Interview
2025 outlook: Will tailwinds trump tariffs?
- U.S. growth is forecast at 2.5% for 2025, following 2.8% in 2024, with real hourly wages projected to rise approximately 1.5% as price inflation outpaces wage inflation.
- Fiscal policy is expected to ease through the extension of 2017 tax cuts and new consumer/business tax measures, while regulatory loosening should boost business confidence and capital spending.
- Tariffs are anticipated to target China and specific auto imports from Mexico and Europe rather than a universal 10-20% levy; the base case implies a tariff drag of a few tenths of a percentage point, whereas an across-the-board scenario would reduce growth by roughly 1 percentage point and raise inflation by approximately 1 percentage point.
- Core inflation in the U.S. is projected to reach 2% by the end of 2026 in the baseline, rising to 2.4% if specific auto/China tariffs are implemented, or potentially higher near 3% under a universal tariff scenario.
- Immigration is expected to decline substantially below the historical 1 million annual average, though net negative immigration impacts on the workforce are not forecast.
- The probability of a 2025 recession is estimated at 15%, aligning with the long-term post-war average, with a 40% probability assigned to a 10-20% across-the-board tariff scenario.
- Interest rate forecasts anticipate a 25 basis point cut at the December FOMC meeting, followed by cuts in January and March 2025, slowing to quarterly reductions in Q2 and Q3 to reach a 3.25% to 3.5% range by late 2025.
- U.S. bond yields and the 10-year yield are expected to trend lower in 2025, while European and non-U.S. bond yields are projected to fall relative to U.S. levels.
- European growth is forecast at 0.8% for 2025, down from consensus, due to trade policy uncertainty causing a 0.5 percentage point downgrade in quarterly growth and a slowing labor market.
- The European Central Bank is expected to cut rates by an additional 25 basis points to reach 1.75% by late 2025 as core inflation returns to 2%.
- China's growth is projected at 4.5%, a downgrade of 0.2 percentage points, though estimated tariff impacts of up to 0.7 percentage points are expected to be offset by monetary easing and state-directed lending.
- An across-the-board tariff scenario is expected to cause significant U.S. dollar appreciation and downside risks for non-U.S. equities, particularly outside China.
- Equity valuations and tight credit spreads suggest lower prospective returns on risky assets over 10-year horizons, though high valuations should not hinder performance over the next 12 to 18 months.
- Investment strategies anticipate maintaining U.S. growth exposure while hedging against tariff tail risks via non-U.S. bonds, U.S. Treasuries, TIPS, and broader equity allocations.
- Option protection is considered increasingly accessible and valuable for hedging macro tails following post-election declines in optionality prices.