Key views Global Monthly 22 January 2025

Macro

Eurozone

The eurozone recovery is set to continue in early 2025, helped by rate cuts feeding through and real income gains supporting private consumption. Our tariff scenario has significant repercussions for the eurozone outlook. Initially in the first half of 2025 frontloading effects actually boost quarterly growth. Afterwards, we see growth and inflation negatively impacted by the gradual implementation of US import tariffs from 25Q3 onwards. In 2026 inflation will undershoot the target. Growth is expected to average 0.8% in 2024 and rise to 1.2% in 2025 to slow down to 0.8% in 2026.

The Netherlands

In 2024, the economy has performed robustly, with Q2 and Q3 showing solid growth. This is expected to have continued in Q4. Risks on the external side are tilted to the downside particularly because of the implementation of US import tariffs. Growth will be domestically driven and will average 0.9% in 2024, 1.5% in 2025, and 0.8% in 2026. Unemployment will increase slightly, but the tight labour market remains a constraining factor. Inflation is expected to stay above the 2% target in the coming years, driven by still high wage growth.

UK

In November, the government announced a fiscal expansion amounting to c1% of GDP. This, alongside rising real incomes, is likely to keep the economy on a solid recovery path for now, though structural challenges remain. New US trade tariffs pose downside risks to growth in H2 25, but the UK is less vulnerable than the eurozone as it is less export dependent. Services inflation is stubbornly high, with wage growth still well above levels consistent with 2% inflation. A sustained return to 2% inflation will take longer than elsewhere, due to historically higher inflation expectations in the UK.

US

Growth and consumption momentum remains strong. Disinflation is resuming but inflation remains above target. The labour market continues to cool, with demand growth slowing, and supply now also losing pace. A weakening labour market and pockets of financial stress among households are likely to contribute to a slowdown in growth into 2025. Policy, in particular tariffs, will start to impact growth and inflation in the course of the year and into 2026. Our 2025 growth forecast is 2.0% on the back of still strong momentum, while the impact of assumed tariffs leaves our inflation forecast elevated at 2.4%.

China

Recent GDP and other macro data confirm that the economy picked up in the final part of 2024, in line with our expectations, driven by Beijing’s policy pivot from September and trade frontloading in the run-up to an expected hike in US import tariffs. We expect Beijing to keep adding monetary easing and fiscal support in an aim to stabilise the real estate sector and domestic demand. Their stepwise approach enables Beijing to finetune support with developments in activity and sentiment, while keeping part of its powder dry for when more is known about Trump’s exact tariff plans and their impact.

Central Banks & Markets

ECB

We expect the ECB to continue cutting rates in January and throughout 25Q1. We see the ECB pausing in April as uncertainty over tariffs as well as policy rates approaching the ECB’s assessment of neutral are reason to adopt a wait-and-see approach. As the impact of tariffs on growth and inflation feed through we see the ECB resuming its easing cycle at the June meeting, and cutting rates by more than markets currently price, until the deposit rate reaches 1% in early 2026. A year from now the ECB will therefore have moved from a restrictive to an accommodative policy stance

Fed

After another rate cut, the Fed’s upper bound on fed funds rate stands at 4.50%. We expect two more 25bps cuts in the first half of this year. We expect disinflation to resume, and the labour market to continue cooling, with a number of weaker reports triggering rate cuts. The policy rate will then be at a still restrictive 4.00%. The Fed will pause here until the full extent and impact of the new administration's policy is starting to reveal itself. Under our baseline assumptions, we expect a pickup in inflation which will leave rates at this restrictive level indefinitely.

Bank of England

The MPC lowered Bank Rate to 4.75% in November, in line with our expectations. Incoming data suggests stubbornly high underlying inflationary pressure, and sticky wage growth. At the November Budget, the government announced a combination of tax rises to fund regular spending, and additional debt to fund growth enhancing public investment. This poses upside risks to medium-term inflation, and is likely to keep rate cuts at a more gradual pace than for the ECB. We expect three 25bp rate cuts each in 2025 and 2026, taking Bank Rate to 3.25% by end-2026.

Bond yields

US and European bond yields are on the rise since last December despite central bank rate cuts. This is primarily driven by strong US economic data and increasing term premia. In our view, US term premia will continue to exert upward pressure on US Treasury yields due to risks associated with higher deficit/debt levels and economic uncertainty. In contrast, term premia in Europe plays a much smaller role on the 10y yield. Market policy rate expectations remain the key driver of EGB yields. Consequently, given our outlook for the ECB, we hold a more optimistic view on European rates.

FX

Since the outcome of the US elections the US dollar has rallied and EUR/USD has weakened in anticipation of what the next Trump government would bring and the possibility of fewer Fed rate cuts. We have downgraded our EUR/USD forecast to 0.98 from 1.00 for the end of 2025. This is following our change in Fed view reflecting fewer rate cuts. Meanwhile our expected ECB rate cuts are more than is priced in financial markets. This is our view if markets remain relatively constructive. Waves of risk-off could support the dollar as safe haven currency.