AB IQ China Economics Outlook Fixed Income Blog

World Economy to Continue Rebalancing in 2025

December 06, 2024

5 min read

Eric Winograd| Director—Developed Market Economic Research

Sandra Rhouma| European Economist—Fixed Income

Eric Liu| Portfolio Manager—Asia Fixed Income

The range of potential economic outcomes is wide, but a solid starting point suggests resilience.

The global economy has performed well in 2024, exceeding even our relatively upbeat expectations. Global growth may not have been exciting—our estimate for real GDP growth for the year is 2.6%—but the world economy did make solid progress toward rebalancing after the volatility of the post-pandemic period. We expect this rebalancing to continue, with both growth and inflation moving back toward equilibrium across the globe.

That said, significant changes in economic policies could alter the picture for 2025 and beyond. If tariffs are imposed broadly, as the incoming US administration has promised, we could see a more pronounced slowdown than we currently expect—and inflation could keep running hotter than desired. We don’t have much clarity yet on policy measures, which makes the range of economic outcomes unusually wide as we head toward the turn of the year.

US Consumer Spending Will Slow…but Gradually and Modestly

Still, the key to the US economic outlook continues to be consumer behavior. A strong labor market should keep household income growth above the inflation rate in 2025, supporting real consumption. With the pace of hiring slowing (Display), we anticipate that consumption will slow as well in 2025, though only gradually and modestly—unless the labor market suddenly collapses.

The Pace of Hiring in the US Is Slowing

Change in US Nonfarm Payrolls (Thousands)

Monthly and 12-month average change in US nonfarm payrolls

Past performance does not guarantee future results.
Through December 6, 2024
Source: LSEG Data & Analytics and AllianceBernstein (AB)

Growth is only part of the rebalancing story. Inflation is also in the process of normalizing, or at least moving toward what a new normal might be (Display). The Federal Reserve is targeting 2.0%, but we expect that over time it will be satisfied with inflation running closer to 2.5%. We think inflation has the potential to hit that mark in 2025, though if new tariffs are imposed that might not happen until 2026 or beyond. Despite the policy uncertainty weighing on the inflation outlook, we still expect the Fed to cut rates steadily in the coming quarters, with the policy rate eventually falling to close to 3% over time.

Inflation Seems Headed Toward Normal

US Consumer Price Index, 12-Month Percent Change

The 12-month percentage change in the US Consumer Price Index

Past performance does not guarantee future results.
Through October 31, 2024
Source: LSEG Data & Analytics

Europe’s Sluggish Growth Is Vulnerable to Trade Upheaval

While the US economy is on track to register impressive 2024 performance, the story is different in Europe, where growth has remained sluggish. The scope for economic divergence in the region seems to have grown.

That storyline seems likely to continue as we move into 2025. Consumer demand in Europe remains weak (Display), the manufacturing sector is already in recession and labor markets are weakening. Because consumer spending doesn’t have as big an influence on final demand as it does in the US, the region relies a lot more on external growth drivers—namely, trade.

On that front, if the US imposes tariffs on Europe, it could easily create a bigger downdraft for what’s already a weak growth outlook. The impact on gross domestic product (GDP) would likely vary substantially across sectors and countries: some of the region’s largest exporting sectors, including autos, machinery, chemicals, pharmaceuticals and food, could take a sizable hit.

Private Demand Remains Weak in the Euro Area

Percent Change Year over Year

Year-over-year percentage change in European private demand and its subcomponents

Past performance does not guarantee future results.
GFCF: gross fixed capital formation
Through September 30, 2024
Source: Eurostat and AB

Given the sluggish growth outlook, we expect the European Central Bank to continue cutting policy rates. That should be enough to ward off a recession for now.

China’s Growth Is Subdued

China, which represents nearly 20% of the world economy, has seen nominal GDP growth fall to its lowest level in roughly a decade. In real terms, 2025 is likely to only see subdued growth by China’s standards, with our projection calling for real GDP growth of 4.5%. Without a social safety net, China is struggling to unlock household savings (Display), limiting the ability of consumers to put a shoulder behind growth. That leaves the public sector to do the heavy lifting.

China Is Struggling to Unlock Household Savings

Household Deposits as a Percentage of GDP

Past performance does not guarantee future results.
Dashed line represents a trendline of household deposit data.
Through September 30, 2024
Source: National Bureau of Statistics of China and AB

Policymakers have taken meaningful steps to support the economy, including rate cuts and a recent 10 trillion yuan ($1.4 trillion) debt package to help strained municipal finances, but we view these as designed to manage the pace of the slowdown, not to push growth onto a more rapid trajectory. And China is vulnerable to a trade conflict with the US, particularly with China’s economy treading water.

Less Election Uncertainty, More Fiscal Spending

It’s easy to point to contentious trade policy as a potential downside risk for the global economy, but other factors could point toward more rapid growth.

The political landscape in 2024 was littered with events that created a cloud of uncertainty on many fronts, and business investment likely suffered as a result. With almost all of these political developments in the rearview mirror, we expect to see some acceleration in capital investment, which should help support growth.

The expected trajectory of fiscal policy seems unlikely to slow growth. It’s been a bulwark for the global economy, enabling expansion to continue even as central banks raised interest rates to bring down inflation. And there’s little reason to expect budget deficits to shrink in 2025. Deficit spending will likely swell the debt burden and—we expect—keep Treasury yields higher than their pre-pandemic range.

The Big Picture: Resilience in the Face of Twists and Turns

It’s a trite, but true, observation that the year to come will surprise us in many ways. The range of economic outcomes is unusually wide and unusually sensitive to potential changes in economic policy. From a broader perspective, though, the solid starting point suggests to us that the world economy is likely to be resilient in the face of the inevitable twists and turns.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Eric Winograd

Eric Winograd is a Senior Vice President and Director of Developed Market Economic Research. He joined the firm in 2017. From 2010 to 2016, Winograd was the senior economist at MKP Capital Management, a US-based diversified alternatives manager. From 2008 to 2010, he was the senior macro strategist at HSBC North America. Earlier in his career, Winograd worked at the Federal Reserve Bank of New York and the World Bank. He holds a BA (cum laude) in Asian studies from Dartmouth College and an MA in international studies from the Paul H. Nitze School of Advanced International Studies. Location: New York

Sandra Rhouma

Sandra Rhouma is a Vice President and European economist on the Fixed Income team. Previously, she was a global economist and strategist at Millennium Global Investments, a London-based currency investment manager. From 2019 to 2022, Rhouma worked for the European Central Bank as a banking supervision analyst before moving into a US economist position. She holds a PhD in economics from the University of Surrey and a master’s degree from Paris 1 Panthéon-Sorbonne. Location: London

Eric Liu

Eric Liu is a Senior Vice President and Portfolio Manager on the Asia Fixed Income team, focusing on offshore and onshore China, Asia Pacific, and emerging-market fixed-income strategies. Prior to joining AB in 2023, he was head of fixed income and portfolio manager at Harvest Global Investments, responsible for renminbi, Hong Kong–dollar and US-dollar fixed-income strategies. Prior to that, Liu held various fixed-income portfolio management and trading positions at Manulife Investment Management, Citigroup and Standard Chartered. He holds a MSc in investment management from The Hong Kong University of Science and Technology and a BSc (Hons) in computer and management science from the University of Warwick. Location: Hong Kong