As we approach the end of 2023, the global economic landscape is beginning to take shape for the upcoming years, with growth projections hovering between 2.5% and 3%. Analysts are indicating that trade may offer significant returns in the following months, yet the advent of new governmental administrations introduces a layer of uncertainty regarding economic forecasts which could lead to market volatilityCurrently, most major central banks are operating within a framework of loose fiscal policies, a situation expected to invigorate global business cycles commencing in the second half of 2025.

Schroders Investment remains firm in its belief that market sentiment surrounding the US economy is overly pessimistic, reasoning that the United States will be a primary engine driving global growthThe optimism among consumers, coupled with a cooling—rather than collapsing—labor market, is anticipated to sustain household spending and thereby fuel economic expansion

Following the inauguration in January, there may be considerable uncertainty regarding policy outlooksDespite this, there is confidence that policy measures aimed at economic stimulation along with moderate supply-side interventions could push growth rates to about 2.5% in 2025, with an escalation to 2.7% in 2026. An acceleration in economic activity may also bring inflation levels above earlier predictions, prompting the Federal Reserve to eventually shift towards interest rate hikes in 2026 after implementing a series of short-term easing measures.

In the Eurozone, positive predictions indicate moderate economic improvement during 2025 to 2026; however, significant challenges persistOn one hand, consumers benefit from lower inflation rates which can alleviate some cost-of-living pressuresOn the other hand, ongoing price pressures hang like a Damocles sword, threatening to restrict further interest rate cuts and narrowing operational flexibility for the European Central Bank (ECB). Predicted terminal interest rates for the ECB are estimated to stabilize around 2.5%, exceeding broader market expectations

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Notably, the sustained decline in manufacturing competitiveness remains one of the Eurozone’s most pressing challengesThis decline can be traced back to persistently high energy costs combined with sluggish productivity, resulting in a compounded adverse effect on the manufacturing sector.

Although industrial production shows signs of gradual improvement in some countries, the aggregate productivity levels across the Eurozone still lag significantly behind pre-pandemic benchmarks, indicating that recovery to past performance levels is far from realizedWhile energy prices have receded from previous peaks, EU firms continue grappling with exorbitant electricity costs, which remain two to three times higher than what US companies are payingConcurrently, there is an upward trend in wage growth that unfortunately correlates with a decrease in productivity, leading to an elevation in unit labor costs which subsequently constrains corporate profit margins.

Turning our attention to emerging markets, a global climate of policy uncertainty is weighing down growth expectations

Schroders Investment has revised its GDP growth forecast for emerging markets downward from 3.9% to 3.7% for 2025, with a minor adjustment to 3.8% for 2026.

Should a robust government-led economy stimulate an uptick in export demand, drive commodity prices higher, and promote investments within manufacturing supply chains, certain emerging market economies could stand to gain considerablyNevertheless, the road to achieving this may be fraught with challenges in the near termThe uncertainty surrounding global policies, a strengthening US dollar, reduced capital flows, and high local real interest rates are likely to act as barriers to economic growth.

Among the major emerging markets, India appears to have the potential for enhanced economic prospects due to lower interest rates, contingent upon the volatile shifts in food pricesA surge in food prices drove October's overall inflation rate above 6%, as compared to a modest 3.7% in August