This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.
The year 2024 was a mixed one for the global economy, disappointing for the UK and most of Europe, but pretty positive for America. Indeed, the most important US share index, the S&P 500, ended the year up 24 per cent on the year, a dramatically better performance than that of the FTSE 100, up just under 6 per cent.
But if there is a sense of unease around – that discomfort noted by Allianz – it is different here and in Europe from the concerns in and about America. Here in the UK the worries are mostly about how the economy will react to the tax increases that come in through 2025, and in particular how companies respond to the rise in their national insurance contributions that start in April.
In the US the situation is different, with the most important single question being whether the booming equity markets can sustain their extraordinary performance, or is this a bubble that will pop? If the latter, that too might trigger a recession, and that would have knock-on effects for the rest of the world.
A House of Commons research paper that came out just before Christmas noted that this was higher than any major European economy, and behind only the US and Canada. The outlook for the US is a bit better, with both the OECD and Goldman Sachs expecting 2.5 per cent, against a consensus of 1.9 per cent. But all forecasts need to be taken with a pinch of salt, for past experience shows that they can be totally wrong.
Acceptable inflation
If you want one single indicator, it is inflation. Does it come back down to 2 per cent or below? Naturally, inflation will vary from country to country, and it depends on the measure you take.
The Traitors reveals uncomfortable truths about our own democracy
Read MoreIt looks as though it will rise further through the spring, but then, maybe, will start to fall so that by the end of the year it will be back to 2 per cent. Why does two per cent matter? Well, it’s the target for the main central banks, but also seems to be the number that is socially acceptable in wealthy countries.
If inflation doesn’t climb too much, then settles back down, we can expect central banks to carry on cutting their interest rates, and for longer-term borrowing costs to ease back. That is important because long-yields affect everything, including the cost at which we can get fixed-term mortgages and the Government can finance the National Debt.
You could see this possibility in political terms. Here, it would destroy the economic plans of Rachel Reeves. In the US, it would lead to a market crash that would destroy the idea that Donald Trump was a competent steward of the US economy. But this is not really about politics. It is about the generation of wealth – real wealth, not paper wealth – in Western democracies.
Need to know
So, you might reasonably ask, what does all this mean for investors? The general rules always apply: that investors should not try to be too clever, should in general have most of their money in global equities (which means mostly in the US), and that dividends or interest should be reinvested so that the magic of compound interest will build their wealth whatever happens in the short-terms to markets.
I was wrong…
I had expected there to be a general realignment of equity investment to value rather than growth, so the share prices on the high-tech giants of America would move sideways or down and the more boring sectors on both sides of the Atlantic would flourish. Wrong. Apple is worth nearly $4trn (£3.1trn) and hit a record high a few days ago, and while the UK markets did well in the first half of the year, they went backwards in the second.
Now, I am reasonably confident about UK share markets, mostly because they are still undervalued, but also because nearly all the big companies are global entities. I do feel there is a real risk of the US equity bubble bursting, and the price of the most flaky assets (including Bitcoin) collapsing. But maybe there can be a year of sideways movements, rather than a crash.
House prices
Finally, what will happen to the price of what for most Britons is their biggest asset, their home?
There will be some cuts in interest rates by the Bank of England, but their ability to do so will be limited by what happens to consumer prices. My guess is this will be a flat year for housing overall, maybe up a bit, but nothing dramatic. On a long view UK homes are a good investment. People need them and we don’t build enough. But the easy money is over, which if you think about it, is no bad thing.
And if something bad does happen? Back to the usual rules: stay invested, diversify risk and wait for the inevitable rebound.
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.
Read More Details
Finally We wish PressBee provided you with enough information of ( Welcome to 2025, a year when recession will always be lurking )
Also on site :