Global economy: Reading between the lines

Please note: All data referenced in this article are sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

The global economy came into this year in fine fettle. The US economy seemed to be on track for a ‘soft landing’, while a recently unveiled fiscal and monetary Chinese stimulus could help the country to avoid a debt-driven recession. In Europe, though, growth is anaemic, but at least it’s growth.

While the above still holds, the start of a new Trump presidency in the US, and German elections in a matter of weeks, have the potential to change the outlook for the global economy. 

US economic exceptionalism

Whether it be the US consumer, labour market, housing sector or tech industries, all seem to point towards a domestic ‘soft landing’. This implies not only that the economy doesn’t plunge into recession, but that it lands. Again, prospects are encouraging: inflation seems to be returning towards the central bank’s 2% target. Indeed, its favoured inflation measure, the personal consumption expenditure price index, hit 2.4% for November.  

Any resurgence in inflation might throw the US Federal Reserve’s economic landing, and rate-cutting schedule, off course. Indeed, risks are probably tilted to higher inflation, given the potential impact of the new US administration’s promised tariffs. 

China’s policy puzzle

Chinese policymakers announced a series of initiatives in late 2024, aimed at reinvigorating the economy. While the People’s Bank of China now describes its stance as being “moderately loose”, it faces a difficult challenge: stimulating consumers and the wider economy without hitting the currency.

It’s probably unlikely that sufficient stimulus can be injected this year so that China’s economy can escape the deflationary danger zone in 2025. With the country’s consumers far from being in spending mode and the economy proving difficult to revive, other markets are key for growth. However, with Donald Trump now in power in the US, that is precisely where current geopolitical risks reside.  

Europe struggles

Last year was another one that saw little growth in Europe, and 2025 is not shaping up to be much better. Despite something of a pick-up in labour market momentum in December, consumption momentum remains stable at best for most of Europe. That said, Spain stands out. The country’s growth rate can rival that of the US.

However, the eurozone’s two biggest economies (Germany and France) are being jolted by political shake-ups. For instance, Germans are preparing to vote for a new government in February. Given the political situation, there seems little hope that fiscal stimulus could spark an economic revival soon. 

Focus on diversification 

Whether inflation, growth or otherwise, economic data can move financial markets. But the link, and timing, between the two can be unclear. Germany is a case in point. The country’s economy was technically in recession in 2024, however its equity market hit fresh highs.

Similarly, any link between geopolitical ructions and their impact on markets can be hard to detect. As such, whatever the political theatre, and especially in especially uncertain times, having a well-diversified portfolio seems prudent.

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