As we kick off 2025, global economies face mixed outlooks, with inflationary pressures, slow growth, and shifting policy dynamics.
In the UK, bond markets had a wobble whilst retail sales growth was weak in December. The Bank of England is trying to play it safe, with rate cuts likely to be gradual as inflation and wage pressures linger.
Meanwhile, the US and Eurozone also grapple with inflation risks and labour market resilience, influencing central bank strategies.
What’s the latest in the UK?
Cautious shoppers weigh on festive retail performance. UK retail sales ended 2024 with weak growth of just 0.5% in December, adjusted for inflation.
This reflects reduced consumer purchasing power as rising prices and cautious spending defined the critical holiday season.
Non-food sales dropped 1.4%, while food sales posted only modest gains.
A late Black Friday provided a temporary boost but failed to counter weak holiday sales overall.
With 2025 sales growth forecast at 1.2%, below projected shop price inflation of 1.8%, retailers face rising costs and limited options to offset them, as consumer demand remains subdued. Read more here.
Rising price pressures present a challenge for the Bank of England’s MPC. The December Decision Maker Panel Survey revealed that firms plan to raise prices by 4% over the year, up from 3.8% in November, the highest since April 2024.
Firms’ inflation expectations also increased, with one-year ahead CPI inflation expectations rising to 3% from 2.8%.
Pay expectations ticked up to 3.9% from 3.8%, and firms expect slower wage growth over the next year, though less so than the November forecast.
These signals of persistent inflation and wage growth suggest that the MPC will continue to cut rates gradually. Read more here.
House prices edged down by 0.2% in December after five consecutive monthly increases. Annually, Halifax reported an increase of 3.3% in December.
The market gained momentum from summer onwards, driven by falling mortgage rates, income growth, and upcoming Stamp Duty changes, which encouraged first-time buyers.
These factors boosted mortgage demand, reaching its highest level in over two years. However, while falling rates and strong demand have supported prices, affordability remains a challenge.
With the Bank Rate expected to decrease slowly, modest house price growth is anticipated for 2025, assuming employment conditions remain stable. Read more here.
Inflation insights. Sarah Breeden, deputy governor of financial stability at the Bank of England, outlined key findings about UK inflation and monetary policy.
While growth is slowing, uncertainty remains about whether reduced consumer spending or supply issues are driving this.
During 2021-22, households managed high energy costs by reducing consumption rather than cutting other expenditure.
Energy price shocks added nearly 4 percentage points to the Consumer Price Index (CPI) at their peak, significantly driving inflation upwards.
While recent economic evidence supports gradually reducing monetary policy restrictiveness, the pace of interest rate reductions from 4.75% will depend on better understanding the causes of economic slowdown and employers' responses to higher employment costs. Read more here.
2025 heralds a bold shift towards a bigger, more active State. Assuming the Autumn Budget’s plans take full effect despite the squeeze from the recent rise in borrowing costs, government consumption is set to rise to 26% of the total by 2028-29, from 22% in 2018-19, while public investment share climbs from 14% in 2016-17 to 20% in 2026-27.
These changes aim to transform public services like healthcare and education, with public sector jobs nearing one-fifth of the workforce by 2030.
The key challenge is ensuring these investments lead to better services and complement private sector growth, rather than crowding it out, while mitigating declining household disposable incomes. Read more here.
What’s the latest in Eurozone?
The inflation beast is down but not quite out. Eurozone inflation nudged-up 0.2pp, to 2.4%, in December.
That needn’t stand in the way of another 25bp ECB rate cut later this month, since inflation is slightly under ECB forecasts and the core rate is stable (2.7%). Yet like Hercules battling the Hydra, slaying inflation requires fighting on many fronts at once.
Resilient labour demand – unemployment stuck at just 6.3% in November – is keeping-up the pressure on services inflation (up 0.1pp to 4%).
Consumer three-year-ahead inflation expectations ticked-up to 2.4%. And tight gas markets threaten to exert renewed pressure on energy prices. The ECB may be wielding their rates dagger for some time yet. Read more here and here.
What’s the latest in US?
Grounds for pausing. The US labour market rebounded strongly into year-end. The concerns that led to the Fed cutting 50bps back in September seem like a distant memory!
An expectation-beating 256k jobs were added in December, the most since March, nudging the unemployment rate down to 4.1% from 4.2%.
Retail, leisure and hospitality, health care and social assistance drove the rise.
On the surface Biden bequeaths a pretty solid labour market to the incoming President. 2.2m jobs were added last year, less than 2023, but more than 2019.
Markets interpreted the data as a green light for the Fed to extend its pause, pricing the next cut in September compared to June prior to the data release. Read more here.
Careful approach makes January pause likely for the Fed. In December the federal funds rate was cut by a quarter point for a second consecutive month, bringing the rate to 4.25%-4.5%.
Amidst rising upside inflationary risk, this decision was described as ‘finely balanced’.
This in turn was driven by continued inflationary pressure and the potential impact of the incoming administration’s policy proposals, leading the markets to widely interpret from the FOMC minutes that the rate cutting cycle will likely be paused in January.
Nevertheless, it is anticipated that the uplift in inflation will not be significant enough to outweigh the labour market softness and subsequently, the FOMC is not expected to permanently divert from gradually easing rates. Read more here.