Economic exchanges essential for profit?

Deutsche Bank's latest research provides an insightful outlook on the global economic landscape for 2025.

The report highlights potential risks of renewed US-China trade tensions under the second Trump administration, which could pose a significant challenge for China's economy. Structurally, there is a growing challenge for the Euro Area as well, as more frictional geopolitics is exposing the vulnerability of the EU's trade-based economic model.

In Germany, the economy is expected to finish 2024 with a slight contraction for the second year in a row. A meaningful recovery is not expected until 2026, requiring more expansionary fiscal policy and effective supply side reforms under the next government.

On a brighter note, India's growth is projected to be at 6.5% in 2025 and 2026, necessitating some monetary policy support. The US Deutsche Bank Research economics team expects faster growth in 2025 under the new administration, with the rate now estimated at 2.5% for 2025 (Q4/Q4).

The UK's Autumn Budget in October 2024 includes historic spending increases and investment, but higher taxation is predicted to hit private demand. Inflation in the UK is projected to rise to 2.9% in 2025, due to administrative tax changes, the national living wage hike, and higher employer national insurance contributions.

The US Federal Reserve made its first interest cut since 2020 in the third quarter of 2024, three months after the ECB had done so. The Bank of Japan is anticipated to raise its policy rate to at least 1% in fiscal year 2025, given a domestically driven recovery and wage growth exceeding inflation.

The European Research team at Deutsche Bank notes that the policy stance of the incoming US Administration is likely to reinforce the gap in the relative performance of European economies in 2025. Core PCE (Personal Consumption Expenditures) is expected to remain at or above 2.5% over the next two years in the US, leading the Fed to undertake an extended pause.

Inflation has been declining more rapidly in recent months in the Euro Area, and the ECB is at least on course to removing policy restriction by mid-2025. After 2025, the adverse effects from the trade war and the anticipation of a more restrictive monetary policy setting have trimmed the growth estimates for the US.

China's growth has improved following the implementation of expansionary macroeconomic policies. However, the property market downturn in China is in its fifth year, with sales rebounding sharply in the past two months, but the large inventory of unsold housing continues to depress prices.

Interestingly, China surpassed the US as India's largest trading partner in 2024, with China and the US being India's two largest trading partners. Increased tariffs on India's exports under the second Trump administration could slow down the exports momentum and prove to be a drag on growth.

The Reserve Bank of India is forecasted to make one 25 basis points repo rate cut in February 2025, followed by another in April 2025.

Jim Reid, the Global Head of Macro Research at Deutsche Bank as of November 2024, emphasises the need for effective policy measures and reforms to navigate these economic challenges. The outlook for 2025 presents a complex picture, with opportunities and challenges alike for various global economies.