As we look ahead to 2025, several macroeconomic factors will shape global economic performance. Key considerations include the implications of rising tariffs, anticipated changes in interest rates, and projections for GDP growth.
1. U.S. Outlook for 2025
Tariffs
The U.S. is expected to increase tariffs in 2025. This move will likely raise inflation, as higher import costs are passed on to consumers. Inflationary pressure will dampen economic activity, resulting in a downward revision of U.S. GDP growth forecasts. It is anticipated that real GDP growth in the U.S. will slow to 1.5%, a significant reduction from the previous forecast of 2.2%. Higher costs due to tariffs will particularly affect consumer spending and broader economic activity.
These tariff increases will impact the U.S. and have global repercussions. Countries with strong export ties to the U.S. (such as China) are likely to feel the strain. Global GDP growth for 2025 is forecasted to be 2.5%, down from 3.0% in 2024.
Interest Rates
In response to the inflationary pressures from higher tariffs, the U.S. Federal Reserve is expected to cut interest rates, though not as aggressively as initially anticipated. Despite the Fed’s rate cuts, other central banks globally – particularly in Europe and Canada – are expected to ease monetary policies more drastically due to the broader economic impact of U.S. tariff decisions.
GDP Growth
While the immediate effects of tariffs will weigh heavily on the U.S. economy in 2025, the outlook for the following year looks more promising. U.S. GDP growth is expected to rebound in 2026, with a projected rate of 2.9% – driven by anticipated tax relief and a potential reduction in tariff burdens.
2. European Outlook for 2025
Price Target and Returns
The revised price target for MSCI Europe by the end of 2025 has been lowered to 2,150, down from an earlier target of 2,500. Despite this revision, a 7% upside from current levels is still expected, with a total return of around 12%, factoring in a 3.5% dividend yield and a 1.5% share buyback yield.
Earnings Growth
Earnings growth for European equities is projected at 4.8% for 2025, which is below the consensus expectations of an 8.3% gain. This subdued growth reflects the global economic slowdown, partly driven by weaker growth in China, as well as potential risks from U.S. trade policies. Sectors heavily exposed to Chinese demand (such as luxury goods, autos, and metals) are likely to face earnings downgrades.
Valuation and Market Re-rating
The price-to-earnings (PE) ratio for MSCI Europe is expected to see a modest increase to 14.1x from the current 13.5x. While this is an improvement, it remains below historical re-ratings seen in periods of U.S. economic soft landings. However, increased mergers and acquisitions (M&G) activity and fiscal flexibility from recent German elections provide some optimism for a gradual recovery in European equities.
3. China Outlook for 2025
Economic Pressures
China’s economic outlook remains under pressure in 2025. We expect persistent downward pressure on corporate earnings due to delayed or insufficient policy actions and the ongoing effects of global tariff and supply chain reorientations. Furthermore, the potential depreciation of the Chinese yuan (USDCNY) to counteract the impacts of U.S. tariffs could diminish the attractiveness of Chinese assets to international investors.
Equity and Currency Risks
MSCI China is already trading at a forward P/E ratio of 9.6x, which suggests limited upside potential unless significant positive catalysts emerge. Additionally, the geopolitical tensions, especially with the U.S. government’s more hawkish stance, could heighten risks for Chinese equities. The depreciation of the yuan, along with rising tariffs, is expected to further dampen investor sentiment and impact performance in Chinese markets.
4. South African Outlook for 2025
Valuation Advantage
South Africa presents a more attractive starting point in 2025. This suggests that South African equities may offer compelling value, especially if the country’s economic recovery continues to shape up.
Economic Growth Potential
South Africa is in the midst of a recovery from an economic slump, and there is room for growth as the country emerges from its low-growth phase. Positive domestic economic data, such as stronger-than-expected car sales, retail sales, and air passenger arrivals, point to improving consumer demand and broader economic activity.
Monetary and Policy Support
The South African Reserve Bank (SARB) is expected to implement rate cuts in early 2025, potentially boosting economic activity and investor sentiment. Additionally, reforms in state-owned enterprises (SOEs), particularly in the rail sector, and fiscal policy adjustments offer hope for a more stable macroeconomic environment. The growing tourism sector, spurred by reforms to visa processing for visitors from key markets like India and China, could also contribute to economic growth.
Challenges and Risks
Despite positive trends, risks persist, especially from external factors like U.S. tariffs and a weaker Chinese economy. The South African Rand (ZAR) could face depreciation due to these global factors, potentially weighing on investor sentiment. Domestic political challenges, particularly regarding the implementation of key reforms, could also limit progress.
In Conclusion
The economic outlook for 2025 presents a mixed bag of opportunities and challenges across different regions. While the U.S. faces the drag of higher tariffs and slower growth, Europe holds moderate optimism due to valuation advantages and potential reform momentum. China is under pressure from global trade tensions, and South Africa, while still vulnerable to external risks, is positioned for potential growth as it recovers from its economic slump. Central banks globally are likely to ease monetary policies, though the extent and timing will vary. Overall, 2025 will be a year of adjustment as global economies navigate the impacts of trade policy changes, inflationary pressures, and shifting growth dynamics.
