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Bulls are riding into 2025 on the back of high hopes for a Donald Trump-inspired boom

New York Stock Exchange trader Walter Lundon shows his allegiance. Picture: AFP
New York Stock Exchange trader Walter Lundon shows his allegiance. Picture: AFP

It has been a year of electoral anti-incumbency, revolutions, war and a global economy that survived a few market tremors to expand at a respectable annual rate of about 3 per cent. The economic outlook for next year is already gearing up to be one of the most uncertain since the aftermath of the financial crisis. In the spirit of festive cheer, however, it is time to look back on some of the things that went right in 2024 and why 2025 might not be as ghoulish as most are expecting.

Here is a potted list of the accomplishments of the past year, with some hopeful prognostics about what the new year may hold.

The first is the unbridled mania that has gripped financial markets in the past two months. A US stock market boom is already in train, driven by Donald Trump’s victory last month. US equity valuations have been on a tear, with the benchmark S&P 500 on course to deliver an annual return of 30 per cent to investors, more than twice that of Japan, Europe and the UK this year.

Money is pouring into American stocks at the fastest pace in three years, positioning for a “Trump boom”. US economic growth is almost certain to outperform its G7 peers next year, powered by Trump’s tax cuts, fiscal stimulus and planned deregulation. This sugar rush is coupled with a broader optimism about AI creating a new productivity boom, justifying steep valuations. Stock market bulls are also betting on Trump watering down his growth-retarding measures such as the mass deportation of tens of millions of migrants and a global trade war.

Now, as with any stock market booms, this one is laced with jeopardy. On some measures, US market optimism has hit peaks higher than before the tech bubble in the 2000s or on the eve of the financial crisis. Even Nouriel Roubini, dubbed the “Dr Doom” of markets, has said there is little alternative to US stocks. It may well go the way of stock market bubbles throughout history with a seismic crash. Or this time could be different. “Historical trends are being permanently broken in real time as mega forces, like the rise of artificial intelligence, transform economies,” according to BlackRock, the world’s largest asset manager.

Supporting the case for the bulls in 2025 will be an environment of steadily falling interest rates. Central banks such as the Fed and the Bank of England are unlikely to embark on the bumper monetary loosenings that had been forecast for large parts of 2024 but borrowing costs will still decline as inflation begins to settle at about the 2 per cent mark. This will support risky assets such as equities and provide a leg up to bonds.

The interest rate environment is the second source of optimism for the global economy next year. The once-in-a-generation tightening cycle, where interest rates were yanked up from close to 0 per cent in advanced economies, piled pressure on fiscal deficits and pushed up debt overhangs. The fiscal state of most rich countries, including the US, France and the UK, has worsened since the pandemic and spending demands on governments are only going in one direction. But debt crises are less likely when central banks are cutting interest rates. That is something to tentatively celebrate.

Another unsung development in 2024 is lower oil prices. The price of Brent crude has fallen from just under dollars 90 a barrel at the start of the year to closer to $US70, exerting a disinflationary force on global prices and a welcome relief after 2022’s global energy crisis. Low oil prices may also beget even lower oil prices, according to Neil Shearing at Capital Economics. “Saudi Arabia and other influential OPEC+ members might shift from a strategy of trying to prop up prices to one of capturing market share from higher-cost producers,” he says. “In other words, 2025 could be the year in which OPEC opens the taps. If this were to happen, oil prices could collapse.”

Two countries that have been perennial sources of pessimism in 2024 could also buck expectations in the coming year: China and Germany. China’s growth worries have preoccupied policymakers inside and outside the country. Yet the past few months have provided some hope that the Chinese Communist Party (CCP) is inching closer to the kinds of stimulus-enhancing measures needed to jolt consumers into life. Economic growth in the fourth quarter has been souped up by government measures and the CCP has said promoting consumer demand is its top priority in 2025. The spectre of Trump’s 60 per cent tariffs could also accelerate growth-enhancing measures at home.

In Germany, 2025 may well be the year that its infamous constitutional “debt brake” is loosened or even abandoned altogether. Europe’s largest economy goes to the polls in February and the centre-right conservatives are expected to be in pole position to form a new coalition. The fiscally hawkish Christian Democrats, who have been most wedded to the constitutional limit on borrowing, are already under pressure to relax the fiscal strictures to pay for their €100bn in promised tax cuts. Jettisoning the debt brake would be an unequivocal positive for Germany and the rest of Europe, freeing its political class to embark on desperately needed borrowing to fund public investment and rebalancing the eurozone’s skewed economy.

One final and often overlooked development that could have a series of growth-boosting consequences for developing economies is the proliferation of weight-loss treatments known as GLP-1 drugs, sold under names including Ozempic and Wegovy. Demand is outweighing supply in big economies, but the coming year could “be an inflection point” with a series of key regulatory approvals due that will “significantly boost growth” through higher labour force participation and lower obesity-related healthcare costs, according to analysts at Barclays.

The Times

Read related topics:Donald Trump

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Original URL: https://www.theaustralian.com.au/business/economics/bulls-are-riding-into-2025-on-the-back-of-high-hopes-for-a-donald-trumpinspired-boom/news-story/18803660955d953ea8041c5cce8de85c