Curveballs for 2025pdf
Curveballs for 2025pdf
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  1. Deutsche BankResearchJim Reid Head of Global Economics & Thematic Research(+44)-20-7547-2943jim.reid@db.comHenry AllenMacro Strategist(+44)-20-7451-1149henry-f.allen@db.comRajsekharBhattacharyyarajsekhar-a.bhattacharayya@db.comIMPORTANTRESEARCHDISCLOSURESANDANALYSTCERTIFICATIONSLOCATEDINAPPENDIX1.UNTIL19thMARCH2021INCOMPLETEDISCLOSUREINFORMATIONMAYHAVEBEENDISPLAYED,PLEASESEEAPPENDIX1FORFURTHERDETAILS.Curveballs for 2025December 2024Deutsche Bank ResearchImage created by DALL-EDistributed on: 09/12/2024 05:31:06 GMT7T2se3r0Ot6kwoPa
  2. ResearchDeutsche BankJim Reid | (+44) 20 7547 2943 | jim.reid@db.comWith 2025 approaching, it’s worth remembering that very few years proceed as expected. That’s been particularly true this decade. So, although our “Trump 2.025” outlook provides the central DB house view, this pack looks at potential realistic positive and negative curveballs that could change the direction of travel. Examples of the unexpected this decade include: •In 2020 the pandemic meant the year-ahead outlooks were redundant by the end of Q1.•In 2021 a surge in inflation surprised virtually everyone.•In 2022 markets were caught off guard by the most aggressive rate-hiking cycle since the 1980s.•In 2023, the consensus wrongly expected a US recession. •In 2024, no-one expected an S&P 500 return that could hit 30% YTD in the days ahead. Soas we look forward to 2025, it’s safe to say that the most surprising thing would actually bea lack of surprises. And in light ofthis, we got thinking about some potential curveballs (both positive and negative) that could change the global outlook again next year.Introduction1
  3. ResearchDeutsche BankJim Reid | (+44) 20 7547 2943 | jim.reid@db.comPositive curveballs2
  4. ResearchDeutsche BankJim Reid | (+44) 20 7547 2943 | jim.reid@db.comCould the upside surprises continue and the S&P 500 post a third year of 20%-plus returns? 7500 (c.25%) would still be within the post-GFC trend channel at the upper end...S&P 500 price index since the GFC Source: Bloomberg Finance LP, Deutsche Bank Asset Allocation, Deutsche Bank3•We’ve just experienced two years of 20%+ returns, but the dot com bubble saw four such years in a row. You could think this is a bubble and for it to still be possible that 2025 sees a big return.•Valuations are historically elevated, but in the dot com bubble, the rally went on for almost two years after the CAPE ratio had got to where it is today. Sothere’s a precedent for this continuing for some time.•In addition, US consensus growth expectations are still only at +2.1% for 2025, having already been revised up from +1.7% in September. If the 2023-24 pattern holds, that could well have further to go, especially in light ofTrump’s tax and deregulation plans. Plusthe US data has generally surprised on the upside over the last couple of months. •See Binky Chadha and team’s 2025 outlook herewhere they are the highest forecast on the street at 7000.50010002000400080005001000200040008000Dec-07Dec-08Dec-09Dec-10Dec-11Dec-12Dec-13Dec-14Dec-15Dec-16Dec-17Dec-18Dec-19Dec-20Dec-21Dec-22Dec-23Dec-24Dec-25LogS&P 500 price index LogTrend growth: 12.5% (annualized)Range:+/-12%Double dip fearsUS debt downgrade; European sovcrisisDollar shockTrade war concernsCOVID-19 selloffFed hiking & Recession fears7000
  5. ResearchDeutsche BankJim Reid | (+44) 20 7547 2943 | jim.reid@db.comAre we underestimating a US Golden Era? It's rare to have such low unemployment and such decent growth. It’s possible we’re in a 1960s or late 1990s period for now... Historically these can last for some time...US Real GDP growth vs UE rate since 1948 Source: BLS, BEA, Haver, Deutsche Bank Asset Allocation, Deutsche Bank4234567891011-6-4-2024681012UE rate (%)Real GDP growth (% yoy)1965-691998-20002023-24UE ≤4% & GDP growthof ≥3% has occurred only 6% ofthe timeStronger growthLower unemployment 4q avg: 2.9% GDP growth and 3.9% UE•For almost two years, the US economy has been growing at an annualised rate above +2.5%. There’s little sign of that slowing, with the Atlanta Fed’s GDPNowtracker for Q4 at +3.3%. •That’s happening alongside historically low unemployment. It hasn’t exceeded 4.3% for more than three years, the longest stretch since 1965-70.•These other low unemployment periods have generally been very good for asset returns. That was the case in the 2017-19 pre-Covid period, as well as the late-1990s.•2025 could be the sweet spot of Trump tax cuts and deregulation, but before the negatives of global tariffs kick-in.•Given that monetary policy is still restrictive, the Fed also have plenty of room to ease policy if required.
  6. ResearchDeutsche BankJim Reid | (+44) 20 7547 2943 | jim.reid@db.comRegardless of whether its sustainable or not, it's possible that the US AI investment boom could continue to power faster growth than the consensus expects...The US AI investment boom is in full flow...Source: Census, Haver, Cascaldi-Garci and Oh (2024), Institute for Human-Centered AI, Stanford University, Deutsche Bank5•Whatever the long-term outlook for AI, there’s no doubt the launch of ChatGPT in November 2022 kick started a boom in investment and equity market animal spirits.•We have been here before. 1997 to 1999 saw US growth at 4.4%, 4.5% and 4.8% respectively when the dot.com boom was in full force.•Whether it is fuelling a bubble and whether it’s sustainable might be irrelevant in 2025.•But it’s also possible these are the early stages of a productivityboom.•We may not know which it is in 2025, and it’s possible the current momentum continues.•See more on this in Matt Luzzetti’s 2025 US Economics Outlook chart book here.-250255075100125-2502550751001251415161718192021222324%y/y%y/yPrivate Construction: Office: Data Center-30-20-10010203090950005101520New orders: computer and related products(3mma)24m %AR24681012142005200820112014201720202023Millions$.blnUS chip imports have surged020406080SpainAustraliaUnited Arab EmiratesJapanSingporeSouth KoreaIndiaIsraelCanadaFranceSwedenGermanyUnited KingdomChinaUnited StatesTotal investments (in USD bln)Private investment in AI across economies
  7. ResearchDeutsche BankJim Reid | (+44) 20 7547 2943 | jim.reid@db.comWill 2025 be the year that Germany adjusts their debt brake to allow for more spending? In theory, they have a huge amount of room which could underpin Europe. If their debt/GDP was the same as the US they could spend $1.6tn. Clearly that won't happen but it shows the potential firepower...General Government Gross Debt as % of GDP, 20236•The next German federal election is happening in 2025, likely in February.•The backdrop is an economy mired in stagnation, with GDP exactly where it was 5 years ago and before the pandemic.•As policymakers seek a solution, the prospect of more debt-financed investment is coming into view.•The SPD and the Greens already favour more debt-financed investment. But interestingly, the CDU leader Friedrich Merz has also indicated he might be open to expanding borrowing limits, so long as that were targeted at investment. This could preserve room for manoeuvre in coalition talks after the election.•A change in the debt brake would require a two-thirds majority, which is far from a given. But Germany has the lowest debt-to-GDP ratio in the G7, so it has more fiscal space.•If we did get fiscal stimulus, that would present an upside risk to German/Euro Area growth which although unlikely to come through before 2026, would offer a huge confidence boost.Source: IMF, CBO, Haver Analytics, Deutsche Bank.Note: IMF gross debt used for non-US countries, CBO’s gross federal debt held by the public used for US050100150200250JapanItalyFranceCanadaUKUSGermany%$8.5tn $3.3tn $2.1tn $2.0tn $1.7tn $1.6tnThe above numbers show how much Germanycould spend if it had the same Debt/GDP as its peers. This clearly won’t happen but shows the potential firepower. Germany’s total economy is $4.5tn.
  8. ResearchDeutsche BankJim Reid | (+44) 20 7547 2943 | jim.reid@db.comMassive bearishness prevails towards Europe, but data from the Bank Lending Survey suggests growth can keep rising from here...The ECB Bank Lending Survey implies higher real GDP growth Source: Deutsche Bank, eurostat, ECB, Haver analytics7•In recent cycles, there has been a tight correlation between Euro Area growth and the Bank Lending Survey.•That’s seen a clear uptick in recent quarters, which based on historic precedent would point to a strong growth rebound.•That’s coming just as the ECB have already cut rates by 75bps, and are widely expected to continue into 2025. We know that the effects of that will be felt with a lag, so that will help growth into 2025 and 2026.•This offers reasons for optimism in a bearish consensus outlook, and so far at least, it’s clear that the widening in the French spread around the budget situation has not transmitted to other sovereigns. For instance, the Italian and Spanish spreads are around their lowest levels of the last 3 years. So that isn’t tightening credit conditions more broadly, with HY spreads similarly seeing little reaction to developments in France.-5-4-3-2-10123450305070911131517192123Real GDP (q/q SAAR)Implied by BLS (2003 to 2019 regression)
  9. ResearchDeutsche BankJim Reid | (+44) 20 7547 2943 | jim.reid@db.comThe M&A rebound: Will 2025 finally be the year of recovery? Will it promote animal spirits?In real terms, there’s been a slump in M&A activity over the last couple of years8•After a very sluggish two years for M&A activity, a lot of the ingredients are in place for a potential rebound in M&A.•Rate cuts have now begun from the major central banks, with more expected to come in 2025.•Growth is expected to remain strong: recession probabilities for the US and the Euro Area are lower than they were going into 2023 or 2024.•Equity markets have been robust, with the S&P 500 on track to post back-to-back gains above 20% for the first time since the late-1990s.•The new Trump administration opens up the prospect of looser regulations that could help spur activity. Plus the election uncertainty is out of the way.•Looking at the more granular quarterly data, we can already see some signs of an uptick. The most recent quarter (Q3 2024) had the highest 0deal count in 7 quarters. 123456719982000200220042006200820102012201420162018202020222024Inflation Adjusted M&A (2018 $)$ TrillionSource: Bloomberg Finance LP, Deutsche Bank. 2024 M&A data up to December 2nd2024.
  10. ResearchDeutsche BankJim Reid | (+44) 20 7547 2943 | jim.reid@db.comUS-China Grand Bargain: What if the geopolitical risk is on the upside? US-China Trade has fallen significantly... could a grand bargain change that?Source: Haver Analytics, Deutsche Bank90501001502002501999200320072011201520192023US-China Trade (Imports + Exports,USDbn, Q2 2024 prices)Global Financial CrisisTrade WarCovid-19•With Trump returning to the White House, few expect a rapprochement in US-China relations.•But throughout history, superpowers have often come to agreements that ease tensions, even as the wider strategic rivalry remains in place.•Moreover, Trump is a negotiator and a deal-maker, and he’ll want to show clear signs of a successful change in the relationship. After all, in his first term, he reached a Phase One US-China trade deal just before the pandemic.•There are plenty of precedents for this, including under Republican Presidents. Under Ronald Reagan, the Plaza Accords were reached. Previously under Richard Nixon, the US began Strategic Arms Limitation Talks (SALT) with the Soviet Union that led to the Anti-Ballistic Missile Treaty. •Today, an equivalent deal could see something like the US reduce tariffs in exchange for concessions from China, such as increasing their imports from the United States. Avoiding a more aggressive trade war could help boost growth on both sides, lifting the global economy more broadly.
  11. ResearchDeutsche BankJim Reid | (+44) 20 7547 2943 | jim.reid@db.comOil is a huge macro swing factor. What if “Drill, baby, drill” is done to extremis?Real Oil Price since 1870Source: GFD, Deutsche Bank10•Oil doesn’t generally outperform inflation in the long term. Since 1900 it’s flat in real terms. But in the last 25yrs it’s increased by 1.5% p.a. above inflation. If history is to be believed, it will continue to mean revert over the long run from the extreme 2008 highs.•Lookingforward, there are several mildly bearish factors that could be more extreme than expected if certain scenarios pan out. This could be a positive growth shock for a lot of countries, as in 2014-15. •For instance, President-elect Trump could decide to maximisethe “drill, baby, drill” rhetoric from his campaign and stimulate production, including through deregulation.•OPEC+ could increase production in 2025 after so far postponing plans to so. •The US could fail to curb Iran oil exports or re-enter negotiations with the country on its nuclear program. •There could also be downward pressure on oil if any of the current global conflicts are resolved.02040608010012014016018020018701890191019301950197019902010
  12. ResearchDeutsche BankJim Reid | (+44) 20 7547 2943 | jim.reid@db.comThe consensus is very bullish the dollar which is a headwind for the rest of the world, especially EM and risk assets. But remember how stretched the Dollar is even if it looks like it will continue to rally. A non-consensus move lower for the Dollar might bring relief to many parts of the world... An exceptionally long time with the USD trading well above PPP11•The Dollar has been high for a long time and the direction of travel looks like it will continue to climb. As it stands, the dollar index is on track for its highest annual closing level since 2001. See our FX team’s global outlook herefor more. •However it’s now approaching one of the longest periods of overvaluation in history and the longest at a 20% overvaluation relative to PPP. •A higher dollar is often an issue for global risk markets so if the consensus is wrong then perhaps global risk will do better in 2025.05101520253035404550737679828588919497000306091215182124Consecutive months of real US TWI being well above PPPMore than 10% above PPPMore than 20% above PPPSource: Bloomberg Finance LP, Deutsche Bank
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