In the following analysis, Gero Jung, chief economist at Mirabaud Asset Management, highlights how central banks are navigating complex economic landscapes, and that gradual rate cuts are expected in 2025. Jung explains how the Fed eyes a neutral stance amid robust U.S. growth, while Europe battles sluggish engines like Germany and France and China faces structural hurdles reminiscent of 1980s Japan, as disinflation shapes monetary strategies worldwide.
As the old saying goes, when central bankers take the stairs up, they take the elevator back down. In other words, rises in policy rates are usually very gradual; however, their fall can be abrupt, as monetary easing generally trails the economic cycle. That was not the case this year, nor will it be next year. Central banks have been proactive and have not waited for a contraction in activity to spring into action. The reasons for this are twofold. On the one hand, disinflation was sustained, and on the other hand, the initial level of policy rates was high. We expect rate cuts to be more measured in 2025, but regional differences are likely to emerge.
The Fed’s balancing act
In the United States, the issue is not to make the Federal Reserve’s monetary policy more accommodating, but rather to bring it back to a more neutral level, given the country’s solid economic growth and above target inflation; still, core inflation does remain above the central bank’s 2% target. The New York Federal Reserve estimates that the real short-term equilibrium level is between 1.6-2.3% for the next three years – or a nominal level between 3.6-4.3%. Quarterly rate cuts therefore remain the most likely scenario for 2025.
US economic growth should surpass 2%, but private demand should normalise and a slowdown in the job market should continue. The risk of a sharp slowdown in activity and a hard landing cannot be ruled out, but given the fiscal stimulus to come, we do not expect this to occur before 2026.
The perception that the Federal Reserve will intervene to prevent too sharp of a contraction in activity or too sharp a rise in market volatility remains prevalent among investors. We also believe that, in the event of a contraction in activity, the Federal Reserve will quickly and sharply ease monetary policy, provided inflation does not stray from the central bank’s target. Another possible adverse scenario would see inflation accelerate again due to continued solid US economic growth and a cyclical recovery in developed countries. This trend could also be reinforced by the election of Donald Trump and an aggressive trade policy and subsequent increase in tariffs. Against this background, the Federal Reserve would have severely limited room for manoeuvre, which in turn would lead to a sharp tightening of financial conditions.
Europe’s uphill battle
Meanwhile, Germany and France, the historic engines of Europe’s economic growth, have seized up. The German industrial machine continues to bear the full brunt of Chinese competition in the automotive sector, particularly in the electric vehicle market, with weak global manufacturing demand also playing its part. In France, the budgetary situation remains uncertain, and the solutions proffered seem to focus mainly on tax increases.
In all cases, by 2025, the fiscal impulse is likely to be negative on growth. Countries such as Spain, Portugal and Greece are thus taking revenge thanks to their more service-oriented economies. An economic growth forecast for next year that has risen to just over 1% could be in jeopardy given the substantial customs duties on products exported to the US that may be imposed. For the time being, the European Central Bank is maintaining a meeting-to-meeting approach, and no prior commitment as to the pace of monetary easing is in place. Thanks to falling energy and goods prices, inflation is now under control, while the services sector should continue to slow down. Therefore, we expect the European Central Bank to cut rates at each of its meetings until June when the deposit rate reaches 2%.
In Switzerland, inflation is likely to remain below 1% due to weak growth and the strength of the Swiss franc. The Swiss economy, however, will continue to be more dynamic than that of the Eurozone. The Swiss National Bank is expected to cut its policy rate to 0.25% by the first quarter of 2025. Further intervention in the foreign exchange market is possible, but it will not be sufficient to counter the strength of the Swiss franc. The potential use of this monetary policy tool will only serve to mitigate episodes of heightened volatility, if necessary.
Fragile China
China, meanwhile, is facing its own challenges. Its growth model, based on exports and manufacturing investment, has hit a ceiling. Faced with a large inventory of empty homes and weak demand, as things stand, the government’s response of stimulating asset prices is unlikely to be sufficient. High levels of public and private debt, a real estate crisis, a shrinking population and fragile commercial banks all point to parallels with Japan in the 1980s, prompting us to remain cautious on China.
