Year Ahead
Economic outlook and President Trump
In our base case, we expect sustained economic growth in the US, supported by healthy consumption, loose fiscal policy, and lower interest rates. Tariff threats are a headwind for Asia and Europe. If imposed, they could be partially offset by reactive stimulus measures in China. We expect growth in Europe to modestly improve as interest rates fall.
US: Slower but solid
Over the past two years, the US economy has defied expectations that higher interest rates would provoke a sharp slowdown. In 2024, nonfarm payroll growth averaged 170,000 per month, and GDP growth estimates point to a 2.7% rate for the full year.
In the year ahead, we expect US economic growth to slow somewhat but remain close to 2%. We believe many of the key factors that have sustained US economic growth in recent years are likely to persist.
Strong incomes support spending
Strong income growth is enabling consumers to increase spending while maintaining decent savings rates. This suggests that consumption can stay robust, provided the labor market remains healthy. Unemployment has started to rise but remains low by historical standards.
We also expect inflation to keep falling, even if selective tariffs contribute to a one-off increase in some prices. US goods prices have been in deflation for the past three years, while stubbornly high shelter prices are easing. In our view, the Fed is likely to look past tariff-induced price increases and will cut interest rates by a further 100bps during 2025, bringing rates close to our estimate of neutral (3.25-3.50%) by the end of the year. Lower rates should ease pressure on indebted households and businesses, and improve conditions in interest-rate-sensitive parts of the economy.
Tax cuts and deregulation under President Trump may further bolster the US economy.
Risks to watch
We are monitoring potential risks. While we do not believe selective tariffs on US imports from other countries are sufficient to derail US growth, blanket tariffs would increase the risk of US stagflation.
Limits on migration introduced in mid-2024, and potential future limits on migrant labor supply, are likely to mean slower labor supply growth. This could cause inflation to remain more stubborn than expected and could limit overall GDP growth.
We also note that US fiscal policy is unsustainable over the long term. We expect a budget deficit in excess of 6% in 2025 for the fourth consecutive year. We do not expect any major measures to address the deficit to be introduced in the near term, and there is a risk that higher long-term borrowing costs weigh on US growth.
Asia: Divergence amid slower growth
We forecast slightly slower growth in Asia in 2025, with regional variations.
China: Tariff headwinds
In our base case, we anticipate the Trump administration will introduce additional selective tariffs on US imports from China, increasing the effective rate from about 10% to 30% by end-2026. In a risk scenario, a 60% blanket tariff could make much of US-China trade unviable.
However, China’s CNY 10 trillion local government debt resolution plan should help mitigate risks, and Beijing appears ready to boost economic stimulus if needed.
We expect China’s growth to move from 4.8% in 2024 to 4.0% in 2025.
Robust growth in emerging Asia
India and Indonesia are likely to experience stronger growth due to favorable demographics and lower tariff risks. In fact, US-China tensions might actually enhance investment in other parts of Asia, bolstering infrastructure and construction activity.
Acceleration in developed Asia Pacific
We forecast Japan’s growth to accelerate to 1.1% in 2025 from -0.2% in 2024, driven by higher wages and consumption, with a Bank of Japan rate hike anticipated by mid-2025. We project Australia’s GDP to increase to 2.0% in 2025 from 1.2% in 2024, aided by fiscal measures to boost consumption and increased mineral demand for renewable energy.
Europe: Uneven and subdued but stronger
In 2025, we expect Europe’s economic growth to be uneven and subdued, yet stronger than in 2024.
Trade risks
A global trade war is a potential risk for Europe in the year ahead, especially for export-oriented economies. At the same time, higher European defense spending and additional investment associated with near-shoring may support growth.
Country-level divergence
We believe Germany, France, and Italy will experience modest growth of around 1%, with structural challenges and fiscal constraints limiting growth. We expect Spain, the UK, and Switzerland to outperform, with growth rates of approximately 2.3%, 1.5%, and 1.3%, respectively.
Fiscal and manufacturing headwinds
Tight fiscal budgets are constraining public spending and limiting the ability of governments to stimulate their economies through public investment. The manufacturing sector is also under pressure due to weak demand from China.
Consumer and monetary support
Despite these challenges, we expect high recent savings rates and rising real incomes to boost consumer spending as inflation declines. Furthermore, we expect further interest rate cuts by the European Central Bank, Bank of England, and Swiss National Bank to support corporate investment.
A Trump presidency, coupled with Republican control of Congress, has the potential to reshape the global economic and geopolitical landscape. Key policy areas in focus for investors include tariffs, fiscal policy, deregulation, monetary policy, and international relations.
Economic implications
Trade: Selective and bilateral tariffs likely
Tariffs—particularly the mooted blanket 60% on Chinese imports and 10% on others—pose the most significant global economic risk. Given potential legal and Congressional challenges, we think that the Trump administration is more likely to implement bilateral and selective tariffs. Such tariffs are likely to contribute to volatility for European and Chinese markets, but in our base case we do not believe they would derail US growth.
Fiscal and regulatory policy: Congressional constraints?
The Trump campaign emphasized extending personal income tax cuts, reducing corporate taxes, and implementing deregulation on the financial and energy sectors. While these measures could stimulate economic activity, Congressional objections amid large federal budget deficits may limit their scope. For example, fiscal hawks in Congress might resist policies that further expand the deficit.
The Fed: Still on course for lower rates
Although tariffs could temporarily increase inflation, we believe the Federal Reserve will continue its path of rate cuts toward achieving a neutral policy stance; we anticipate 100bps of rate cuts in 2025. Nevertheless, the Fed will closely monitor factors that could have a more long-lasting impact on inflation or inflation expectations, including limitations on migration, blanket trade tariffs, or significantly looser fiscal policy.
Geopolitics: Peace through strength
A “peace through strength” approach to Trump’s foreign policy could increase volatility in a market seeking greater geopolitical stability.
Initially, we expect a more confrontational approach toward China, strains in transatlantic relations, and a “maximum pressure” strategy on Iran, with a view of seeking deals to preserve US interests. At the time of writing, Polymarket prices the odds of Trump ending the Russia-Ukraine war within 90 days of taking office at 39%.
Market implications
Equities: Divergent US and international impact
For the US, we anticipate the S&P 500 reaching 6,600 by the end of 2025, driven by benign growth, lower interest rates, and AI advancements. Potential tax cuts and deregulation under a Trump administration could further support markets. Our preferred sectors include technology, utilities, and financials. While tariffs may affect tech earnings, AI infrastructure spending remains robust. Utilities may face headwinds from less government support for renewables, but demand for AI data centers should drive power demand. We expect the financial sector to benefit from deregulation.
International markets could face greater headwinds from tariffs. That said, Beijing’s potential stimulus in response could help mitigate the impact on China, US imports from markets like Taiwan and Korea are not easily replaceable, and most US sales by European companies are from goods and services made in the US.
Bonds: Yields rise too far?
US Treasury yields rose in anticipation of a Trump presidency. But with the Fed likely to stay on a rate-cutting path, and with plans to loosen fiscal policy facing potential Congressional constraints, we think yields are likely to fall in the year ahead. We believe investors should use currently elevated yield levels to lock in returns.
Currencies: Near-term dollar strength, longer-term weakness
The US Dollar Index has strengthened on confirmation of a Trump presidency, driven by expectations of lower taxes, higher tariffs, and heightened geopolitical uncertainty. While the dollar may remain strong in the short term, we believe that the dollar is now overvalued and overstretched at current levels. The Chinese yuan is likely to remain pressured until clarity about trade tariffs emerges.
Gold: Initial sell-off, a good hedge
Gold prices sold off on confirmation of a Trump presidency, with a stronger US dollar, higher yields, and a decline in equity market volatility crimping investor demand for the metal. However, in 2025, we believe gold will remain an effective hedge against key political concerns, including government debt levels, inflation, or geopolitical tensions. We maintain our target of USD 2,900/oz by end-2025 and continue to recommend an around a 5% allocation to gold as a diversifier.
Base case: Growth despite tariffs
- 0 %
Probability
S&P 500: 6,600
US 10-year yield: 4.00
EURUSD: 1.12
US equities rise. US growth is supported by deregulation and improved business confidence, more than offsetting the impact of selective tariffs on Chinese and key European imports. Trade and geopolitical negotiations add to volatility for European and Chinese markets. The most expansionary US fiscal plans are shelved and inflation falls toward target. Bond yields fall slightly and central banks consistently cut interest rates toward neutral.
Bull case: Growth surge
- 0 %
Probability
S&P 500: 7,000
US 10-year yield: 4.50
EURUSD: 1.15
US equity markets surge on strong US growth and AI optimism, and inflation remains contained. A trade deal is reached and/or Chinese fiscal stimulus and stronger global demand are sufficient to support European and Asian markets, despite tariffs. Bond yields stay elevated on stronger longer-term growth and inflation expectations. Central banks gradually cut interest rates toward neutral.
Bear case: Hard landing
- 0 %
Probability
S&P 500: 4,500
US 10-year yield: 2.50
EURUSD: 1.05
US growth declines owing to weak consumer spending and deteriorating labor markets. Tariffs add to economic challenges for Europe and Asia. A weaker consumer more than offsets the inflationary impact of tariffs, and inflation falls, prompting central banks to cut rates. Global equities suffer double-digit losses, and credit spreads widen. Assets with safe-haven characteristics, including high-quality bonds, gold, the Swiss franc, and the yen, appreciate.
Bear case: Tariff shock
- 0 %
Probability
S&P 500: 5,100
US 10-year yield: 5.00
EURUSD: 1.00
The imposition of large, blanket tariffs on US imports from multiple countries and retaliation from trading partners trigger higher US inflation, which, alongside a rising fiscal deficit, leads to higher bond yields. The disruption to global trade leads to lower US domestic demand and much weaker global economic growth. US and global equities decline.
Explore more of the Year Ahead 2025 report
Year Ahead
In our base case, we expect sustained economic growth in the US, supported by healthy consumption, loose fiscal policy, and lower interest rates. Tariff threats are a headwind for Asia and Europe. If imposed, they could be partially offset by reactive stimulus measures in China. We expect growth in Europe to modestly improve as interest rates fall
A Trump presidency, coupled with Republican control of Congress, has the potential to reshape the global economic and geopolitical landscape. Key policy areas in focus for investors include tariffs, fiscal policy, deregulation, monetary policy, and international relations.
Decade Ahead
The 5Ds—debt, deglobalization, demographics, decarbonization, and digitalization—will be significant forces in the decade ahead that present opportunities and risks for investors. In aggregate, we expect them to lead to higher growth and periods of higher inflation over the long term.
Since the beginning of the decade, cash returns have struggled to surpass inflation and bonds have faced headwinds from rising interest rates. In contrast, equities have thrived, and private markets and commodities have offered robust returns. Looking ahead, we expect equities and private markets to continue to offer the highest potential returns.
Top investment ideas
Entering 2025, we believe stocks still have more to go, with our base case expectations of growth (despite tariffs), lower interest rates, and AI advancements. In fixed income, we think there is an opportunity to lock in yields for quality bonds. In currencies, while the dollar may remain strong in the short term, we believe it is looking stretched and advocate for selling it at further strength. We also like gold as a diversifier. Finally, we think the global real estate outlook looks promising.
Taking a step back, while these investment ideas present compelling cases for immediate action, developing a strategic plan that links goals with strategies can improve investors’ chance of success and help them stay focused on the bigger picture amid potential market turbulence.
Forecasts
We aim to provide the direction of travel for the economy and asset classes against a wide range of market outcomes ahead. The upside scenario would see lower taxes, deregulation, and trade deals adding to a positive market narrative built on solid growth and continued investment in artificial intelligence, while the risk scenario is that trade tariffs, excessive fiscal deficits, and geopolitical strife will contribute to higher inflation, weaker growth, and market volatility.
Disclaimers
Disclaimers
Year Ahead 2025: UBS House View
Chief Investment Office GWM | Investment Research
This report has been prepared by UBS AG, UBS AG London Branch, UBS Switzerland AG, UBS Financial Services Inc. (UBS FS), UBS AG Singapore Branch, UBS AG Hong Kong Branch, and UBS SuMi TRUST Wealth Management Co., Ltd.
