Weekly Update - Convictions for 2025: a year of economic policy choices

Economic performance in 2025 is likely to be a continuation of the trends seen in 2024, with the United States outperforming the rest of the world, while Europe remains fragile, and uncertainties persist in Asia. Economic policy choices will then play a decisive role, with competing trade policies, monetary policies moving out of sync, and tensions and rivalries building on the fiscal/industrial policy front.

A first half similar to 2024. 

The divergences seen in economic growth in 2024 should continue, at least during the first half of 2025. The US economy should continue to benefit from solid fundamentals (high corporate profit margins and healthy household balance sheets). High productivity gains will continue to support dynamic growth without much inflationary pressures, allowing (moderate) rate cuts by the Federal Reserve.

In addition, fiscal policy will remain expansionary in 2025, with the prospect of further tax cuts. After flirting with recession at the end of 2024, economic growth in the euro area is likely to remain weak in the first half of the year. Political uncertainties will add to the challenges.These include structural problems (depressed manufacturing sector in Germany, low productivity, etc.) as well as more cyclical difficulties (weak Chinese demand, high savings rates, fiscal consolidation).

Nevertheless, the fall in inflation and the cut in key interest rates should encourage consumers to save less. Finally, the difficulties in the Chinese property market are likely to persist, continuing to weigh on household consumption (property being the main households’ asset) and therefore on the Chinese economy.

A more uncertain second half.

After a busy electoral year in 2024, 2025 will be marked by the economic policy decisions of the new governments. The transition from campaign promises to implementation will produce a great deal of uncertainty for both growth and inflation in the major economic areas.

Our investment convictions for 2025

1. Equities: towards a broadening of US performance

2. Equities: favourable contagion to EU markets

3. Government bonds: EU/US desynchronisation taking shape

4. Corporate bonds: European credit remains attractive

5. Currencies: The dollar remains strong

6. Currencies: The yen, the only currency that could surprise against the dollar

7. French real estate: a fall in interest rates insufficient to provide any real impetus

8. Private assets: a favourable environment for private debt and infrastructure

More details in our 2025 themes publication.

Other highlights of the week

In the highlights of the week, we chose to talk about the business climate in the euro area and the Fed, BoE and BoJ monetary policy decision :

• In the euro area : business climate indices remain weak: The composite PMI index for the euro area (weighted average of the manufacturing and services sectors) rose to 49.5, close to the expansion zone, driven by a rebound in the services index and still buoyed by the dynamism of the peripheral economies. The manufacturing sector remains depressed, particularly in Germany, where it came in at 42.5 compared with 43 last month. In France, the composite PMI index rose slightly to 46.7 but was still marked by weak demand. The national business sentiment indices (INSEE for France and IFO for Germany) also fell, moving further away from their long-term averages and signaling downside risks to growth in the euro area.

• A hawkish Fed shook up markets, status quo for the BoE: As expected, the Fed cut its key rates by 25 bp to a range of 4.25-4.50%. The key news from the meeting was the hawkish tone that followed, with upward revisions to inflation forecasts and fewer rate cuts predicted by Fed members (only 2 for 2025 out of the 8 meetings). These announcements resulted in a rise in 10-year yields, a reduction in expectations of key rate cuts, a EUR/USD exchange rate that touched 1.03 and a sharp correction in the equity markets. Also as expected, the Bank of England left rates unchanged at 4.75%, but unlike the Fed, its message was more dovish, with 3 out of 9 members voting for a cut and the recent rise in wages being put into perspective by the BoE.

• BoJ: no change in rates before a catch-up year for the yen ?: While last summer's 0.25% increase in the Bank of Japan's (BoJ) key rates was followed by the unwinding of speculative positions in the yen (and hence a sharp rise in the Japanese currency), the BoJ has since left rates unchanged. This was the case again this week, even though one of the committee members was pushing for a 25bp rise. Moreover, the tone appeared moderate, with the BoJ stressing that supporting economic growth remained the priority, with inflation in Japan remaining close to target (2.3% year-on-year in October). Nevertheless, the BoJ seems prepared to raise rates gradually over the course of 2025 (two rate hikes according to the markets), which should encourage the yen to appreciate.

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