- Trade policy will be a key factor over the next twelve months, with the impact of potential tariffs ranging from benign to highly damaging.
- The Aviva Investors investment team expect divergence in pace and scale of monetary easing across countries.
- The team prefer to enter 2025 overweight US equities and the US dollar, alongside UK government bonds.
Aviva Investors, the global asset management business of Aviva PLC (‘Aviva’), expects 2025 to be marked by significant policy uncertainty, which could lead to a wide range of possible outcomes for the global economy, both positive and negative.
Moreover, the return of President Trump to the White House is expected to bring with it a host of important changes across the policy spectrum: from trade, to tax and spending, regulatory, immigration and foreign policy. Any one of these would be significant in its own right, so the combination and sequencing of all of them will prove challenging for markets to digest. Moreover, while the direction of travel is clear for each, the timing and magnitude are not.
The increased use of tariffs is the key example for the coming year. Through the election campaign it was suggested that tariffs of 60 per cent could be imposed on all imports from China, with 10 per cent on all other imports. And then more recently, further threats of 25 per cent on Mexico and Canada and an additional 10 per cent on China (these are the three largest trading partners for the US) if they did not curb flows of illegal immigration and illicit drugs. Whether these threats represent a realistic scenario for tariffs likely depends on what is ultimately motivating them. If they are used in a bargaining process, then they may not last or may never be implemented. But if they are about trying to de-couple from key trading partners, then it seems more likely the tariffs would be used, but would not necessarily need to be broad based. Beyond what the US administration decides to do, there will likely then be a response from countries that are impacted, in some cases conciliatory and in others retaliatory. As such, think trade policy is likely to weigh on global growth.
However, other policy measures could be positive for growth, especially in the US. Extension of the personal tax cuts (due to expire at the end of 2025), in addition to providing some further tax breaks for individuals and corporates, should result in US growth accelerating again in 2026. Regulatory changes could also play a role in helping spur productivity and growth. The reaction of US equities to the election outcome (they rallied around five per cent) suggests that these factors, alongside continuing solid economic performance this year, are more important drivers of the outlook. More broadly, Aviva Investors’ central scenario is that global growth will be around three per cent across 2025 and 2026.
Meanwhile in Europe, there is the prospect of the dual challenge of a more difficult trading relationship with the US, alongside softening Chinese growth (and potential pressure from the US to also reduce reliance on China as a trading partner). While the broader Eurozone has recovered reasonably well from the energy crisis of 2022/23, Germany has not. Industrial production remains weak, with structural cost challenges and fierce competition in autos from the rise of China as a global exporter of EVs. Again, policy makers will need to rise to the challenge, with some easing of fiscal rules likely in Germany following the Federal election in February and potentially new funds to be made available from the EU for defence and other areas.
In the UK, growth and inflation have both been a little better than expected in 2024. The new government has raised taxes and spending – the latter by more than the former – to provide a boost to growth into 2025. But there is uncertainty around how businesses will respond to higher national insurance contributions – with both wage growth and employment likely to be negatively impacted. The UK may also be in the crosshairs for tariffs from the US, at least on some sectors, but will likely have little fiscal room to manoeuvre to cushion industry. We expect growth to be around 1.2 per cent in 2025, with inflation close to the two per cent target.
With regards to asset allocation, Aviva Investors’ investment team prefers to be overweight US equities, despite elevated valuations. Earnings are expected to be the key driver next year, with a clearer case for US corporates out-earning the rest of the world. Moreover, the AI-theme will remain a key driver for 2025, as the hyperscalers continue to invest and businesses look to increase adoption. The team prefer to be only modestly overweight duration, with a preference for gilts on the view that the Bank of England will cut rates more than the market expects in 2025 on a softer inflation outlook and weaker than expected growth. In contrast, the team have a modest underweight in Japanese government bonds, with the inflation outlook there consistent with a further normalisation of rates faster than what is implied by the JGB curve. The team are broadly neutral in credit, with overweights in high yield funded out of underweights in investment grade. That largely reflects the relative spread. Both are tight on a historical basis, but with late-cycle dynamics likely to sustain those spreads next year, the pick-up in high-yield is more attractive. Finally, a stronger US dollar in 2025 is expected, especially against Asian currencies, as the full effect of US tariffs works through and US out-performance drives flows.
Michael Grady, head of investment strategy and chief economist at Aviva Investors, said:
“The economic outlook for 2025 is dominated by uncertainty, leaving open various outcomes for markets over the next twelve months. We expect we will see answers develop imminently with further clarity around President Trump’s policies likely to coming into view upon his return to the White House.
“The developments around US Tariffs will be a particularly important area to watch with regards to the global economic outlook over the next twelve months. It remains to be seen whether some of the proposed levies actually come to fruition. Whatever the outcome, we would expect some response from countries that are impacted, leading to a tense and uncertain policy environment that will ultimately weigh on global growth.”
