The 2025 outlook

In addition to the economic outlook, we are pleased to share a report from the Macquarie Wealth Management Investment Strategy Team with their views on the road ahead for investors.

Key insights

Geopolitics will play a larger-than-normal role in determining returns

The US election result has turned an otherwise positive outlook for investors into one that is more challenging. The incoming Trump administration is already arming itself to disrupt global trade, US immigration, but more growth-positive policies include corporate regulation and corporate tax cuts. However, campaign rhetoric doesn’t always translate into reality and even if it does, it will take time to implement. Markets moved quickly to price in the changes to US economic policy based on campaign rhetoric to a point where the risk is now that the changes are either underwhelming or take longer than expected to implement with some retracement likely.

The Russia-Ukraine war seems to be entering a crucial stage, with US military support for Ukraine increasing before the change in administration, and Russia responding with the threat of using nuclear weapons and the support of North Korean boots on the ground. The Israel-Hamas war has already become a regional conflict, but the Biden administration has recently brokered a deal for a ceasefire. A sharp rise in the price of oil is the key threat, but a broader flight to quality can’t be ruled out at some point either.

The US remains the growth engine of the global economy

The US consumer has weathered high interest rates over the past couple of years and become the engine of global growth. This is no mean feat when global growth outside of the US has been relatively weaker, and US leadership is likely to continue next year. A key positive for the US is that productivity growth is stirring, due in some part to the investment in AI by US firms.

China’s economic architecture will need to adapt when US trade tariffs become a reality. Exporting clean technology and investing in its production capacity will be on a collision course with US tariffs applied to these goods. Similarly, Europe and Japan rely heavily on trade and an increase in the cost of global trade will cause damage that may need policy to provide additional support.

Inflation has eased, and policy is supporting growth

In 2025, inflation will not be the threat that it was in 2024. It has already eased to allow most of the world’s major central banks to be advanced in their easing cycle. China is dealing with its own domestic issues by using both fiscal and monetary policy in a piecemeal way. Other central banks such as the RBA will be forced to keep policy tight until lift off around the middle of the year, possibly when others have finished easing. Japan is out of sync and nearly a cycle behind and is beginning to withdraw pandemic stimulus slowly.

US inflation may begin to pick up late next year due to an increase in trade tariffs, but in other economies it should ease because of weaker demand. The net result of slowing inflation and easing monetary policy would normally be stronger global growth in 2025, but geopolitical events may upset the apple cart.

Australia is stuck between a rock and a hard place

Australia would most likely be in recession if not for the economic drive from immigration, government spending and trade. High interest rates have weighed on housing and consumer spending, but tax cuts and easing inflation have provided some green shoots for consumer spending, although it’s difficult to know how sustainable this will be until rates are cut. Furthermore, even when policy does begin to ease there will be limits on how much support it can provide. The only way out of this hibernation is for productivity to lift, but unlike the US, there are no green shoots.

The property market has not buckled under high interest rates, but it’s not Sydney and Melbourne doing the heavy lifting. Brisbane, Perth and Adelaide are leading the way, while Melbourne is being weighed down by its vacant property tax. Sydney is somewhere in between. It seems cash, rather than borrowing, is driving the outperforming capital cities and investor demand has picked up outside Melbourne.

A lot of good news is in the price of risk assets. Maintain a diversified portfolio

Prior to the US election result, US risk assets were well bid on the prospect of the structural earnings tailwind from the AI evolution and a cyclical rebound as the Fed cut rates. The prospect of deregulation and microeconomic reform and tax cuts from the incoming Trump administration then propelled equities to a new record high, with little room in the price for disappointment. At this stage equities have absorbed the rise in bond yields from the election promises, but another leg up may cause dislocations. US credit spreads also reflect the positive mood in US equites. Regional markets have also rallied even though the structural earnings tailwind of AI earnings is missing.

The bull case for equities is that tariffs are not raised as much as promised and the cuts to immigration are more modest or the implementation of both polices is delayed past mid-term elections. But the microeconomic reform and tax cuts are implemented as announced during the pre-election campaign. The bear case is the corollary on tariffs and immigration, with little action on tax and reform. Reality probably lies somewhere in between, but the policy changes, whatever they are, will be implemented against a solid US economic backdrop that has a track record of proven resilience. Investors need to straddle both upside and downside risks and manage volatility. Investors should have a barbell built with a core allocation to alternative and real assets to manage volatility in both risk, and safe haven, public market assets.

Macquarie Wealth Management Investment Strategy Team