Dec 10, 2024
Written By: Keith Prather, Managing Director, Armada Corporate Intelligence
As we look ahead to 2025, the global economy stands at a crossroads, with the United States playing a pivotal role in shaping the global economic landscape. The election of Donald Trump as the 47th President of the United States marks a significant potential shift in policy direction, bringing both opportunities and challenges for domestic and international markets.
The U.S. economy is expected to maintain a robust growth trajectory in 2025, with forecasts ranging from 2.0% to 2.7%. This growth rate, while slightly lower than the 2.7% forecast for 2024, still outpaces the long-term trend of 1.8% seen in the years following the 2008-2009 financial crisis. The global economy is anticipated to grow at around 3%, with China projected to expand by 4.5% (weaker than its average of 6.7% between 2010 and 2024).
Inflation, as measured by the Personal Consumption Expenditures (PCE) price index, is expected to average around 2.2% in 2025. However, core inflation may remain above 2.5% for most of the year due to potential policy-induced inflationary pressures. The Federal Reserve is likely to navigate this landscape carefully, with the federal funds rate projected to decrease to 3.5% by the end of 2025.
Labor Market and Productivity
The unemployment rate is forecasted to be around 4.2% in 2025, indicating a moderately tight labor market. This low unemployment rate, coupled with rising wages, could continue to contribute to sticky inflationary pressures. However, a potential productivity boom, driven by advancements in artificial intelligence and technology, may help offset some of these pressures and support economic growth.
Fiscal and Trade Policy
The new administration’s fiscal policy is expected to be expansionary, potentially including tax cuts and increased spending in areas that have higher economic multiplier impacts on the economy. Timming and cutting spending in some areas will be offset by investments in others. While this could fuel growth in the short term, it could also lead to higher inflation and interest rates. The sustainability of U.S. debt is a growing concern, with the Congressional Budget Office projecting the debt-to-GDP ratio to reach 107% by 2029.
The Trump Treasury Secretary Appointee Scott Bessent (at the time of writing) has touted a 3-3-3 plan, which targets a 3% annual GDP growth rate coupled with trimming the budget deficit to 3% (currently running 6.4% which is $1.8 trillion), and a 3 million barrel per day increase in daily oil production in the US (to help tame inflation).
Trade policy under the Trump administration poses one of the most significant risks to global growth in 2025. Campaign promises of substantial tariff increases, particularly on Chinese imports, have raised concerns about a potential trade war. While the full implementation of these tariffs seems unlikely, even modest increases could impact global supply chains and economic growth. In the first term, some estimates show increased tariffs only increasing macro inflation by 2 tenths of a percent – it only had a marginal impact.
Credit Conditions and Financial Markets
Treasury yields are expected to trend lower in 2025, with the 10-year yield potentially moving towards the 4.0% to 4.25% range. However, this forecast is subject to change based on inflation trends and Federal Reserve policy decisions. The yield curve is likely to remain inverted, albeit at lower levels.
Corporate bond issuance is projected to grow moderately in 2025, with global bond issuance expected to increase by 4%. This growth, while positive, represents a slowdown from the robust 17% growth anticipated in 2024. The U.S. dollar corporate supply is forecasted to reach $850 billion in 2025, making it a strong year for issuance but not breaking records.
Expanding Industries
Several industries are poised for expansion in 2025 (not an exhaustive list):
- Artificial Intelligence and Technology: Increased investment in AI and related technologies is expected to drive growth and productivity gains across various sectors.
- Life Sciences: Continued innovation and investment in healthcare and biotechnology are likely to fuel expansion in this industry.
- Data Centers: Construction and expansion of data centers are projected to continue, driven by increasing demand for cloud computing and data storage.
- Renewable Energy: The power sector is anticipated to see growth, particularly in clean energy projects and infrastructure (bolstering the electricity grid, etc).
- Financial Services: Banks, private equity, and private credit firms may benefit from improved conditions and the opportunity for increased risk-taking.
- Pockets of Construction: Some segments of the nonresidential construction sector should continue to experience strong growth. Construction of manufacturing and industrial facilities will remain chief among those opportunities.
Industries Under Pressure
Some industries may face challenges in 2025 (also not an exhaustive list):
- Traditional Manufacturing Relying on Foreign Trade: Sectors heavily reliant on imports or exports could be impacted by potential trade tensions and tariff increases.
- Real Estate: The commercial real estate sector, particularly office spaces, may continue to struggle with changing work patterns post-pandemic. But again, some pockets will remain robust.
- Industries Dependent on Government Contracts: Potential shifts in government spending priorities could impact contractors and other sectors reliant on federal funding.
Global Risks
Several global risks could impact the economic outlook for 2025:
- Geopolitical Tensions: Ongoing conflicts in Ukraine and the Middle East, as well as potential escalations with Iran or China, could disrupt global markets and supply chains.
- Trade Disputes: The implementation of aggressive trade policies by the U.S. could lead to retaliatory measures from trading partners, potentially slowing global growth. An example like the trade dispute started with the ban of US advanced chips exports and Chinese rare earth materials ban may have just been the start of an interesting period ahead.
- Debt Sustainability: Rising global debt levels, particularly in advanced economies, could pose risks to financial stability.
- Technological Disruption: While AI and other technologies offer growth opportunities, they also present risks of job displacement and economic inequality.
The U.S. Dollar and Global Implications
The U.S. dollar is expected to remain strong in 2025, supported by relatively higher interest rates and robust economic growth. This strength could have mixed implications for the global economy. While it may help control inflation in the U.S., it could create challenges for emerging market economies with dollar-denominated debt.
The potential for more restrictive trade policies and a stronger dollar could lead to tighter financial conditions globally, particularly in emerging markets. This could result in capital outflows from these economies and increased volatility in currency markets.
Conclusion
The economic outlook for 2025 presents a complex picture of growth opportunities and potential risks. While the U.S. economy is expected to maintain its growth trajectory, supported by technological advancements and productivity gains, it also faces challenges from potential policy shifts and global uncertainties.
The trajectory for US debt accumulation and the risks to global financial markets was unsustainable, regardless of which party won the election. Significant fiscal changes would be required regardless, and the impacts of those measures would hit any party in power.
The new administration’s policies, particularly in trade and fiscal matters, will play a crucial role in shaping both domestic and international economic landscapes in the years ahead. Industries aligned with technological innovation and financial services are likely to see expansion, while those vulnerable to trade tensions or shifting government priorities may face headwinds.
Keith Prather, MBA: Managing Parter and Co-Founder – armadaintel.com
During his 21 years as Armada’s primary strategist, Keith has worked with Fortune 500 companies on everything from economic forecasting to M&A strategy, strategic planning, and corporate marketing efforts. He has pioneered the concept of the Continuous Situation Analysis that companies use in a fast-paced, aggressive modern business environment.
Mr. Prather serves as an analyst briefing executives on domestic and global economic outlooks, geopolitical risk, supply chain issues, raw material supply, and environmental impacts on business operations.
Keith is the chief editor and one of the two primary writers for the Flagship, an Executive Intelligence Brief. Executives around the world read the Flagship for insight, foresight, and risk intelligence. Keith is also a keynote speaker for industry associations.