While in most major advanced economies the year-on-year growth in nominal wages has been back above inflation for a few months now, we can ask ourselves where households’ purchasing power stands compared to its pre-inflationary crisis level. This purchasing power can be measured in two ways: in the broad sense and more accurately, when it is calculated on the basis of the real gross disposable income (GDI) of households; and in a narrower sense, but perhaps more meaningful for households, when it is assessed on the basis of real wages.
Will 2025 fulfil all the good wishes being exchanged across the globe as these lines are being written? Probably not, sadly. But narrowing it down to the field of global economics, I see five critical questions that will determine how good 2025 will turn out.
The Main recent economic news.
Equity indices, Currencies & commodities, and Bond markets.
While the Bank of England's (BoE) decision to keep its key rates unchanged at 4.75% on December 19th was in line with market expectations, the vote by three MPC members in favour of a 25 basis point cut was less so. This week, which has had a wealth of economic indicators in the UK, will certainly have shifted the lines, between rising inflation in November and heightened fears that an overly restrictive monetary policy could derail the economic recovery. Indeed, the BoE has revised its growth forecast for Q4 downwards, from 0.3% to 0.0%.
The Fed ended the year with a reduction in its target rate (-25 bp), which now stands at +4.25% to +4.5%. Meanwhile, median expectations by committee members of the number of cuts fell from four to two for 2025. The response from the financial markets was abrupt.
The year 2024 is coming to an end, but political and economic uncertainties persist and are expected to continue into 2025, albeit in new forms. Donald Trump’s economic agenda is known. On the other hand, the measures that will actually be implemented, their timing and their economic impact are among the great known unknowns of 2025. In any case, uncertainty itself is expected to be a major drag on growth next year. A convergence of growth rates between the US and the Eurozone is expected in the course of 2025, via a slowdown in US growth. The latter would suffer from the inflationary effects of Trumponomics and the resulting more restrictive monetary policy, with the Fed's expected status quo on rates throughout 2025
A turbulent 2025 is expected to follow a 2024 marked by dynamic growth and the start of a monetary easing cycle. While growth is expected to slow towards its long-term level, the political plans associated with the change of president and Senate majority suggest an increase in inflationary risk. As a result, the Federal Reserve is expected to put a premature end to rate cuts.
The upcoming protectionist shift in the United States, the structural difficulties in industry and the political instability in France and Germany will limit the eurozone's economic growth margins in 2025. However, the labour market is holding up well in many countries (the unemployment rate in the eurozone is still at a record low level). In addition, some of the shock will be cushioned by inflation falling back down to its target level and by the continued cycle of interest rate cuts. Under these conditions, there is still anticipation of a slight increase in eurozone economic growth in 2025, to 1.0%, which will, again, be underpinned by significant differences in growth levels between Member States.
After outperforming between 2005 and 2018, German growth has since underperformed. Germany is the only major European economy to have seen its GDP stagnate for the third year in a row, due to the weakness of its industry (reflected this year in site closures and a moderate upturn in unemployment). The relative persistence of inflation and a fiscal policy limited by the debt brake rule are also weighing on the recovery potential. Finally, at a time when Germany is already being penalised by a lack of investment and high energy costs, it is vulnerable to a possible increase in US tariffs.
France's economic growth is set to slow over the next two years, and the unemployment rate is set to rise, at a time when the gains in purchasing power associated with disinflation are behind us and political uncertainty is likely to weigh heavily. A difficult period that could be cushioned by a rebound in aeronautical production, but which could also see the materialistion of downside risks weighing on trade opportunities in Germany and the United States. One of the challenges for France will be to achieve fiscal consolidation without affecting its attractiveness, and in particular the ability of its labour market to create jobs when the recovery takes hold.
In Q3 24, real GDP remained unchanged. Domestic demand added 0.5 percentage points to the overall growth, while the net exports contribution was negative. The economic slowdown reflects the disappointing performance of manufacturing (-1.3%), while the services value added rose 6.5% above pre-crisis level. Italian exports have been declining in the last year and a half. The potential implementation of new measures to protect US production by the new US administration might have a significant impact on the Italian production system. The Italian trade surplus with the US in the first eight months of 2024 stood at EUR 26.5 bn, about 70% of the overall trade surplus.
Spain's outperformance is set to continue throughout our forecast horizon. Private consumption is expected to remain the driving force behind GDP growth, buoyed by slowing inflation and a strong labour market. The contribution of foreign trade is expected to fall due to an anticipated increase in imports and the potential second-round effects of higher US customs tariffs on Spanish exports. Investment is expected to recover, buoyed by NGEU funds and monetary easing. Finally, even though there is no draft budget for 2025, fiscal consolidation is expected to continue over the next two years.
Following a period of economic stagnation in 2023, Dutch growth gathered momentum in 2024 on the back of solid consumer confidence and more favourable financial conditions thanks to the ECB interest rate cuts. At the same time, the Dutch labour market remains tight, with plenty of unfilled jobs; this should lead to stronger real-wage gains, thereby further supporting private consumption. While business investment has been declining since the start of 2023, there is hope that it will gradually recover in 2025 in line with additional monetary policy easing, which is expected in Europe. Public investment growth is also set to remain quite supportive implying a larger government deficit
Belgian economic growth remains somewhat below but close to trend. Our nowcast for the 4th quarter indicated 0.3% QoQ growth. Domestic demand will have to continue to offset a negative contribution from net exports at a time when declining demand for specific products and a challenging external environment weigh down on the trade balance. Whereas, last year, firms’ investment spending took on the role of growth engine, private consumption is now slowly returning to center stage. A pressing need for fiscal consolidation should hold back further increases in government outlay.
The UK’s policy mix (a combination of fiscal and monetary policies) is expected to be more accommodative in 2025. Its positive effects will be limited, however, given the very gradual fall in interest rates and the introduction of more restrictive budgetary rules. After GDP growth in the third quarter of 2024 fell short of expectations (+0.1% q/q), activity is expected to strengthen in Q4 (+0.3% q/q) before stabilising around this level in 2025 (between 0.3% and 0.4% q/q). The United Kingdom, which has a trade balance almost in equilibrium with the United States and exports mainly services to the US, also seems to be in a better position than its European neighbours to avoid the rise in US tariffs.
The Japanese economy continues to be characterised by weak growth, which slowed in Q3. The positive momentum in inflation and wages is in line with the Bank of Japan's objectives. This picture should enable the Bank to continue its gradual monetary tightening. However, domestic political developments (general elections resulting in a loss of political strength for the government), as well as external ones (Donald Trump's victory) are not helping stability.
GDP growth, inflation, exchange and interest rates.
Since 2019, private sector debt in emerging countries as a whole has risen as a percentage of GDP, while at the same time private sector debt in advanced countries has fallen. However, a country-by-country analysis shows that China alone is responsible for this increase and that, even excluding China, debt ratios show positive aggregation effects. In fact, on the basis of median ratios and credit gaps, excluding China, the private sector has develeraged in a large number of countries, until the third quarter of 2024. Current and future economic and financial conditions point more to a continuation of the decline than to a rebound.
