January 2025 | Investment update

US economy thrives as the pace of global growth falters

Economic fortunes diverge. While other countries falter, the US economy continues to go from strength to strength. Economic growth remains robust, firms are still hiring and unemployment is low. In contrast, the UK economy is slowing, as higher taxes and concerns about the recent Budget take their toll. Recent surveys of the economy have also shown the labour market weakening and consumer and business confidence falling.

Inflation is proving to be tricky to shift for central banks, but it should not be a problem in the long term. Europe faces headwinds with political turmoil in France and Germany, which could further hamper growth. China is likely to hit its 5% growth target for 2025, but economists say more stimulus will be needed as trade tensions loom.

A quiet month for equities. European stocks came under pressure from political turmoil in France and Germany, while the euro lost ground against other major currencies. The dollar rose and US stocks dipped after the US Federal Reserve (Fed) suggested it could slow the pace of rate cuts in 2025. Meanwhile, markets remained calm after Syrian rebels announced they had ousted Syria’s president Bashar al-Assad.

The FTSE 100 dropped after hopes faded of rapid interest rate cuts in the UK and US in the coming months following strong pay data and an increase in inflation. The pound hit its highest level against the euro since the Brexit vote after the European Central Bank (ECB) cut interest rates for the fourth time this year. With oil prices tumbling below $70 a barrel, OPEC+ members agreed to delay crude production increases.

Fed cuts rates. The US Federal Reserve (Fed) reduced interest rates by a quarter of a percentage point, but suggested it would make fewer cuts than expected in 2025, sending the dollar higher and US stocks lower. Economists believe that if Donald Trump imposes steep import tariffs on foreign imports, the Fed will also have to reduce borrowing costs more gradually, leaving interest rates higher for longer.

US inflation rose slightly to 2.7% in November, up from 2.6% the previous month. US economic output hit its highest level in nearly three years to close out 2024, driven by gains in the service sector. America’s job market rebounded in November, with employers adding 227,000 workers in a solid recovery from the previous month.

UK inflation rises. The Bank of England kept interest rates on hold after inflation rose for the second month in a row to 2.6% in November. Wages are also rising, going up by 5.2% in October. Unemployment remained steady at 4.3%. The UK economy shrank unexpectedly by 0.1% in October, underlying the scale challenge Labour faces.

Firms are cutting jobs at the fastest pace since the global financial crisis, excluding the pandemic. The fall in private sector employment has been blamed on the £25 billion increase in employers’ National Insurance contributions under Labour’s Budget. Output among UK manufacturers also contracted at the fastest pace for almost a year in November, as the sector grapples with higher taxes.

Barnier steps down. French Prime Minister Michel Barnier resigned after his government became the first to be toppled by a no-confidence vote for more than 60 years. German Chancellor Olaf Scholz also lost a no-confidence vote following the collapse of the coalition in November, setting up a February election. Meanwhile, the European Central Bank (ECB) cut interest rates by a quarter percentage point to 3% – the fourth cut in 2024.

The region’s average inflation rate increased to 2.3% in November, rising above the ECB’s target for the first time in three months. The manufacturing recession has deepened, driven by a sharp slowdown in the region’s largest economies. Several automotive companies have recently announced plant closures and layoffs as they struggle with weak demand, high production costs and competition from China.

China’s problems deepen. Economic data from China suggests government efforts to stimulate growth are faltering, a sign that Beijing will need to introduce stronger measures to boost growth in the coming year amid escalating trade tensions. Officials have signalled additional support, including plans to boost borrowing, cut interest rates, and stabilise stock and property markets to address sluggish consumer spending.

Retail sales growth slowed sharply in November, while investment in fixed assets also weakened. Industrial production showed some improvement, but many economists predict China’s growth will decelerate in 2024, especially if Trump imposes steep tariffs on Chinese imports. China’s exports also grew at a slower pace in November.

Global outlook is positive but risks remain. The US economy enters 2025 in great shape and has avoided recession. Output is above pre-pandemic trends, unemployment is around 4% and inflation is trending downwards. However, Trump’s agenda does pose some serious risks to growth with potential repercussions for both the European and Chinese economies.

UK inflation and rates are projected to fall less than expected over the next two years after the Autumn Budget delivered spending and borrowing rises, according to the Organisation for Economic Co-operation and Development (OECD). The UK economy is forecast to grow 1.7% in 2025, before slowing in 2026, while the global economy is predicted to grow by 3.3% in 2025.

Thank you for reading and please look out for another update next month.

Ascot Lloyd Investment Team

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