Uncertainty Is Certain

2025-01-20 09:27:00 ET

Summary

• Proposed U.S. policy pivots have broadened the spectrum of potential growth outcomes.
• Bonds are poised to play a crucial role in portfolios in 2025.
• Elevated U.S. deficits and divergent global economic paths enhance already appealing global diversification opportunities.
• Markets are pricing in terminal policy rates for global central bank easing cycles that appear somewhat high relative to our baseline outlook.

Key takeaways

The change in U.S. leadership increases global economic uncertainty in 2025. The incoming administration’s protectionist proposals have the power to reshape trade relationships and alter economic dynamics worldwide. With actual policies and their impacts still uncertain, we foresee a wide range of potential outcomes. Here are our near-term economic views:

• Uncertainty is certain: Proposed U.S. policy pivots have broadened the spectrum of potential growth outcomes. Inflation risks in the U.S. and recession risks in many non-U.S. economies have both increased. Our baseline expectation is for economically manageable U.S. tariff increases on China and other trading partners. However, more forceful efforts to rectify longstanding trade imbalances could disrupt the global economy and financial markets. Across developed markets ((DM)), we expect inflation to continue converging toward target levels, enabling DM central banks to keep cutting interest rates. However, price level adjustments from higher tariffs could delay additional progress, especially in the U.S. Greater policy uncertainty amid a generally strong U.S. economy argues for a more gradual, data-dependent approach.

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