2025 expected to bring resilient economic growth, with headwinds easing in the second half of the year 

EFG today presented its outlook for 2025 with its top-ten convictions for the coming year. Following the soft landing in 2024, it expects economic growth to remain resilient in 2025. EFG nevertheless anticipates that a number of headwinds could persist in the first half of the year, creating some uncertainty and potentially weighing on growth. It expects the situation to improve in the second half of 2025 and foresees further improvement into 2026.

EFG take the view that the global economy will show continued resilience in 2025 with GDP growth likely to reach around 3.2%. However, they have identified three main headwinds that could cause uncertainty and challenge economic growth in the first half of the year in particular:

First, EFG believes international trade could be disrupted if the Trump Administration introduces new tariffs on US imports, which could be as high as 60% for goods from China and 10%-20% for imports from the rest of the world. These steps and the retaliatory measures that they will likely trigger could threaten global growth and increase uncertainty about future trade relationships.

The second headwind relates to the Chinese economy, which is suffering from structural weaknesses in the property market, high local government debt and poor consumer confidence – all challenges that cannot easily be resolved and will weigh on the global economy, unless significant stimulus is forthcoming. Third, as Western Government’s around the world start to tackle their excessive deficits, this could act as a break to growth. This will though be differentiated based on the growth and productivity focus for each country. As a result, “bond vigilantes” will have a significant influence in 2025.

The outlook for the global economy is expected to improve in the second half of the year, however, EFG believes that the BRICS group could emerge as a key driver of global growth as they continue to increase in size and importance. BRICS nations are now home to around 45% of the world’s population and generate 37% of global GDP. Looking ahead to 2025, they are expected to account for half of the increase in global GDP according to the IMF with G7 major advanced economies contributing just 15%.

Another important theme in 2025 will be a shift in policy focus from inflation to employment. EFG takes the view that with inflation now close to pre-pandemic levels and back within central bank target ranges, the focus will shift to the labour market and onto job creation to drive growth. This shift will bear fruit in H2 2025 and into 2026.

AI goes mainstream

Alongside these macro themes, EFG anticipates that the importance of generative AI as a driver of growth will become increasingly visible in 2025. Following the rapid adoption of this technology in 2024, EFG anticipates that 2025 will be a year in which generative AI goes mainstream. With the US leading the way in AI investing, and with China and Europe lagging behind, AI is an important source of strength for the US economy, especially if it feeds through to higher productivity.

EFG points out, however, that the increased usage of AI will push up electricity demand, with consumption by data centres, AI and the cryptocurrency sector set to double between 2023 and 2026 – paving the way for a comeback for nuclear energy to meet this soaring demand.

Corporate earnings expected to exceed long-term trend growth

2025 is also expected to bring corporate earnings growth of above 10%, supported by the resilience of the global economy. This would exceed the average annual growth in earnings of 6% seen over the last ten years. EFG believes that some sectors will fare better than others, with those that struggled in 2024 likely to rebound in 2025. Looking at the US, there is some concern about whether this level of earnings growth can be achieved, given the degree of concentration in the US stock market, with the top-ten companies in the S&P 500 index currently accounting for 35% of market capitalisation. Meanwhile, the outlook for small and mid-sized companies in growth sectors such as technology looks more positive.

Turning to the US and global equity markets in 2025, EFG believes the outlook is most promising for the consumer discretionary sector, given the broadly supportive economic fundamentals for this industry. In particular, wage growth, employment trends, accumulated savings, wealth effects and falling interest rates will buoy consumer spending in 2025, albeit to varying degrees. Further, EFG believes that in the consumer discretionary sector, valuations on the basis of its proprietary model are cheap relative to other cyclical sectors.

Opportunities in 10-year yields and high yield markets

In terms of opportunities in the fixed income markets in 2025, two trends are emerging. First, EFG believes there will be a general tendency for yield curves to steepen, particularly in the US. The conventional explanation is that this would be driven by more short-term interest rate cuts by policy makers as inflation recedes further. There will also be upward pressure on long-term bond yields as a result of higher government deficits. The second area of opportunity is in government bond yield spreads as well as opportunities in corporate and high yield markets. Sector and company selection will be more important than ever in an environment characterised by political and competitive change. EFG also continues to see opportunities in emerging market hard and local currency debt, given the stronger environment for BRICS.

Moz Afzal, Global Chief Investment Officer at EFG: “For 2025, we expect economic growth to remain resilient. There may still be a number of headwinds that could challenge growth in the first six months of the year but they should ease in the second half. It is set to be an interesting year, with many different trends emerging, such as shifts in policy focus from inflation to employment, vulnerable government deficits, BRICS growing in importance. From a thematic perspective, we like trends such as AI going mainstream, the nuclear power renaissance, and a consumer discretionary revival. This all – means that 2025 will no doubt be a year of both opportunities and challenges.”

Overview of EFG’s top-ten convictions for 2025:

• The global economy remains resilient despite headwinds: Three headwinds are expected to influence the global economy in 2025: Trade disruption, continued problems in China’s economy and high government debt and deficits. Measures might be introduced to improve government efficiency in the US and loosen restrictive fiscal policies in Germany. Uncertainty will be most pronounced in the first part of the year but should ease in the second half of 2025 and into 2026.

• BRICS grow in importance: The BRICS group is growing and now includes nine economies, accounting for 45% of the world population and 37% of global GDP. Half of global growth in 2025 will be generated by BRICS nations. There may be greater cooperation within the group on trade and finance as they become less dependent on western economies.

• Focus of policy shifts from inflation to employment: With the battle against inflation largely won, the focus will move to job creation. This shift will be easiest in the US where the Fed has a dual mandate – low inflation and maximum employment. Job creation is also a high priority for many other countries.

• Government deficits remain a problem: Global government debt has reached USD 100 trillion and high deficits mean debt levels are set to rise even further. High debt levels will not, however, lead to austerity policies. Indeed, some countries may move in the opposite direction.

• AI goes mainstream: The uptake of generative AI has been faster than that of the Internet. The US leads China and Europe in AI investment, placing the US economy at a clear competitive advantage. Cloud-based infrastructure needs to grow and adapt to accommodate these changes.

• Nuclear power renaissance: Global electricity demand will soar due to the electrification of housing, transport and industry, data centres and cryptocurrencies. Nuclear power is likely to make a comeback as governments seek to meet the sharp rise in demand for electricity.

• Corporate earnings still supported: Corporate earnings generally grow over the long term but in the short term, the extent to which they can surprise on the upside is important for the equity market. In the last two years, earnings were broadly in line with expectations and the S&P 500 has produced gains of over 20% each year. Current expectations are for 10% earnings growth in 2025.

• Market concentration – a relative danger: The top-10 companies in the S&P 500 index currently account for 35% of its market capitalisation. This level of concentration has not been seen since the 1960’s. However, three factors suggest this is not a problem: Historic parallels, the selection of appropriate valuation measures and the risk of not owning the largest stocks.

• Consumer discretionary is our favoured sector: The consumer discretionary sector is EFG’s favoured area of the US and global equity market for 2025. Wage growth, employment trends, accumulated savings, wealth effects and falling interest rates are expected to be supportive of consumer spending in 2025.

• Yield curve steepening: The fixed income market offers a range of opportunities. In 2025, two areas appear to be particularly interesting. First, there will be a general tendency for yields curves to steepen, particularly in the US. Opportunities related to the yield spread are also likely to be found in the eurozone, as well as corporate and high yield markets and the BRICS.