The year 2024 is nearing its end. Although this year has passed quickly, it is filled with many events worth reflecting on. If I had to summarize this year in four words, it would be: "Full of surprises."

The main themes of the market in 2024 include the looser policies of global central banks, inflation, employment, economic growth, the USA presidential election, the rapid spread of AI, and the escalating geopolitical tensions in Europe and the Middle East. In the coming years, the impacts brought by these variables are expected to continue resonating in the global economy.

Most major global stock indices achieved double-digit returns this year, while also setting new historical highs. Patient investors were rewarded this year, which was not something that many analysts or investors could foresee at the beginning of 2024. AI is undoubtedly still in a prosperous period and has become a primary driving force behind market performance, with expectations for this trend to continue into 2025.

In 2024, most developed countries' central banks adopted a loose policy inclination, with further interest rate cuts expected in 2025. So, how did the major economies perform in 2024? What might the trends be in 2025? How might the policies from the Trump era affect the market trends next year? The reduction of regulations, tax cuts, tariff policies, and large-scale deportations of immigrants create uncertainty for 2025. How might the performance of the money market be?

This forward-looking article will explore the economies of the USA, Europe, and the United Kingdom, and attempt to provide some strategies for the upcoming year 2025, which is filled with both opportunities and uncertainties.

Global trend of interest rate cuts

The year 2024 is a year of "global interest rate cuts."

Except for the Reserve Bank of Australia maintaining the cash rate at 4.35% and the Bank of Japan exiting negative interest rates and raising the policy rate to 0.25%, most developed countries and major economic central banks have adopted loose monetary policies this year. It is expected that this trend of easing will continue in the future, with central banks gradually returning from tightening policies to a more 'neutral' stance.

At the last meeting of the year, the Federal Reserve lowered the rate by 25 basis points to 4.25%-4.50% with a 'hawkish rate cut.' This is the third consecutive rate cut this year, with a total reduction of 100 basis points. According to the Federal Reserve's dot plot, the pace of rate cuts is expected to slow down in 2025 and 2026. Federal Reserve officials have lowered their expectations for the rate cut in 2025 from 100 basis points to 50 basis points.

Economic forecasts indicate that the Federal Reserve expects inflation to accelerate next year, with PCE (Personal Consumption Expenditures) inflation now projected to reach 2.5% by the end of 2025 (up from 2.1%), and 2.1% in 2026 (up from 2.0%). Overall, the Federal Reserve expects that inflation will not return to the target of 2.0% until 2027.

The European Central Bank lowered the deposit rate by 100 basis points to 3.0% this year, marking the lowest level since the beginning of 2023. Further rate cuts are expected at the beginning of 2025, likely in a gradual manner of 25 basis points.

The Bank of England lowered the benchmark rate by 50 basis points to 4.75% through two rate cuts. Although the latest MPC (Monetary Policy Committee) vote indicates a shift in the rate cut stance, Governor Bailey emphasized the high uncertainty regarding the economic outlook and stated that taking a 'gradual' approach to rate cuts remains correct.

Economic Outlook

Inflation.

Inflation has been the focus of policymakers and investors this year. Developed economies have either reached or are close to the central bank's inflation target (usually 2.0%). However, progress may be slow in 2025 due to the re-emergence of price pressures, with specific impacts varying by country.

In the USA, the policies proposed by Trump (especially tariffs and immigration) may pose an upward risk to inflation. For example, tariffs will raise the prices of imported goods, and deporting immigrants may impact the supply of labor, thereby increasing wage costs and further driving up the prices of goods and services.

In the Eurozone, inflation has gradually retreated from its peak of 10.6% in 2022, and this year it is approaching the European Central Bank's target of 2.0%.

In the United Kingdom, the trend of slowing inflation is significant; after peaking at 11.1% at the end of 2022, inflation rose to 2.6% in November for the second consecutive month this year. The UK's economic stagnation and significant adjustments in public spending are expected to continue putting pressure on inflation.

GDP Growth

In terms of growth, the USA's economy is performing better than other developed economies, although it still faces pressures from high inflation and the residual effects of previous significant interest rate hikes. The OECD (Organization for Economic Cooperation and Development) projects that the USA's GDP will grow by 2.4% by the end of 2025.

GDP growth in the Eurozone and the United Kingdom is expected to reach 1.3% and 1.7% respectively by 2025, although growth may be hindered by trade tensions and economic weakness.

Employment

The US labor market is showing signs of cooling in 2024, but overall remains robust. Employment growth is expected to continue until 2025, although the unemployment rate may rise slightly. Meanwhile, labor markets in the Eurozone and the United Kingdom are also expected to face a certain degree of slowdown.

Currency Trends

Given the impact of the aforementioned monetary policy and economic outlook, the US Dollar may continue to be strong in 2025, especially against the backdrop of rising inflation expectations and a slowdown in the Federal Reserve's interest rate cuts. In contrast, the Euro may be under pressure due to the European Central Bank's accelerated interest rate cuts, while the British Pound may show relatively more resilience due to the Bank of England's cautious interest rate policy.

Outlook for the Trump Era

Trump's possible re-election in 2025 adds more uncertainty. It is expected that he will push to raise tariffs on imported goods and implement strict immigration policies. This may pose challenges for consumer spending and overall economic growth while supporting the US Dollar.

Considering this, this article considers a baseline Trump scenario composed of the following elements:

Tariff Increases

Trump's tariffs mainly target Mexico, but he may shift to conduct bilateral negotiations with other countries, including Mexico, Canada, the European Union, and Japan. Assuming the effective tariff rate in the USA rises by about 5 percentage points by 2025, the net macroeconomic effect of this will be upward pressure on US prices and downward pressure on the actual incomes of the USA and other countries.

Tax Cuts

Trump may pass a reconciliation bill within the first six months of his tenure to extend the tax reduction policy of 2017. Other tax reduction measures are also possible, including lowering corporate taxes and eliminating tips tax, but funding for these measures will come from increased tariff revenue and cost cuts. Although the market remains concerned about the USA's high government debt, the net macro impact may be limited.

Stricter immigration policies.

Trump will further enhance security at the southern border of the USA and reduce the Inflow of undocumented workers, but legal immigration should continue. These actions will lead to a gradual tightening of the labor market, yet a sufficient supply should remain in the coming years. Trump will accelerate the deportation of some individuals with serious crimes, but the scale of these deportations will not significantly impact the overall labor market situation. At least in the initial years, the net macro impact may not be substantial.

Deregulation and regulation.

Trump will sign an early executive order overturning the Biden administration's extensive regulations in areas such as Energy, finance, employment practices, and Consumer protection. The macroeconomic impact of deregulation is notoriously difficult to assess, but it is reasonable to expect that the cumulative effects of these policies can promote growth and suppress inflation in the short term. The long-term impact of these policies is a more challenging question.

Animal spirits.

This is an unknown. Since the election, various Indicators measuring the economic prosperity and market confidence in the USA have risen, which may reflect expectations for deregulation and easing of the tax burden. Despite deeper issues, the net macro effect may generate a positive demand shock for the USA economy, although this sentiment may be short-lived.

Conclusion

The year 2024 has been an unexpected year, but it sets the tone for 2025. With the easing of Global monetary policy, uncertainties in economic growth, and the complexities of geopolitical situations, investors need to plan cautiously and think ahead to seize opportunities and face challenges.