocks are supported by a strong structural outlook – benefiting from the country’s role in the global value chain, particularly in robotics and semiconductors.

United Kingdom

The government’s latest budget significantly increased taxation and borrowing to fund spending and investment, leading to higher bond yields and some political fallout. Despite committing to avoid further tax increases or borrowing, the credibility of this commitment is in question.

Her new fiscal rules leave little room for error, as higher borrowing costs or weaker economic growth could render current fiscal plans incompatible with these rules. By the next budget in late 2025, additional measures may be necessary to maintain fiscal stability.

Furthermore, current spending plans may prove unsustainable, leading to potential tax increases. Although fiscal rules might be rewritten, doing so could test the confidence of financial markets.

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