The US economy appears to be shifting from late-cycle back to mid-cycle, conveniently avoiding a recession, according to Capital Group economist Jared Franz.
“The US economy is ageing backwards like Brad Pitt’s character in the movie The Curious Case of Benjamin Button,” he said.
“Going forward, we are headed for a multi-year expansion period, perhaps fending off a recession until 2028. If the US economy continues to grow at a strong rate of 2.5% to 3%, that could provide a healthy tailwind for markets.”
His views are shared by many commentators, with US and global consensus not exactly on blue-sky, but benign scenarios.
The house view at abrdn is for continued strong US GDP growth, driven by a cooling but still solid labour market and strong corporate profitability. Tax cuts should also be a tailwind for growth in 2026, according to Peter Branner, abrdn chief investment officer.
He doesn’t think there will be many cuts by the Federal Reserve, expecting only three in 2025. This would leave US inflation around 2.5% for the next few years and rates at a higher plateau than originally expected of between 3.5% and 3.75%.
“While the Fed is likely to cut by less than previously expected, the European Central Bank is likely to cut more aggressively because of trade uncertainty and the EU’s underlying economic weakness,” he said.
Daniele Antonucci, chief investment officer at Quintet Private Bank, predicted rates will normalise at around 3.5% in the US and UK, and 2% in the eurozone. This means yields on cash will likely decline, increasing the incentive to invest elsewhere.
“Following a 12-month period when the global economy demonstrated surprising resilience, the outlook for 2025 suggests a return to more normalised growth led by the United States (with forecast annual GDP expansion of 2.5%) and the UK and eurozone lagging at 1.5% and 0.8%, respectively,” he said.
In the euro area, growth has been “anaemic at best” and other parts of the world such as China are likely to remain challenged too, according to Julian Le Beron and Ranjiv Mann, co-managers of the Allianz Strategic Bond fund.
Global monetary and fiscal policy stances provide “a supportive backdrop for global growth prospects”, although economic trajectories are likely to diverge – to the managers, this is providing an anchor for sovereign bond markets through the course of the year.
Inflation prospects improved globally, with core inflation rates inching back towards central banks’ targets in the major markets, reinforcing expectations of an interest rate cutting cycle across the G10 markets.
The managers particularly celebrated the Federal Reserve’s efforts as successful and praised the central bank’s shift of focus onto maximum employment rather than price stability.
“The shift to pre-emptive, front-loaded rate cuts suggests the Fed has learned lessons from previous economic cycles, where policy restraint typically stayed in place for too long, unnecessarily raising recession risks,” they said. “The Fed’s actions have, for now at least, increased the probability of a US soft landing in 2025, even though history tells us that this is a rare outcome.”
But there were some more sceptical takes too.
Ariel Bezalel and Harry Richards, who run the Jupiter Strategic Bond fund, reminded investors just how rare a soft landing is historically – occurring only about 20% of the time over the past 120 years, while the remaining 80% of cases was a hard landing.
“Given such empirical evidence, markets might be underestimating slowdown prospects, which may necessitate the Fed to cut rates much deeper than currently priced,” they said.
“At approximately 4.5% on the 10-year US treasury, it’s fair to say that at a minimum this is an attractive hedge to risk in portfolios considering what’s on the horizon.”
For the managers, more cuts are needed to avoid a recession, which is already peeking through via a labour market that is “already showing signs of cracking”, with jobs growth “at recessionary levels”, and US consumers “feeling the heat”.
“Among the key reasons cited for Donal Trump’s thumping victory was the strong impact of the cost-of-living crisis of the last three years on US households,” they said.
“Headline figures show the economy still seems to be robust, but the verdict of the average US citizen speaks otherwise.”