As we embark on a new year, it’s common practice to make predictions about the economic and investment landscape.
Challenges facing the global economy
We anticipate that the global economy in 2025 will face numerous challenges, including shifting U.S. trade policies, structural issues in China and slow growth in the eurozone. Despite these obstacles, we expect global gross domestic product (“GDP”) to grow by approximately 3%. This is a modest pace compared to historical standards but enough to support “risky” assets, such as non-government non-investment grade bonds, equities or commodities.
In our view, in the U.S., higher inflation and interest rates than what market participants previously expected, along with slower GDP growth, will characterize the year. However, strong household and business balance sheets should help cushion the impact. In China, fiscal and monetary support could spur short-term growth, but structural constraints such as elevated debt levels and supply/demand imbalances will likely reemerge. Meanwhile, Canada may see early gains from lower interest rates, but slowing immigration and U.S. tariffs could cap growth at around 1.5% by 2026. In our view, emerging markets will generally experience gradual slowdowns, with India continuing as a standout performer.
In our view, in the U.S., higher inflation and interest rates than what market participants previously expected, along with slower GDP growth, will characterize the year.
We expect interest rates to fall further in 2025, but central banks will likely approach monetary easing cautiously. In the U.S., inflation driven by tariffs may peak at 3% before moderating in 2026, prompting the U.S. Federal Reserve Board (“Fed”) to adopt a measured stance, with rates likely ending the year between 3.50% and 3.75%. While we predict China and Australia to tread carefully, the European Central Bank may implement more aggressive cuts due to persistently weak growth, likely weakening the euro.
The Bank of Japan stands out as a potential exception, which may raise rates amidst unique domestic conditions.
While geopolitical events will dominate headlines, their direct economic consequences may remain limited. The return of Donald Trump to the U.S. presidency could shape global dynamics, from trade relations to conflict risks. Tensions between the U.S. and China will likely deepen, but the economic fallout will likely play out over years rather than months. Of note, a potential conflict over Taiwan remains a low-probability, but high-impact risk.
We also believe concerns over a global trade war may be overblown. While tariffs and protectionist measures from the U.S. will likely disrupt trade flows, global trade volumes are unlikely to collapse. Adjustments in exchange rates and selective retaliation from other nations may limit the broader impact. We expect U.S. imports to shrink, but global trade could still post modest gains if the world economy remains resilient.
High debt levels and widening budget deficits will likely constrain fiscal policy across many advanced economies. Countries like France, Italy and the U.S. face increasing scrutiny from bond markets, which could force governments to prioritize fiscal discipline over stimulus spending. While emerging markets in Asia appear better positioned, vulnerabilities in economies like Brazil remain a concern. These fiscal pressures are likely to temper expectations for bold policy moves in 2025.
Navigating the AI boom
U.S. equities are poised to outperform in 2025, driven by the continued expansion of the artificial intelligence (“AI”) bubble.
Potential for a brighter 2025?
Despite notable risks, 2025 could surprise to the upside. A stronger-than-expected recovery in global productivity, driven by technological advancements and structural reforms, could push GDP growth closer to 4%. Alleviating inflation pressures in major economies and sustained fiscal and monetary support could further bolster economic momentum. While this optimistic scenario requires several factors to align perfectly, it serves as a reminder of the potential for resilience and recovery in the global economy.
Wishing you and your loved ones a happy, healthy, and prosperous 2025 and for the economic stars align in 2025!
Corrado Tiralongo
Vice President, Asset Allocation & Chief Investment Officer
Canada Life Investment Management
Disclaimers:
The views expressed in this commentary are those of Canada Life Investment Management as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their advisor for advice based on their specific circumstances. The content of this material (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.
This material may contain forward-looking information that reflects our or third-party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as ofJanuary 17, 2025. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise. Investment Planning Counsel Inc. is a fully integrated wealth management company. Counsel Portfolios are a family of funds managed by Canada Life Investment Management Ltd., a subsidiary of the Canada Life Assurance Company. Trademarks owned by Investment Planning Counsel Inc. and licensed to its subsidiary corporations. Mutual funds available through IPC Investment Corporation and IPC Securities Corporation.
