Economic Outlook

Economy

Over the past year, the global economy has been gradually slowing, yet remains resilient because of a robust labour market. This trend of gradually slowing global growth is likely to continue although the downside risk will increase if global trade tensions escalate significantly. Heading into 2025, there has been a divergence within developed market economies where the manufacturing sector has been sluggish but overall growth has been supported by strong services activity.

The global economic outlook for 2025 is heavily dependent on the policies implemented by United States (US) President-elect Donald Trump. With the Republican party securing a clean sweep of control of the US Senate and House of Representatives, President-elect Trump may be emboldened in pushing through his policy priorities. Nonetheless, it is important to understand that President-elect Trump’s implemented policies may differ from his campaign policy pledges.

Based on what we currently know about Trump’s policy priorities, an economic growth divergence may emerge this year where the US economy outperforms global peers over the coming quarters (Figure 1). The laggards will be countries most affected by trade tariffs.

* Data is forecasted by UOB.
Source: UOB Global Economics & Market Research, Bloomberg (30 November 2024)

Pro-growth policies like tax cuts and deregulation are expected to further support the US economy which has been underpinned by resilient consumer spending. That said, consumption may slow slightly over the coming year.

In the near-term, global exports will likely be supported as companies rush to front-load shipments ahead of potentially new trade tariffs imposed by the US. As the year progresses, the trade outlook will become less certain, and tariffs may end up casting headwinds for export-reliant economies.

The biggest risk for the global economy is tit-for-tat trade restrictions. While we believe President-elect Trump will use the tariff threat as an opening negotiation ploy to yield concessions from trade partners, his first term highlights that investors should be mindful of a deterioration in global trade relations. Other risks to consider are ongoing geopolitical conflicts, political gridlock in some countries, China’s growth slowdown, and extreme weather patterns.

Inflationary pressures have eased over the past two and a half years, reducing input costs for businesses and easing the cost-of-living squeeze on households. This has allowed many global central banks to turn their focus towards economic growth risks by cutting interest rates. Looking ahead, the risk is that tariffs imposed by the US may cause inflation to re-accelerate, so rate cuts may be cautious and more gradual over this year.

The Chinese economy will continue to face challenges ahead. Over the past year, it has been propped up by export demand stoking a manufacturing recovery, offsetting headwinds caused by a weak property market and sluggish domestic consumption. As trade tensions with the US looks likely to increase in the coming year, it is increasingly important that domestic consumption stabilises and supports economic growth. This will require significant fiscal and monetary stimulus from the government.

The outlook for other Asian economies will depend on China’s growth path and the scale of US tariffs. ASEAN economies may see heightened scrutiny due to its rising trade surplus with the US, but a continued increase in foreign capital investments, a large and young population base, and stable political environment are positive factors.

Inflation

Since the middle of 2022, inflation has been slowing, and in most countries, it has converged towards the 2% level targeted by most central banks.

While this was expected to continue for the coming year, the inflation slowdown may falter if services prices stay elevated. Unusual weather patterns also have a negative impact on global agricultural commodity supply, potentially leading to higher prices.

We now also need to factor in the inflationary impact of certain policy priorities of US President-elect Trump.

For the US, an extension of individual tax cuts will support consumption demand, preventing a drastic slowdown in inflation. New import tariffs imposed by the Trump administration will potentially mean higher end-prices paid by American consumers, causing inflation to re-accelerate in the US. Trump’s immigration policy proposal of large-scale deportation could lower the workforce number, leading to higher wages, and consequently higher inflation.

As for the rest of the world, an escalation of trade tensions will affect global supply chains, potentially resulting in higher prices.

While we await President-elect Trump’s policy implementation, the outlook calls for stable inflation (Figure 2) but we acknowledge there are greater upside risks for inflation in the year ahead.

* F and dotted lines represent yearly average consumer preice index (CPI) forecasted by UOB.
Source: Bloomberg (30 November 2024)

Central Bank Policies

Over the past year, the slowdown in inflation has allowed many central banks to shift their focus towards supporting economic growth. This is evident in the increasing number of central banks that have cut interest rates recently.

Encouragingly, these rate cuts are not because of recession concerns but represent a fine-tuning of monetary policy to reflect the current inflation and growth outlook.

For 2025, the path of global monetary policy will be heavily dictated by both the economic and inflationary impact of US President-elect Trump’s policies.

The outlook is for cautious rate cuts ahead, and the magnitude and pace of rate cuts will vary across global central banks because different economies will be affected differently by US policies (Figure 3).

Source: Bloomberg, UOB Global Economics & Market Research (13 January 2025)

We expect the US Federal Reserve (Fed) to deliver only one 25 basis points (bps) rate cut in the second quarter of this year because the US labour market has proven to be more resilient than expected while US President-elect Trump’s tariff policy could cause inflation to re-accelerate. Thereafter, we expect the Fed to keep interest rates on hold for the rest of 2025.

Given economic weakness and a quicker slowdown in inflation, we expect the European Central Bank (ECB) to bring forward 100 bps of rate cuts to the first half of this year, via 25 bps reductions in January, March, April and June. This will lower the deposit rate to a neutral level of 2% by the end of the second quarter of 2025. If rising trade tensions dampen Eurozone exports and economic growth by more than currently expected, the ECB may have to react with even more rate cuts.

China has announced it intends to pursue a “moderately loose” monetary policy strategy to support an economy facing both domestic and foreign headwinds, suggesting more rate cuts ahead. That said, China faces limits on how much it can cut interest rates as potential capital outflows could drive depreciation pressure on the Chinese Yuan (CNY). Instead of aggressive rate cuts, we think China’s central bank (PBoC) will focus on reducing banks’ reserve requirement ratio (RRR) by another 50-100 bps this year. We also expect a 30 bps cut in total to the benchmark 7-day reverse repo rate and also the 1-year and 5-year loan prime rates (LPR).

Despite muted inflation across the region, other Asian central banks are likely to stay cautious. While potential growth headwinds caused by US tariffs may warrant rate cuts, Asian central banks could refrain from aggressive moves given concerns over currency weakness and capital outflows.

Japan is likely to remain the outlier as the only major central bank raising interest rates, although we expect only one more rate hike early this year before interest rates are held steady.

We acknowledge risks to our interest rate outlook. If trade tensions result in tit-for-tat retaliatory tariffs and countries prioritise a policy of onshoring supply chains, a re-acceleration of inflation in some countries and weaker economic growth in other countries could result in a desynchronised path for global interest rates.

Asset Class Views

Stocks

The outlook for global stocks remains positive as the global economy continues to expand while corporate earnings remains resilient.

Nonetheless, periods of market volatility may be seen owing to uncertainties over United States (US) policies and the interest rate outlook. Stock market returns may vary for different countries, which will offer different opportunities for investors. The focus should be on economies and sectors with less export dependence on the US.

Looking broadly at global stocks, we favour investments in quality dividend stocks as dividend payouts will remain attractive due to strong balance sheets and cash flows. We also have a positive outlook for developed market financials and the technology sector.

A discerning approach is however required as certain markets and sectors will be impacted differently depending on the scale of policies implemented by US President-elect Trump. Drawing reference from Trump’s first term between 2017-2020, the expectation of tax cuts triggered a sharp rally in US stocks across 2017 while the imposition of trade tariffs saw Chinese stocks underperform during 2018 (Figure 5).

S&P 500 index used as benchmark for US stocks. STOXX 600 index used as benchmark for European stocks. MSCI Asia ex-Japan index used as benchmark for Asia ex-Japan stocks. CSI300 index used as benchmark for China stocks.
Source: Bloomberg (30 November 2024)

One thing to be mindful of is that US President-elect Trump may implement both tax cuts and tariff policies concurrently this time, so the stock market’s trend may not be as distinct as seen in 2017-2018. Instead, concurrent policy shifts may result in phases of market volatility this year.

We hold a neutral outlook for US stocks as valuations are arguably stretched. Nonetheless, Trump’s pro-growth policies like tax cuts and deregulation will support US corporate earnings, while the US economy is set to outperform global peers. That said, US stock market returns are unlikely to be as strong as that seen in 2023 and 2024. In recent years, US mega-cap technology stocks have contributed disproportionately to broad index returns. In 2025, other US stocks outside of these mega-caps will likely catch up due to less expensive valuations and more domestic exposure, offering potential for better returns.

Trump’s policy priorities will likely benefit US financials and the tech sector. For the US tech sector specifically, Trump's policies could encourage fresh research and development (R&D). Artificial intelligence (AI) innovation continues to power the technology sector, but sector leadership will eventually broaden out from mega-cap companies to other software companies.

Beyond this, quality US companies in economically sensitive sectors will benefit from the US’ economic resilience. US small-cap stocks will also face less headwinds due to domestic-focused businesses.

The outlook for European stock markets is uncertain despite likely rate cuts by the European Central Bank (ECB). This is due to the Eurozone’s weak economic momentum while potential trade tensions with the US and China may darken the export outlook. To unlock Europe’s growth potential, policy shifts or structural reforms are required but this may not be forthcoming due to political turmoil in Germany and France. As such, though European stock valuations are significantly lower than US peers, we retain a neutral outlook for European stocks. given potentially weaker corporate earnings growth.

The outlook for Asian stock markets is mixed. While potential trade tensions and China’s uncertain economic recovery will weigh on Asian stock market sentiment, there are certain positive factors. Asia ex-Japan stock valuations remain attractive, corporate earnings will likely stay robust, while potential fiscal stimulus by China may also mitigate some downside risks. Export-reliant companies will face headwinds, while Asian companies that are less reliant on external trade and focuses more on domestic-oriented businesses may fare comparatively better across this year.

For Chinese stocks, sectors that may do comparatively better are those deemed strategic by the government, defensive stocks, domestic-oriented companies, and sectors offering high dividend payouts.

Knowing this, investors should be agile and proactive in their exposure to Asian and Chinese stocks. A market neutral strategy designed to potentially generate returns regardless of whether the market goes up or down will allow you to seize opportunities and lower portfolio volatility. Quality Asian dividend stocks also offer attractive income.

ASEAN will continue to benefit from ongoing supply-chain diversification, regional policy coordination and stable politics. For exposure to ASEAN stocks, investors should consider a diversified exposure via funds. We also like Singapore stocks, which will continue to benefit from strong performance in bank stocks and attractive dividend yields from real estate investment trusts (REITs).

The outlook for bond markets will depend on the state of the US economy and US President-elect Trump’s policies. Over 2024, the yield differential between US investment grade bonds and high-yield bonds narrowed significantly, indicating investors’ willingness to allocate capital to riskier bonds as the resilient economy kept default risks low.

In the short term, global bond markets may see increased volatility and bond yields may stay elevated given the inflationary impact of potential trade tariffs.

An acceleration in US fiscal spending may worsen the country’s fiscal deficit, which would entail greater bond issuance by the US Treasury Department. This outcome may be negative for US bonds.

Despite these risks, we continue to favour investment grade bonds because their attractive yields can build investment income over a long-term horizon. Investment grade bonds can also help investors guard against trade tensions and geopolitical uncertainties. As such, investment grade bonds will continue to play an important role of diversification in an investor’s portfolio.

Chinese bonds have risen sharply over the past year amid heightened expectations of significant rate cuts to support the domestic economy. While this trend is likely to continue in the short-term, we are mindful of the government intervening to cool the bond market rally.

Many are wondering whether a second Trump presidency will make the US dollar (USD) great again. This is far from certain, although foreign exchange rate volatility will rise.

We expect the USD to strengthen in the first half of this year as tariff uncertainties dominate. That said, we think USD strength will moderate in the second half of 2025 as the market prices in the tariff impact.

Asian currencies will likely weaken alongside the Chinese Yuan (CNY) for this year. This is because Asian currencies are more sensitive to tariffs and elevated US interest rates and will thus face a longer period of weakness as compared to major economy currencies.

We retain a positive view on Gold as safe haven demand will likely stay strong given geopolitical risks and potential trade tensions. In addition, consumer demand for physical gold and jewellery remains strong while emerging market central banks may continue to increase their Gold holdings. We expect Gold to rise to USD 3,000 per ounce by the fourth quarter of 2025.

The outlook for crude oil prices is negative given uncertainty over the global growth outlook and uncertainty over China’s demand. The supply outlook is also unfavourable with OPEC+ looking to ramp up oil production from April. This continues to nullify ongoing geopolitical risks. We expect Brent crude oil prices to fall to USD 70 per barrel in the second half of the year.