Global Economic Outlook – Q1 2025

We are proud to introduce a new quarterly publication series by Neil Woodford, one of the most accomplished investors of his generation. With over three decades of experience managing billions in assets, Neil has built a reputation for independent thinking, long-term value creation, and anticipating trends that drive transformative change.

This publication will reflect his expertise, offering thoughtful analysis of the global economic outlook with a focus on developed markets like the US, Europe, China, and the UK.

Alongside quarterly updates, Neil will also share insights on specific issues that we believe entrepreneurs and investors alike should consider when planning for growth or assessing their portfolios.

To launch this series, Neil has provided an overview of the current economic environment, outlining the opportunities and challenges ahead for 2025.

We are thrilled to bring his unique perspective to Curated Capital and look forward to sharing his insights.

James Minns
Senior Executive Officer, Curated Capital

Introduction

The global economy has been through a very turbulent four years but is now beginning to emerge into some sort of “normality” in which the extraordinary policy settings of recent times can be set aside.

Albeit that we are all familiar with what has happened, it is important to recognise that the world’s monetary and fiscal policymakers, in a very short space of time, have had to lurch from extraordinarily supportive policy during the pandemic to the most restrictive in nearly two decades following Russia’s invasion of Ukraine.

In some ways, it is remarkable that these events have been navigated without more damage being inflicted on the global economy’s health. Indeed, the US and UK economies, in particular, have confounded negative consensus expectations and performed much better than was expected.

This, of course, has prompted concerns about the persistence of service inflation and wage growth and led to an especially cautious approach to reducing official interest rates.

It is this debate about the speed of policy loosening that has become the central debate amongst most economists in recent months, and it is generally seen as key to the near-term outlook for the global economy.

One notable characteristic of this recent period is the pretty poor forecasting record of developed economy central banks who, generally, underestimated the inflationary consequences of much higher energy prices and then underestimated, at least in the US and the UK, the resilience of the economy to much higher interest rates.

I think this is because their models have failed to properly calibrate the changed relationship between official interest rates and economic growth. In particular, they have failed to fully explain the sensitivity of the household sector to policy rates.

This is especially evident in the UK, where, as a result of regulation, an ageing society and the changing nature of the mortgage market, household deposits, for the first time in modern economic history, significantly exceed loans, and in the mortgage market, 86% of lending is now on fixed rates, typically for five years. In the US, 92% of mortgage lending is on fixed rates, typically for 30 years.

Neil Woodford

Global economic outlook

The IMF and the OECD are forecasting similar rates of growth for the world economy in 2024, at about 3.2%, and in 2025, at about 3.4%. Both organisations highlight the same issues constraining the world economy, namely the lagged effects of high inflation and the slow normalisation of monetary policy, the military conflicts in Ukraine and the Middle East, and escalating trade tensions, principally between China, the US, and the EU.

Both organisations highlight that these growth rates are below the decade average before the financial crisis but go on to suggest that they are close to the currently estimated growth potential across advanced and emerging economies.

Because I am more optimistic than both of these organisations with respect to the US, China and the UK economies, I have a slightly higher global growth forecast. The only other notable difference is that I am more cautious about the outlook for the EU economy.

I have been, and remain, optimistic about lower inflation in 2025. Central banks have generally been pretty cautious in reducing interest rates, citing “sticky” services inflation as a brake on lower policy rates. I think this caution also stems from the fact that the US and UK economies were both much more resilient following significant increases in interest rates than either of these central banks had expected.

The recessions that many had forecast on both sides of the Atlantic never appeared, and I suspect that this outcome partly explains their caution now. Nevertheless, I expect lower energy prices and slower wage growth in 2025 will drive inflation lower, leading to further cuts in official rates in the US and the UK. Rates will also fall in the EU as they have in China, but in Japan, rates are moving in the opposite direction, albeit very cautiously.

What the OECD and IMF don’t mention in their summaries are the constraints that all economies confront as they seek to decarbonise. In most developed economies, this adjustment process involves regulation and taxation, both of which raise the prices of goods and services deemed to be polluting, which naturally and deliberately reduces demand.

In Europe and the UK, which have adopted some of the most rigorous climate change policies globally, their broad economic impact has been to constrain growth, albeit the resulting emission reductions have been significant.

In the future, the next phase of decarbonisation on the journey to net zero will focus on the transport sector, which will have a disproportionate impact on Europe’s economy given the significance of its automotive manufacturing sector, and will likely continue to constrain its growth potential.

So, in summary, my global growth expectations for next year are higher than those of the IMF and the OECD. I think the US and China will both deliver higher growth, as will the UK, all for slightly different reasons. Offsetting this will be slower growth in Europe. I don’t run a sophisticated model of global GDP but I would expect growth in 2025 to be in the range of 3.5 to 4.0%.

USA

The US economy will continue to perform well and beat expectations. Lower inflation, interest rates and taxes will be key. Trade friction is a headwind but not significant enough to derail other factors.

The IMF expects the US economy to grow by 2.2% in 2025, and the OECD expects 1.6%. In my opinion, both are too low, as are their forecasts for 2024.

The most significant new variable in the US is the election of Donald Trump and the Republican clean sweep in the Senate and the House of Representatives.

We will know much more about Trump’s policy agenda after the inauguration, but we already know that it will feature significant tax cuts for businesses and individuals. These tax cuts will be significantly positive for growth, just as they were in the first three years of his first presidential term before the pandemic hit.

Whilst most commentators accept that tax cuts will boost growth, many are concerned that Trump’s tariff agenda will raise US inflation and that this will worry the FED and lead to rates staying higher for longer.

Although this is clearly a risk, I believe three factors will offset the potentially inflationary consequences of import tariffs. First, many exporters to the US will look to cut prices to compensate for the tariffs. Second, US wage increases are likely to be lower than they would otherwise be. Finally, energy prices are likely to be potentially much lower going forward.

On this point specifically, downward pressure will come from Trump’s drilling agenda in the US, a calming of the military conflict in the Middle East and potentially, an energy price dividend from an end to the war in Ukraine brokered by Trump.

Between 2010 and 2019, US growth averaged approximately 2.25%. With continued reductions in inflation and interest rates, lower energy prices and meaningful tax cuts, I expect growth in 2025 to stay above 2.5% and possibly accelerate beyond this as the policy mix takes full effect in 2026 and beyond.

US equity markets have reacted positively to Donald Trump’s election victory and the Republican clean sweep as investors take on board the implications of tax cuts and lighter regulation on corporate profits.

On the other hand, the Treasury market, fearing the potential inflationary consequences of a stronger economy combined with Trump’s tariff agenda, was initially more cautious, and yields rose. The market had seemed to conclude that a stronger economy would lead to a slower pace of interest rate cuts and a generally more cautious FED.

More recently, that view has begun to shift, and ten-year yields have fallen again to 4.2% as investors factor in lower energy prices, the product of more drilling in the US, peace in the Middle East, and potentially in Europe.

Although Trump is undoubtedly good news for the economy and corporate profits, the outlook for US financial markets is more nuanced. At an aggregate level, equity market valuations are very high in absolute terms and relative to history.

In large part, this reflects extreme investor enthusiasm for leading US technology companies best represented by the Magnificent 7. These are undoubtedly an exciting and impressive group of businesses that will likely dominate their respective industries for many years to come, but this is precisely what their share prices are also anticipating.

Importantly, this does not mean that I anticipate some kind of precipitous correction in the US equity market nor in the share prices of the Mag 7. However, it does mean that I think these stocks will struggle to outperform the wider index in the future.

In my opinion, the most attractive opportunities in the US equity market are in the market’s mid and small-cap sectors, where valuations are still surprisingly depressed.

As for the treasury market, as in the UK, I expect 10-year yields over the next year to fall to below 4% as the FED continues to cut rates and inflationary concerns begin to abate. As for the US dollar, my view has shifted a little after the election result, and I now expect it to remain strong, following its rise against most major currencies in recent weeks.

“Valuations in US mid- and small-cap stocks remain at historical lows, presenting significant investment opportunities compared to overvalued large-caps.”

China

Headwinds remain, and trade friction is a problem, but China’s significant policy stimulus will be sufficient to generate higher and more balanced growth with less reliance on manufacturing and exports.

Both the IMF and OECD have growth forecasts for China in 2025 at 4.5%, well below the official target of 5%. Until quite recently, I would have agreed that it was likely that the Chinese economy would struggle to deliver the official growth target, but recent policy initiatives announced by the finance minister have made me more positive.

A package of stimulus measures announced in early November was targeted at alleviating local government debt problems. It followed an earlier announcement in September, which targeted reducing borrowing costs and providing support to the equity market.

Following Trump’s inauguration early in the New Year and more visibility on US tariffs on Chinese exports, more targeted and scaled fiscal stimulus measures are expected to be announced by the Chinese authorities, but this time directly focused on stimulating consumer demand.

This important step to help rebalance the economy away from its dependence on manufacturing and exports is eagerly awaited. I expect it to be at a scale that will deliver the required results, namely more balanced growth that meets the official 5% target.

Consequently, I am more bullish than the IMF and OECD. Not only do I see growth accelerating following this package of stimulus measures, but I also expect the growth that the economy delivers to be more balanced.

Most importantly, I expect domestic demand growth to accelerate, prompted by higher consumer spending. Some company reports and economic lead indicators are, encouragingly, already pointing to early signs of improving activity. Meanwhile, inflation is likely to remain very low, which leaves room for further reductions in interest rates.

China’s equity markets and the Hang Seng index have endured a long period of poor performance and are now back at levels first reached in 2006. The most recent weakness was prompted by a combination of political and economic concerns that led to significant disinvestment from international investors alongside domestic selling of the market.

Chief amongst those concerns were fears that China’s excessive growth dependence on infrastructure investment and the property market would leave a troubling legacy of misallocated capital, falling property prices, bad debts, financially imperilled local governments and a household sector reluctant to spend. The increasing trade war with the West and deteriorating geopolitical relationships added to the portfolio of anxiety.

These concerns have not gone away but significantly, China’s leadership now seems to be determined to address many of them with long overdue specific and targeted policy initiatives. Some of these initiatives have yet to be announced, specifically the fiscal stimulus measures targeted at the household sector.

However, so far, the evidence is that China’s leadership is determined to address the challenges with well-directed and appropriately scaled reforms and money alongside cuts in interest rates. It would also appear that they are already starting to have a beneficial impact on the domestic economy.

Of course, the trade and geopolitical issues remain, and we will have to see what happens when Donald Trump assumes the presidency in January.

But for the time being, the cocktail of domestic policy measures is significant enough to persuade me that the time has come to be much more bullish on the market, not least because Chinese blue-chip equity valuations are so low and, in many cases, discount a significantly worse economic outcome than is now likely, alongside a full-blooded trade war that will not only harm China economically but also the EU and the US.

China’s 2025 fiscal stimulus includes $700 billion in infrastructure investment to stabilise growth, offsetting a decline in export dependency.

The EU

The EU faces many challenging economic and political issues, structural rigidities, and excessive regulation. These problems will be hard to overcome, leading to lower growth in the medium term than developed economy peers.

Germany, France and Italy account for 53% of the EU economy, and all three economies are grappling with significant economic and political headwinds.

Germany, for so long the EU’s engine of growth, has endured two years of zero growth and is confronting further significant challenges. Its manufacturing and export sectors are faltering as the economy struggles with trade friction, slower growth in China, and a bleak outlook for the automotive sector as car sales have plummeted across Europe.

A static economy has also highlighted the issues of regulation, skill shortages, and a lack of investment in infrastructure.

France shares some of these problems, as well as a weak government and a fiscal crisis that has partially undermined confidence in its bond market.

Italy, which has been grappling with excessive government borrowing, high unemployment and low productivity for many years, has a stable government but also shares some of Germany’s challenges with respect to its significant manufacturing and export sectors.

Despite stronger growth in some peripheral economies within the EU, the core is clearly struggling, and I expect growth to disappoint again in 2025.

Some relief will come as the central bank cuts interest rates, but in my opinion, this will be insufficient to offset the challenges holding the core of Europe back.

The IMF and OECD expect the Euro area to grow by about 1.25% next year, which is higher than this year’s 0.7%. I expect growth to be similar, if not lower, than in 2024.

Perhaps as worrying as these economic issues are, there is an increasing realisation that the EU has become structurally uncompetitive because of overregulation and its leading green policy agenda.

These issues will not be easily overcome and, in part, are the cause of the political instability which is affecting many of its core economies.

Structural rigidities, excessive regulation, growing political discontent and fragmentation, high unemployment, sovereign debt challenges and growing trade friction, in particular with China, and possibly in the future with the US, are all combining to create a very difficult backdrop for the economy and, in my opinion, for the region’s equity markets. Although none are expensively rated, neither do any look appropriately cheap in my view, other than possibly Italy, whose index is dominated by lower-rated banks, insurance and oil companies.

Of course, there will be some attractive individual equity situations across Europe’s indices, but for the region as a whole, I am cautious, especially so for those parts of the economy heavily dependent on sectors like the automotive industry, which are navigating an incredibly difficult time at the moment.

I am not at all clear about how these serious and fundamental political and economic problems will be overcome, but the risk attaching to something more profoundly disruptive happening must have increased.

Germany, the EU’s largest economy, faces its third consecutive year of zero growth, with industrial output in key sectors like automotive at historic lows.

The UK

The UK economy will beat consensus growth expectations. Lower inflation, interest rates, and consumption growth are the key factors driving that growth.

Despite many headwinds, the UK economy has confounded the consensus narrative and significantly outperformed expectations in recent years.

Despite an extremely disappointing budget in late October, which resulted in higher levels of taxation and government spending, I expect that in 2025, the economy will yet again beat consensus expectations (OBR, MPC, OECD, IMF) and deliver growth in excess of 2%.

Perhaps the biggest single variable for the economy going forward is how consumer saving pans out over the next few years. At above 10%, it remains significantly above its long-run history and well above saving in the US, which is down at 4% of GDP. For the record, my hunch is that consumer savings will fall from this elevated 10% level, providing an additional growth boost to the economy in the years ahead.

I expect inflation to fall back towards 2% as 2025 unfolds, as wage increases moderate and energy prices weaken. Consequently, I expect interest rates to continue to fall through the year to 3.75% by the last MPC meeting in November.

Although higher taxes are a headwind for the economy, to help put the additional £25bn annual bill in employers’ national insurance announced in the recent budget into context, households increased bank deposits by an additional £20bn in October alone.

In other words, although higher corporate taxes will be a challenge for profitability, for the economy as a whole, they are not that significant.

The UK equity market has been a serial underperformer for nearly a decade and has been structurally undermined by a series of poorly thought-through and damaging regulatory reforms that date back to the early 2000s. This has left it trading on a very low valuation that is hard to reconcile with the quality, growth and return on capital of the businesses in the broader index nor with the underlying performance of the economy.

Despite many headwinds, the economy should continue to outperform its peers in Europe and be capable of delivering 2% growth for at least the next two years. If households elect to reduce the current high level of saving, consumption growth could generate even faster growth.

This encouraging backdrop should create the circumstances for a significant rally in the market, but in the meantime, whilst international investors remain on the sidelines, further corporate activity and significant share buybacks will continue. Lower inflation in 2025 and a series of further interest rate cuts will also give more support to the market.

After such a long period of underperformance, this outlook may seem improbable to sceptical investors who have witnessed years of relatively poor returns in the UK equity market. However, history shows that mean reversion is the most reliable predictor of return to those prepared to be patient.

UK household savings remain at over 10% of GDP—double the US rate—offering potential for a significant economic boost as savings unwind.

Conclusion

In conclusion, as I look ahead to 2025, I see a world navigating through significant economic shifts, with clear divergences across regions and markets.

In my view, the US economy will perform well and exceed consensus expectations. Lower inflation, declining interest rates, and supportive fiscal policies will be key drivers of this outperformance. While trade friction remains a challenge, I don’t believe it will derail broader economic momentum.

In China, I expect the government’s substantial policy stimulus to generate higher and more balanced growth, reducing the economy’s reliance on manufacturing and exports while boosting domestic consumption.

Europe, however, presents a more difficult picture. Structural rigidities, excessive regulation, and political fragmentation are likely to weigh on growth, leaving the EU trailing behind its developed economy peers.

Meanwhile, I believe the UK will once again defy expectations. With falling inflation, lower interest rates, and robust consumer spending, the UK is well-positioned to deliver above-consensus growth.

In financial markets, I think the dynamics will reflect these regional disparities. In the US, the Magnificent 7 stocks are unlikely to sustain their recent outperformance, with more compelling opportunities emerging in mid- and small-cap equities.

China’s equity markets, which have been undervalued and overlooked, appear ready for recovery as stimulus measures take effect. By contrast, European equity markets are likely to underperform, weighed down by the region’s broader challenges. In the UK, I see a strong possibility for a meaningful rally in equities after a decade of underperformance, as market conditions improve.

That said, surprises could always alter the landscape. A peace deal in Europe brokered by Trump, a trade agreement with China, much lower energy prices, or significantly reduced global inflation are all possibilities. However, EU political tensions could also escalate, creating further uncertainty.

In my view, navigating 2025 will require a clear focus on the macroeconomic environment but the potential opportunities could be significant.

Important information

The document is intended exclusively for professional clients, and no other individuals should act upon it.

The views expressed in this article are those of the author at the date of publication and not necessarily those of Curated Capital Ltd. The contents of this article are not intended as investment advice and will not be updated after publication unless otherwise stated.

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Except where otherwise indicated herein, the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date hereof.