Economic Outlook 2025: A Shift in Expectations
As the global economy navigates the complexities of inflation and growth, Vanguard’s latest economic and market outlook for 2025 presents a nuanced perspective. Led by Global Chief Economist Joseph Davis, the research team anticipates a more limited easing cycle by the Federal Reserve, driven by sticky inflation and a slowing U.S. GDP growth rate of 2.1% next year.
Inflation Remains a Key Concern
Despite recent progress, core inflation is expected to stay above 2.5% in 2025, forcing the Fed to maintain its policy rate at or above 4% by year-end. This challenges market expectations of aggressive rate cuts, suggesting a different path ahead as inflation persists and economic growth remains resilient.
Supply-Side Factors Drive Growth
Vanguard attributes the robust 3% GDP growth in 2023 to productivity gains and available labor, rather than monetary policy. These supply-side factors have helped drive growth while inflation cools. However, emerging policy risks like stricter immigration rules and trade tariffs could offset these positive drivers.
Global Economic Outlook
The firm projects a moderation in U.S. GDP growth to 2.1% in 2025, while other major economies face tougher conditions. The Euro area is expected to grow a mere 0.5% due to weak productivity and fading external demand, and China’s growth forecast is at 4.5% amid property sector troubles and subdued confidence.
Market Implications
Vanguard sees growing tensions between momentum and stretched valuations, particularly in U.S. equity ETFs. While near-term returns could remain strong if earnings growth persists, high starting valuations will likely drag on long-term performance. In contrast, the ETF issuer remains constructive on bonds, projecting 4.3% to 5.3% annualized returns for both U.S. and global ex-U.S. bonds over the next decade.
A Shift in Expectations
As the economic landscape evolves, investors must adapt to a new narrative. With inflation persisting and economic growth remaining resilient, Vanguard’s outlook challenges market expectations and suggests a different path ahead. By understanding these shifts, investors can better navigate the complexities of the global economy and make informed decisions for the future.
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