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1The global economy has admirably navigated through a series of shocks over the past few years.With inflation nearly back on track across many economies and central banks recalibrating policy,the Mas-tercard Economics Institute(MEI)believes it is time for the economy to shift gears once again.MEI expects the global economy in 2025 to be defined by shifts in monetary policy,fiscal policy and a move toward equilibrium rates for growth and inflation.Here are the key economic forecasts for 2025:While there is a common narrative around the world,it is crucial to recognize the important nuances by region and country.Our regional sections highlight these differences.MEI forecasts 3.2%global GDP growth in 2025,following a 3.1%pace in 2024.Growth is expected to remain strong in the U.S.,India,and the Gulf Cooperation Council(GCC),with modest expansion in Europe and much of Latin America and the Caribbean(LAC).In contrast,MEI expects a gradual stabilization in the Chinese Mainland on increased policy stimulus.Inflation eased significantly across the major economies in 2024,driven by lower pric-es for durable goods and easing inflation for nondurable goods.While tariffs continue to pose upside risks to goods prices,moderating wage growth is expected to ease inflation in select services industries.MEI forecasts trimmed global inflation at 3.2%(removing the top and bottom 10%outliers)and average weighted inflation for G10 countries at 2.4%.Consumers remain empowered as innovation and digitalization in the retail sector provide them with more choice and businesses with greater operational efficiency.MEI expects basket shifts;with lower prices and declining interest rates,spending on big-ticket items electronics,furniture and appliances will improve.While pent-up demand for experiences has diminished,MEI still observes a strong desire to prioritize spending on“big moments.”Of course,the outlook is not without risks.The geopolitical backdrop remains a signif-icant issue in Europe,Asia and the Middle East.Additionally,there is uncertainty sur-rounding the costs and gains of the incoming US administrations economic agenda.MASTERCARD ECONOMICS INSTITUTEEconomic outlook 2025Steering through changePublished:December 09,20242We also explore a few key themes shaping the 2025 global economy,leveraging Mastercards aggregated and anonymized data to provide a unique perspective.This includes cyclical changes such as shifts in consumption as central banks lower rates or how consumers respond to price level changes and structural changes,like the impact of migration on capital flows or workplace flexibility driving greater female workforce engagement.Finally,MEI addresses how trade policy will influence relative prices worldwide.Note:estimates are%change of annual average.SOURCE:MASTERCARD ECONOMICS INSTITUTE FOR ECONOMICS IN OUR RESEARCH COVERAGE AND IMF FOR REST.LONG-RUN ESTIMATES FROM IMF AND OXFORD.Mastercard Economics Institute 2025 forecasts by marketUnited StatesChinese MainlandGermanyJapanIndiaUnited KingdomTurkeyFranceSaudi ArabiaItalyPolandCanadaUnited Arab EmiratesBrazilSingaporeSouth KoreaMexicoAustraliaSpainIndonesiaReal Gross Domestic Product(%YoY)2.34.50.61.26.61.22.70.83.70.73.41.8522.51.81.52.11.95Real Consumer Spending(%YoY)2.64.70.80.96.21.31.70.84.51.13.52.14.322.81.81.82.425Consumer Price Inflation(%YoY)2.70.42.12.24.12.6301.821.64.52.12.54.31.8 23.82.82230 %YOY-20liAmsterdamBarcelonaDubaiLucernGenevaIstanbul LondonDublinMadridSevillePragueBudapestAthensPueblaTokyoBacalarStockholmRomeSan Miguel De AllendeFukuokaTulumVeniceTbilisiSharjahVelenciaCopenhagenLombokPricing priorities:Travel twins and apparelConsumers worldwide have been navigating a bumpy road of rising prices over the last five years,largely driven by the pandemic and geopolitical tensions.While inflation the rate of increase in pric-es has slowed significantly,price levels themselves remain elevated.As the prices of goods and services rise,purchasing behaviors are shifting gears.For essential goods and services with few substitutes,the quantities purchased are unlikely to decline significantly in re-sponse to price increases.However,for products and services with varied price and quality levels avail-able,we may see a trend of“trading down,”where consumers opt for more affordable versions.We examine this phenomenon in two specific sectors travel and apparel both of which are impacted by a growing number of options and more information,allowing consumers to seek the best value.In the travel economy,we explore the concept of duplication in destinations,which have been dubbed“travel dupes”.But rather than focus on the unknown and hidden“dupes,”we analyze“travel twins”which we believe are destinations that offer similar attractions and experiences at lower prices or with smaller crowds.MEIs analysis reveals that average annual year-to-date(YTD)growth in hotel transactions across duplicate destinations is nine percentage points higher compared to their more well-known counterparts.In Europe,the picturesque canals and bike-friendly atmosphere of Copenhagen mirror Amsterdams charm,while in Mexico,Bacalars crystal-clear waters and lush greenery rival the beauty of Tulum.Similarly,in Southeast Asia,Lomboks stunning beaches and serene landscapes offer an alternative to the bustling crowds of Bali.Global themesSOURCE:MASTERCARD ECONOMICS INSTITUTE Travel twinsInternational hotel transaction YOY(Jan-Sep23 vs Jan-Sep24)TwinOriginal4For the apparel sector,consumers can get access to the latest,most stylish fits in a timely fashion and at affordable prices,even after factoring in global transportation costs,thanks in part to the accel-eration of e-commerce options.Using aggregated and anonymized Mastercard data,we segmented apparel brands into“high-end luxury”and“mass market”(more affordable).We then compared YTD spending growth on high-end luxury versus mass apparel brands across 26 countries.We found that spending growth on mass apparel brands is outpacing high-end luxury brands in 85%of these coun-tries,with a seven-percentage point difference on average.However,there are some countries buck-ing this trend.In Mexico,high-end luxury spending is gaining traction,while in Japan,the depreciation of the yen is boosting visitor arrivals and visitor spending on high-end luxury goods.In fact,in Japan,spending on high-end luxury brands is outpacing mass brands by 14 percentage points.Will this continue in 2025?The sustainability of“trading down”will depend on whether consumers still view price levels as too high.With inflation rates easing and more time passing since the initial pan-demic-induced shock,MEI expects this phenomenon to ease.However,consumers will remain savvy and informed,continuing to search for ways to make their dollars go further.2024 YTD(Jan-Sep)spending growth differential onMass vs.Luxury apparelNote:Growth differential calculated by subtracting 2024 YTD(Jan-Sep)spending growth on high-end luxury apparel from spending growth on mass apparel.Analysis covers both domestic and cross-border spending.AustraliaGermanyUnited KingdomPolandChileItalySpainAustriaBrazilUnited Arab EmiratesSingaporeDominican RepublicUnited StatesIndiaFrancePhilippinesColombiaThailandCanadaEgyptHong Kong SARBelgiumHungaryNew ZealndMexicoGreeceJapan-16pp-14pp-12pp-10pp-8pp-6pp-4pp-2pp0pp2pp4pp6pp8pp10pp 12pp 14ppSOURCE:MASTERCARD ECONOMICS INSTITUTE 5Migration and moneyThe last few years saw significant movement in people and,by extension,capital.Notable standouts include net migration contributing 8.4%to Canadian population growth over 2019-2023,compared to 2.5%in the U.S.Without migration,population growth would have been only 0.7%in Canada and 0.8%in the U.S.The largest outflows of population came from India,Mexico,Russia,Syria,the Chi-nese Mainland,Bangladesh,Pakistan and Ukraine,driven by a variety of factors,including the search for better opportunities and security concerns.While migration results in a loss of human capital,it also generates substantial remittances,which serve as a lifeline for low-and middle-income communities in developing economies.According to the World Bank,remittances surged from$128 billion in 2000 to$857 billion in 2023,with an estimat-ed growth of 3%in 2024 and 2025.The top five remittance recipients are India,Mexico,the Chinese Mainland,Philippines and Pakistan.Remittances are particularly important in South Asia,accounting for over 6%of Sri Lanka GDP and 5%of Bangladesh GDP.Economic recovery and local financial re-forms are expected to sustain remittance growth in South Asia through 2025.In LAC,the U.S.-Mexico corridor is the worlds largest remittance pipeline,with 95%of remittances to Mexico coming from the U.S.,mainly from California and Texas.For lower-income households in Mexico,remittances constitute about a third of their income and are often essential for consumption.Remittances are also a vital component of GDP for many Caribbean and Central American countries.However,downside risks for remittances to LAC include a softening U.S.labor market and potential changes to immigration policies.There are cross currents for 2025.On the one hand,migration is likely to slow,particularly given changes in immigration policy in the U.S.and other developed economies.On the other hand,the con-tinued digitalization of the payments industry allows recipients to shift to digital and mobile channels,considerably reducing frictions and costs.Net migration 2019-2023Contribution to population growth5%0%-5%Population growth since 2019Australia0005222019202020212.5%3.5%4.8%3.3%2.1%7.3 2220231044GermanyUnited StatesPopulation growthNet migrationSOURCE:HAVER ANALYTICS,AUSTRALIAN BUREAU OF STATISTICS,STATS NZ,OFFICE FOR NATIONAL STATISTICS,CONGRESSIONAL BUDGET OFFICE,UN POPULATION DIVISION,MASTERCARD ECONOMICS INSTITUTE 6The SHEconomyIn the last several years,the global economy saw the“great resignation”turn into the“great return”.To varying degrees across countries,there has been a return of workers,particularly in the younger cohort and,interestingly,women.This is known as the SHEconomy.Examining data from the OECD,we find that the“cyclical”labor force participation rate,which mea-sures the percent of the population aged 25-54 that is working or looking for work,has exceeded its 2019 levels for women in 38 out of 46 countries in the sample,while only 23 out of 46 countries show a higher participation rate for men.Take India,which is a country of rapid labor force expansion and strong economic growth,the partic-ipation rate for women aged 25-54 is up 12 percentage points from 2019 to 2023,versus only a one percentage point gain for men of the same age.Even more starkly,in countries such as Chile,Turkey,South Africa and Finland,the female participation rate has increased,while the male participation rate has declined.There are several potential explanations for this phenomenon.For one,womens labor force participation is structurally lower compared to men globally,providing a longer runway for growth.More specific to this economic cycle,it likely reflects the disproportionate job creation in fe-male-dominated sectors such as healthcare and education.Additionally,the rise of remote work may benefit women,as it expands job opportunities and makes it easier to balance the demands of work and family life.Many of these dynamics are expected to remain true in 2025,leading MEI to antici-pate that this trend will persist.This increase in female participation is particularly important in advanced economies with low popula-tion growth.Greater participation in the workforce among young women will help counter the unfa-vorable demographics which,all else equal,reduce the size of the workforce.Labor force participation rate(Age 25-54)Change 2019 vs 2023FemaleMaleSOURCE:OECD LABOR FORCE SURVEY,MASTERCARD ECONOMICS INSTITUTECosta RicaRomaniaLatviaBrazilLithuaniaSloveniaGreeceSwitzerlandSouth AfricaNorwayGermanyGolombiaIcelandBelgiumCzechiaAustriaUnited StatesUnited KingdomSpainIsraelFranceHungaryFinland-6-5-4-3-2-1012-202468101214SwedenNetherlandsDenmarkPortugalChileCanadaBulgariaItalyCyprusNew ZealandKoreaJapanTurkeyLuxembourgMexicoAustraliaCroatiaaIrelandPolandEstoniaSlovakiaMaltaIndia7Policy PivotIn 2024,central bankers began steering monetary policy away from rate hikes toward cuts.In 2025,MEI expects to see the consequences of these policy shifts.The reduction in interest rates has been observed across the globe in 2024,with the European Central Bank(ECB)on track to deliver 150 basis points(bps)of rate reductions,the Bank of England(BoE)a total of 100bps,the Bank of Cana-da 150bps,the Reserve Bank of Australia 100bps and,importantly,the Federal Reserve(Fed)cuts of 100bps.The reduction in interest rates aims to fine-tune monetary policy,keeping the economy on a smooth track as inflation cools and labor markets adjust.Importantly,central banks are aiming to reduce rates from a restrictive level to a“neutral”level,rather than a stimulative one.This means that while interest rate reductions will support the economy through easier financial conditions,central banks are intentionally not planning to reduce rates to the point where inflation and economic growth would reaccelerate above equilibrium.Nonetheless,lower rates translate to lower borrowing costs,influenc-ing how consumers prioritize their purchasing power.At MEI,we have developed a framework to test the sensitivity of interest rate cuts to changes in the consumer basket.For simplicity,we focus on unanticipated policy shifts from the Federal Reserve and the spillover effects on other countries.In order to compare the relative sensitivities of various cate-gories of spending in the U.S.,Canada,and the U.K.to U.S.monetary policy surprises,MEI examined the impact of an unexpected 100bp cut in the Fed funds rate on overall financial conditions,which capture a combination of asset prices,interest rates,exchange rates and other market measures.MEI then analyzed the influence of changes in U.S.financial conditions on real spending growth over the next year in the U.S.,Canada and the U.K.As expected,the U.S.is more sensitive to changes in the Feds monetary policy than other coun-tries.However,MEI observes spillover effects through the financial conditions channel that influence spending trends in Canada and the U.K.These countries are likely to show heightened sensitivity to U.S.financial conditions,given their historically higher ratios of household debt to disposable income.Because of this,MEI expects almost twice as much growth for personal consumption in the U.S.than for the U.K.and Canada,one year after a surprise rate cut by Fed.In the case of Canada,being the country with the highest debt to disposable income ratio among the three of them,MEI expects the least consumption growth to occur.A consistent theme across the U.S.,Canada and the U.K.is increased spending on household applianc-es,electronics and computer software,driven by easier financial conditions in the U.S.Interestingly,the impact on travel differs by country.For instance,while easier financial conditions in the U.S.lead to a rise in international travel by Americans,a similar effect is not observed among travelers from the U.K.and Canada.It is important to underscore that this model is illustrative,designed to represent the sensitivity of the consumer basket to financial conditions often regarded as a key mechanism for implementing mone-tary policy.8Impact on YOY real consumption(%)from a 100bps U.S.Fed funds unexpected rate cut in a period of one yearUnited StatesCanadaPositive ImpactNegative Impact9United KingdomSOURCE:BUREAU OF ECONOMIC ANALYSIS,MASTERCARD ECONOMICS INSTITUTE10Trade tensionsMEI expects developments on U.S.trade policy to impact the economic outlook of most countries around the world.There has been discussion amongst the new U.S.administration to propose increas-ing tariffs on imports from the Chinese Mainland by 60%and tariffs on the rest of the world by 10%to 20%.In addition to the Chinese Mainland,countries most at risk are those with the largest share of goods exports heading to the U.S.relative to their total exports.Mexico and Canada are highly depen-dent on the United States,but as the revision of the USMCA approaches(“new NAFTA”trade agree-ment),their negotiation positions differ.These fresh trade risks emerge as global trade in goods is already facing headwinds from economic nationalism,supply chain reconfigurations and military conflicts.However,it is often overlooked that trade in services,where traditional tariffs do not apply,has continued to grow.This growth is driven by the rise of the digital economy and a shift in consumer preferences from goods to services,a trend that has been further reinforced by the pandemic.MEI expects that imposition of tariffs-and likely counter-tariffs-would serve as a downside to real global growth and an upside to inflation.Growth is likely to be further impacted by uncertainty that will weigh on investment until these policies become clearer.However,some impacts can be offset by greater intra-regional trade,a trend already underway,as well as by growing trade in data and in ser-vices,which can increase productivity and be deflationary.These potential benefits,however,will play out over a more extended period.Exports to the U.S.,%of totalNote:Size and color of the bubble denote share of exports to the U.S.11201420162018202020222024Exports to the US,%of total78.0y.0.0.0.0.0.0 1420162018202020222024Mexico8.0%8.5%9.0%9.5.0.5 1420162018202020222024Germany20142016201820202022202414.0.0.0 .0.0$.0&.0(.00.02.0%VietnamCanada72.0s.0t.0u.0v.0w.0 x.0y.0 1420162018202020222024SOURCE:IMF,MASTERCARD ECONOMICS INSTITUTE14.0.0.0.0.0.0 .0%Chinese Mainland12United States:The laws of motionKey messages:Fundamentals for the U.S.economy are favorable,but external factors,most no-tably policy changes,could alter momentum.Lower interest rates will support activity in interest-sensitive sectors,as well as consumers and businesses that depend on financing.MEIs analysis of aggregated and anonymized zip-code-level data reveals that gains in discretionary spending are driven by higher income populations,a trend that could continue in 2025To quote Newton,“an object in motion remains in motion at constant speed and in a straight line un-less acted on by an unbalanced force.”This principle can be applied to the U.S.economy in 2025.MEI anticipates that policy changes will play a pivotal role in shaping the nations economic trajectory.On the one hand,MEI expects a positive boost from deregulation and its potential impact on sentiment.On the other hand,factors such as tariffs,shifts in immigration policy and heightened policy uncer-tainty could act as headwinds.Additionally,policies leading to an expanded deficit,including changes to the tax code,are likely to have a more pronounced impact on the economy in 2026 rather than 2025.The combination of the favorable handoff from 2024(MEI expects 2.8%real GDP growth in 2024)and expected policy changes leaves MEI to forecast 2.3%growth in real GDP in 2025.MEI expects CPI inflation of 2.7%and core CPI(ex-food and energy)inflation of 3.0%in 2025.It is important to emphasize that consumers are experiencing the economy in markedly different ways.Those who own homes and financial assets have benefited from significant increases in asset values since 2019,making them more likely to spend on discretionary goods and services.In contrast,other consumers face economic pressures,including elevated prices for essentials and high borrowing costs.MEIs analysis of aggregated and anonymized Mastercard data across the top 10%and bottom 20%of zip codes,ranked by income data from the Census Bureau,reveals the former outpacing in spend-ing on discretionary categories and travel and experiences.However,the gap in spending growth be-tween the top and bottom income cohorts on essentials is relatively narrow.We explore this differen-tial by state,which shows a more uniform spending picture across the country for essentials.Indeed,the economic narrative is not one-story fits all.In addition to carefully monitoring the policy environment,MEI is also focused on the path in the labor market.Job creation has moderated from its elevated levels at the start of 2024.While not our base case,if the hiring rate were to fall further,there is a risk of slowing net job growth and a further in-crease in the unemployment rate.This would impact wage growth and,therefore,consumption.Regional themes13Travel,entertainment and recreational services(2024 YTD versus 2023)Differential in spending growth between top 10%and bottom 20%income areasNon discretionary retail and services(2024 YTD versus 2023)Discretionary retail and services(2024 YTD versus 2023)SOURCE:MASTERCARD ECONOMICS INSTITUTETop 10%minus bottom 20Key messages:In 2025,MEI expects the Canadian economy to grow at a moderate pace as the benefits of lower interest rates and easing inflation offset the effects of slower population growth.Lower interest rates should alleviate household stress by reducing the burden of debt payments outpacing income growth.The economic trajectory differs across provinces,driven by housing conditions.MEI forecasts real GDP growth of 1.8%in 2025,slightly above the 2024 estimate of 1.6%.This modest uptick in growth reflects tailwinds expected to offset prevailing headwinds.On the upside,the Bank of Canada(BOC)is likely to continue cutting interest rates,reaching 2.75%by April 2025,as inflation aligns with its 2%target.MEI projects CPI inflation to ease to 2.1%year-over-year(YOY)in 2025,down from 2.5%in 2024.MEI expects that recently announced tax-relief measures will boost consumption growth in the first half of 2025.Lower rates are expected to promote job growth,stimulate consumer spending and re-vive activity in the housing market.Business investment is also likely to rise,supported by lower inter-est rates and the anticipated pickup in economic growth.However,MEI expects these tailwinds to be partially offset by elevated debt burdens,slower population growth and heightened policy uncertain-ty.Notably,Canadas GDP per capita has declined,signaling underlying economic challenges.The housing market remains a focal point due to the strain from elevated household debt.With debt payments outpacing income growth,consumers continue to feel the squeeze of past interest rate hikes.MEIs analysis of SpendingPulse insights,which track in-store and online retail sales across all payment methods,reveals robust consumer spending growth per capita in Quebec and the Maritimes between the first half of 2022 and the first half of 2024,contrasting with softness in BC and Ontar-io.This divergence stems from lower household debt-to-income ratios in Quebec and the Maritimes,while higher home prices in BC and Ontario have led to sharper increases in mortgage payments.Although lower rates should boost consumer spending overall,not all households will benefit equally.Consumers with five-year fixed rate mortgages renewing in 2025 will likely face higher debt pay-ments,further limiting their spending power.Beyond monitoring potential shifts in trade policy with the U.S.,Canadas largest trading partner,MEI is focused on population growth trends.While a slowdown in population growth may weigh on aggre-gate economic growth,it could also reduce pressure on shelter inflation.This would support continued real wage growth,boosting consumer purchasing power.Canada:Tailwinds stronger than headwinds15Change in core retail sales per capita(H1 2022 VS H1 2024)Change in mortgage payments(H1 2022 VS H1 2024)OntarioNova ScotiaAlbertaBritish ColumbiaSaskatchewanManitobaQuebecNew BrunswickNewfoundland and Labrador050100150200250300350400450500550600650700-2.0-1.5-1.0-0.50.00.51.01.52.0Change in core retail sales per capita(H1 2022 vs H1 2024)Percent change in core retail sales per capita vs change in mortgage paymentsSOURCE:STATISTICS CANADA,CMHC,SPENDINGPULSE,MASTERCARD ECONOMICS INSTITUTEPercent change in retail sales per capita-2.52.116Key messages:MEI expects Brazils economy to slow down in 2025,after a period of overheating driven by fiscal policy.A more balanced outlook is anticipated as fiscal policy shifts to reduced stimulus,while higher rates help stabilize the economy.Consumer behavior in 2025 is likely to be more conservative,with higher rates and reduced fiscal transfers leading to softer consumption.Brazil is projected to shift toward slower,more sustainable growth in 2025 as the economy adjusts from a period of overheating.MEI projects real GDP growth at 2.0%for the year,down from around 3.0%in prior years when Brazil repeatedly surpassed expectations.While this can be considered good news,it has also led to a tighter labor market and increased the usage of available capacity,which now limits the pace of future growth.Additionally,fiscal policy has been overused,requiring adjust-ments.Inflation is signaling the need for correction.MEI projects inflation at 4.3%in 2025,following an esti-mated 4.7%in 2024 above the central banks target ceiling.Inflation tends to act as a thermometer of the economy;if its too high,policy adjustments are needed.With the inflation target at 3.0%and inflation running around 4.0%,more policies may be implemented to rebalance the economy.Regarding policies,MEI expects that the Brazilian central bank will continue to hike rates,while fiscal policy will be pressured to slow down.MEI forecasts central bank rates at 14%by May 2025(with risks of more hikes needed.)Assuming a deceleration in fiscal policy,there may be room for rates to re-turn to 13%by the fourth quarter in 2025.In terms of fiscal policy,a deceleration in spending growth is expected in 2025 after strong expansion in recent years.In such a scenario,consumers tend to become more conservative.For 2025,MEI forecasts a deceler-ation in private consumption from its previous steep growth(chart below),reflecting more expensive credit and less support from fiscal transfers.Consumers will likely absorb the impact of higher rates in the coming quarters,which should soften consumption of durable goods and non-essential services.Risks to the MEI forecast appear to be biased toward a more challenging outlook.On the positive side,a stronger harvest and faster macroeconomic policy adjustments could lower perceived risk,making the measures less costly and putting the economy in better shape by the end of 2025.On the more challenging side,smaller-than-needed fiscal adjustments could force the central bank to hike rates further,pushing growth to a softer pace and leading to a less organized adjustment.Brazil:Aiming to rebalance policies17SOURCE:HAVER,IMF,MASTERCARD ECONOMICS INSTITUTE20222020201820162024201420129095100105110115120125130202220202018201620242014201280100120140160180BrazilColombiaReal private consumption indexed to 2010 average20222020201820162024201420128010012014016018020222020201820162024201420128010095105110120115125ChileArgentinaMexico20222020201820162024201420129010011012013014018Key messages:Countries in the region are expected to experience growth divergence in 2025 due to varying monetary and fiscal policy stances.Mexico and Central America will face potential impacts from changes in U.S.trade and migration policies.Fiscal policy will remain a key focus,with inflation serving as the primary thermom-eter of policy success.LAC is a truly diverse region,with countries at various stages of development and different global con-nections.Despite these differences,all countries in the region will face the consequences of local and global policies in 2025.Locally,economies such as Chile and Colombia are expected to benefit from lower interest rates,while policy uncertainty may slow growth in Peru and Mexico.Argentina should benefit from strong macroeconomic and microeconomic reforms,leading to a rapid growth rebound.Regarding inflation,the convergence debate will remain active.While inflation has been decelerating,most countries are yet to reach their targets for 2025.Perus inflation is at desired levels,while Mex-ico,Colombia and Chile are still in the process of convergence,with inflation hovering around 4%and aiming for 3%.In Argentina,the ongoing disinflation process is expected to continue as policy adjust-ments take effect.MEI projects inflation at 35%in 2025,down from 120%in 2024,with risks skewed toward even lower inflation.Inflation remains a key indicator of success and the pace of convergence will guide the next steps in fiscal and monetary policy.In LAC,fiscal policy performance will be a critical focus in 2025.While monetary policy is responding to inflation and could be adjusted if inflation stops converging(as seen in Brazils recent shift),fiscal policy will require attention in many countries.In Mexico,the new administration will need to balance increased social spending with fiscal consolidation and may need to rely on new sources of revenue.Colombia is likely to continue discussions on tax increases.Chile has maintained a more balanced fiscal policy.Argentina has made strong fiscal adjustments but faces the challenge of ensuring long-term sustainability.Furthermore,the region could benefit from the U.S.shift in focus towards the Chinese Mainland.While Mexico will likely be part of ongoing discussions about U.S.trade policy,the emphasis on reduc-ing the Chinese Mainlands importance could,after some negotiations,be beneficial to Mexico and other countries in the region.However,global exposure of the region and social pressure against fiscal adjustments could hurt growth prospects.The Chinese Mainlands economic deceleration,coupled with U.S.policy discussions on trade and migration,could impact different countries in the region differently.Chile and Peru are more closely connected to the Chinese Mainland,while Central America and Mexico are more tied to the U.S.(see trade chart below).Policy changes in the U.S.could affect Mexico and Central American countries through trade and remittances.In Mexico,changes to the judicial system may also negatively impact business confidence.Latin America and Caribbean(excluding Brazil):Dealing with the consequences19Share of export to Chinese Mainland and U.S.Chinese MainlandU.S.ColombiaMexico0 0 19201920202020202120212022202220232023 202420190 192019202020202020202120212021202220222022202320232023202420242024ArgentinaBrazilChileSOURCE:HAVER,MASTERCARD ECONOMICS INSTITUTE20Key messages:MEI expects lower interest rates and higher government spending to support growth.Rising trade tariff concerns may elevate business uncertainty and dampen invest-ment.Consumer spending is likely to strengthen,supported by wage growth and reduced savings rates.In 2024,the U.K.economy experienced a strong rebound from the technical recession in 2023 driv-en by domestic demand.The cost-of-living crisis subsided,with consumers benefiting from elevated wage growth.Unlike in many European countries,U.K.consumers real disposable incomes wage growth net of inflation have recovered to pre-pandemic levels and are projected to continue to grow further,albeit at a slower pace,in 2025.MEI forecasts real GDP growth of 1.2%in 2025,up from 0.9%in 2024.In 2025,MEI predicts U.K.households and businesses will continue to benefit from the Bank of En-glands(BoE)interest rate cuts that will further ease the mortgage squeeze and support investment.However,MEI expects the BoE to proceed more cautiously than other European central banks,cutting rates a cumulative 100bps in 2025.Not only is U.K.wage growth more stubborn,but MEI expects that the new governments inaugural budget,which delivered the biggest increase in spending,bor-rowing and taxation in post-war history,will increase inflation.MEI expects expansionary fiscal policy to support growth next year,though some of the gains may be offset by heightened trade uncertainty stemming from proposed tariffs on European exports by the incoming U.S.administration.The implementation of such tariffs remains a key downside risk to MEIs outlook.Despite purchasing power recovering to pre-pandemic levels,U.K.consumers have continued to save a higher proportion of their income compared to historic norms.According to MEI,lower interest rates should disincentivize some savings,thereby boosting household consumption.Similar to other Europe-ans,the Brits have also remained more price conscious during the period of elevated prices.However,as 2025 approaches,“trading down”behavior is giving way to a“trading up”mentality,with average transaction sizes increasing compared to last year,particularly in travel,hospitality and electronics.The chart below illustrates the YOY percentage change in average transaction size across spending categories,with bars representing each month from June to September 2024.United Kingdom:Government spending to outweigh trade uncertainty21United KingdomMonthly average ticket size growth-June-September 2024|%YOYSOURCE:MASTERCARD ECONOMICS INSTITUTE-14%GroceryApparelJewelryElectronicsHome furniture and furnishiingsLodgingRestaurants and barsHomeimprovementcenters-12%-10%-8%-6%-4%-2%0%2%4%6%8%-4%-2%0%0%-4%-4%-5%-11%-2%1%-3%3%-2%-9%3%-12%-9%-9%-3%-4%-1%0%3%2%2%1%9%3%-3%4%2Key messages:MEI expects real GDP growth to accelerate,supported by declining interest rates,but remain soft as tighter fiscal policy and trade uncertainty will act as headwinds.MEI expects inflation to be close to target in most countries,but geopolitical risks and tightness in global liquified natural gas supplies pose upside risks.Consumer spending will benefit from a moderation in savings rates,reflecting domestic tailwinds.In 2024,European economies emerged from nearly two years of stagnation as the impact of the large inflationary shock faded.Lower inflation allowed central banks to start cutting interest rates,which MEI expects to continue in 2025,supporting the recovery.MEI predicts the European Central Bank(ECB)to cut rates by a cumulative 125bps to 1.75%in 2025.MEI expects Eurozone real GDP growth of 0.9%in 2025,up marginally from an estimated 0.8%in 2024.However,new headwinds to growth are expected.First,the re-introduction of EU fiscal rules means that several EU countries,including France and Italy,will need to cut government spending.The im-pact on GDP growth could be mitigated by the faster deployment of NextGen EU funds,particularly in southern and central and eastern Europe(CEE).Second,the new U.S.administration pledged im-plementing tariffs on European exports to the U.S.Even if the tariffs are delayed or only partially im-plemented,the increased uncertainty alone could delay investment decisions and boost precautionary savings among consumers.The full imposition of tariffs presents a key downside risk to MEIs outlook.Meanwhile,consumer fundamentals remain strong.Unemployment rates may edge up,but MEI ex-pects them to remain historically low.Real disposable income growth,the difference between wage growth and inflation,is likely to moderate but remain positive,meaning that consumer purchasing power will continue to grow.Furthermore,household savings rates,which remain elevated by histor-ical standards,are likely to moderate as interest rates fall.Despite strong fundamentals,consumers remain price-sensitive,opting for budget rather than premium products and services,a behavior that should gradually unwind as purchasing power improves.The chart below illustrates how price-sensi-tive European consumers shifted to cheaper options in 2024,such as in fashion and restaurants.MEI expects regional differences to persist.Uncertainty around trade policy will likely weigh more on manufacturing-heavy economies like Germany,whose car industry remains at the greatest risk of tariffs and less on services-driven southern European economies that may benefit from more U.S.tourists.MEI expects lower interest rates to reinvigorate housing markets and household consumption in the Nordics,where nearly all mortgages are at variable rates,with Nordic real GDP growth rising from 1.3%in 2024 to 1.7%in 2025.Household consumption will also drive growth in CEE,where real wage growth remains the strongest in the region,offsetting the uncertain trade outlook.MEI expects CEE real GDP growth to rise from 1.8%in 2024 to 3%in 2025.Europe:Fresh challenges23Price-sensitivity across categories3m to September 2024|YOY percentage point increase/decrease in premium apparel spending relative to budget apparelincrease/decrease in full-service restaurant spending relative to fast foodAustriaBelgiumCroatiaCyprusCzech RepublicDenmarkFinlandFranceGermanyGreeceHungaryIrelandNetherlaandsNorwayPolandPortugalRomaniaSlovakiaSloveniaSpainSwedenSwitzerlandUnited Kingdom-7-6-5-4-3-2-10123Italy-2.5-1.2-6.3-2.1-2.1-20.91.31.1-0.2-0.5-1.5-0.8-0.6-0.5-2.3-0.1-0.7-0.2-3.20.71.50.12AustriaBelgiumCroatiaCyprusCzech RepublicDenmarkFinlandFranceGermanyGreeceHungaryIrelandNetherlaandsNorwayPolandPortugalRomaniaSlovakiaSloveniaSpainSwedenSwitzerlandUnited Kingdom-5-4-1-30-2136254Italy0.4-1-1.9-1.7-0.2-0.7-0.9-1.2-1.2-3.4-4-0.3-1.1-1.3-0.60.41.3-41.84.80.10.1-2-4.124SOURCE:MASTERCARD ECONOMICS INSTITUTEincrease/decrease in cross-border t e spending relative to domestic t eAustriaBelgiumCroatiaCyprusCzech RepublicDenmarkFinlandFranceGermanyGreeceHungaryIrelandNetherlaandsNorwayPolandPortugalRomaniaSlovakiaSloveniaSpainSwedenSwitzerlandUnited Kingdom-6-5-1-40-31326-254Italy0.20.10-1.2-2.3-2.1-2.1-2.1-0.31.30.750.12.20.10.5-0.2-0.1-0.1-1.4-0.9-4.62.60.325Key messages:Continued investment,public and private,will underpin solid non-oil GDP growth in the Gulf Cooperation Council(GCC).After progress on macroeconomic adjustment in Turkey and Egypt,both countries central banks will be able to lower policy rates in 2025,supporting economic growth next year and into 2026.Tourism is likely to remain a bright spot for the regions economies.In 2025,MEI expects real GDP growth to accelerate to 3.7%in the GCC,up from an estimated 1.8%in 2024,underpinned by robust non-oil economic activity and at least a partial recovery in oil produc-tion.Despite lower oil prices,diversification efforts should continue as governments leverage strong balance sheets to finance investment in infrastructure.Private sector investment should also benefit from lower interest rates,supporting employment and domestic consumption.Population growth remains an important driver of economic activity for the region and particularly private consumption,even if the pace moderates.Demographic changes such as higher female labor force participation will also help to drive consumption growth by increasing households disposable incomes.Economic growth in Turkey and Egypt is constrained by macroeconomic adjustments including tight fiscal and monetary policies.With inflation moderating,monetary policy should ease in 2025,allow-ing growth to gradually rebound;however,geopolitical event risk in the Middle East and Africa region remains elevated.According to the UN Tourism statistics,South Africas outlook has improved following the formation of the national unity government which reduced uncertainty and boosted confidence,albeit from low levels.An improved electricity supply is encouraging,but a more meaningful rebound in activity re-mains constrained by lack of investment and structural reforms.1MEI expects tourism to remain a bright spot for the region.The GCCs strong push to grow its tour-ism sector has made it one of the fastest growing destinations in the world.The strength of the USD-pegged currencies has also added to the demand for outbound travel also.Meanwhile,travel to Egypt has remained resilient and Turkey remains a favorite for European travelers.According to the UN Tourism statistics,South Africa is yet to recover to pre-pandemic levels,and tourism continues to represent a growth opportunity without capacity constraints seen in other countries.Middle East and Africa:Sustained growth1.As reported from the UN tourism data statistics26Domestic and cross border spending on Experience vs Things in destination economy(Relative to same time in 2019)ThingsExperienceQatarSaudi ArabiaUnited KingdomUnited States2020-100%00 0000 222024202020222024202020222024202020222024SOURCE:MASTERCARD ECONOMICS INSTITUTE27Chinese Mainland:Steering through uncertaintyKey messages:Official exit-entry immigration administration data highlights that there is still runway for travel recovery.MEI expects the Chinese Mainlands economy to stabilize at 4.5%in 2025,support-ed by increased policy stimulus.Consumer demand for domestic travel is likely to remain strong in 2025,while de-mand for discretionary goods is expected to stay weak.Re-escalating trade tensions could prompt the Chinese Mainland to intensify ef-forts to achieve greater economic and technological self-reliance.MEI expects the Chinese Mainlands economy to stabilize at 4.5%in 2025,driven by increased gov-ernment stimulus and more favorable base effects.However,there is a downside risk to this forecast if U.S.-Chinese Mainland trade tensions re-escalate.A potential U.S.decision to raise tariffs on all Chinese imports to 60%could significantly weigh down the Chinese Mainlands exports to the U.S.,potentially reducing the Chinese Mainlands GDP growth by approximately 1.7 percentage points cumulatively during the 2025-2026 period.There are three key factors currently weighing on the Chinese Mainlands economy:(1)weak consum-er confidence,driven by rising concerns about job security and slower income growth;(2)a persistent housing market slowdown,with monthly housing sales falling by 60%from their peak in April 2021;and(3)disinflationary pressures,as the GDP output gap widened to-2.1%in the third quarter in 2024,eroding industrial profits and wage growth prospects for 2025.To counteract these pressures,the Chinese Mainland has introduced a series of stimulus measures since September 2024,including a 20bps cut to the seven-day reverse repo rate;a 50bps cut in the reserve requirement ratio(RRR);establishing a CNY 500bn swap facility for non-bank financial insti-tutions to borrow directly from the Peoples Bank of China(PBoC)to purchase stocks;and lowering the down-payment for second home purchases to a historic low of 15%.These pro-growth measures are expected to help stabilize the Chinese Mainlands economy in 2025,but a significant reacceleration remains unlikely due to fragile consumer sentiment and structural headwinds.A sustainable recovery in the Chinese Mainlands economy will require substantial struc-tural reforms to shift the country from an investment-and export-driven growth model to one fo-cused on consumption and innovation.Chinese consumer demand for domestic travel is expected to remain elevated in 2025,while the pace of international travel is likely to stay subdued due to budget constraints.The chart below shows our estimate of the Chinese Mainlands cross-border recovery rate based on official exit-entry immigra-tion administration data.Consumer demand for home appliances and electronics may see a modest improvement,supported by the governments trade-in policy.Demand for healthcare and education is expected to remain steady.However,the likelihood of a material rebound in the Chinese Mainlands discretionary consumption in 2025 appears low,given the moderate economic outlook.28Chinese Mainland cross-border travel recovery ratio, 2019 levelsOutbound tourist recoveryInbound tourist recoverySOURCE:EXIT-ENTRY IMMIGRATIONN ADMINISTRATIONQuarterRecovery percentage(%)Q4-2023Q3-2023Q2-2023Q1-20230255075100125Q1-2024Q2-2024Q3-202429Key messages:In 2025,Asia Pacifics(AP)growth is expected to align with 2024 levels,supported by lower inflation and interest rates.India is projected to remain the fastest growing major economy,both regionally and globally.MEI expects consumers to allocate more spending toward discretionary items,with travel continuing to be a priority.2025 is set to be a year of discovering what normal looks like for economies that have been swinging around wildly since 2020.Many AP economies are likely to experience a slight pickup in GDP growth,though the Greater Chinese Mainland is likely to remain on a softening path.By comparison,India is likely to outperform,being less exposed to global demand and more driven by the structural rise of the middle class and investment.See the chart below for more insights on the overperformers versus underperformers in the region.MEI also anticipates Malaysias economy will outperform in 2025,driv-en by a robust labor market and strengthening investment(projected 4.7%GDP growth with upside risks).MEI expects consumer spending across AP in aggregate to remain resilient,supported by tight la-bor markets and a catch-up in inflation-adjusted wages.This trend is likely to be driven by declining inflation,while wage growth remains solid.This is especially the case in Australia,New Zealand and Singapore,where inflation is expected to ease to around 2-3%following more significant price shocks.By contrast,the Chinese Mainland,Hong Kong SAR and Taiwan experienced less price volatility.For additional details,refer to the Chinese Mainland section.Meanwhile,expected lower interest rates in 2025 should bring some relief for households burdened by debt,freeing up consumers to shift some spend to discretionary goods and services.MEI expects interest rates to continue to fall,indicating an easing of monetary policy,with 100bps rate cuts likely from central banks in Australia and New Zealand,as well as rate cuts across most of north and south-east Asia.Japan is likely to be the main exception,as the Bank of Japan(BOJ)is signaling the need to keep raising rates to fight inflation.As seen in other regions which exited from pandemic restrictions earlier,MEI expects AP travel trends to remain robust.The key factor to watch will be the extent to which labor markets stay strong.There is more room for recovery of outbound tourism from NE Asia,as Japans exchange rate regains some of its multi-year losses and as the Chinese Mainlands outbound passenger recovery continues.Ac-cording to IATA data from the UN Tourism Tracker,most other markets have already seen a full recov-ery of outbound tourism.Compared to the volumes of 2019 the total passenger demand recovery in AP was still 12low 2019 levels as of mid-2024.The main risks to keep an eye on in the region include the potential for higher oil prices to drive an unwelcome rise in headline inflation,as well as trade-related issues in a region highly exposed to global trade.Asia Pacific:Divergent paths back to normal30GDP and Consumption|Indexed to 2019=100Seasonally adjusted,real,local currencyEconomyGDP growth-latest available,year-on-yearIndia6.7%Malaysia5.3%Philippines5.1%Indonesia5.0%Sri Lanka4.7%Chinese Mainland4.3%Singapore4.1%Taiwan3.9%Thailand2.9%Hong Kong SAR1.8onomyPCE growth-latest available,year-on-yearIndia7.6%Philippines5.0%Indonesia5.0%Malaysia4.8%Sri Lanka4.2%Thailand3.4%Singapore6.4%Taiwan2.7%South Korea1.3%Japan0.7%SOURCE:IATA DATA FROM THE UN TOURISM TRACKER31Seeing around the cornerFollowing a successful 2024,the global economy sets course for another year of expansion,shaped by shifting fiscal and monetary policies.As the business cycle matures,the structural forces that have shifted the landscape will become more apparent,helping to define the new landing place for econo-mies across the globe.There is uncertainty surrounding the impact of policy changes in the U.S.,which includes a substantial agenda covering immigration restrictions,tariffs,taxes,deficit expansion and deregulation.While some of these policies may support growth,others could constrain it and contribute to inflation.Many proposals remain too underdeveloped to incorporate into a forecast,but our perspective will continue to evolve as the policy direction becomes clearer and as our data captures emerging trends.32About the Mastercard Economics InstituteDisclaimerThe Mastercard Economics Institute provides insights into global and local economic trends using advanced analytics and Mastercards proprietary data assets.Established in 2020,MEI supports businesses,governments,and policymakers with economic monitoring services and timely analysis on economic themes including consumer spending,retail and travel trends,and other local and global ba-rometers of economic performance.MEI offers valuable perspectives to inform decision-making and promote sustainable growth worldwide through our thought leadership series,and through Master-cards specialized product offerings.2024 Mastercard International Incorporated.All rights reserved.This Mastercard Economics Institute presentation(This“Presentation”)and content or portions thereof may not be accessed,downloaded,copied,modified,distributed,used or published in any form or media,except as authorized by Mastercard.This presentation and content are intended solely as a research tool for informational purposes and not as investment advice or recommendations for any particular action or investment and should not be relied upon,in whole or in part,as the basis for decision-making or investment purposes.This presentation and content are not guaranteed as to accuracy and are provided on an“as is”basis to authorized users,who review and use this information at their own risk.This presentation and content,including estimated economic forecasts,simulations or scenarios from the Mastercard Economics Institute,do not in any way reflect expectations for(or actual)Mastercard operational or financial performance.Notes&Disclaimer
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2025 World Economic Outlook The World Faces Trump 2.0January 17,2025*Translated from the original Japanese version released at the end of December 2024(slightly modified)Table of Contents22025 World Economic Outlook1.Real GDP Forecast(p.4)2.Trump 2.0:Policies and Impacts(pp.5-9)3.Chinas Economic Slowdown(p.10)4.Commodity Market(p.11)5.Risk Scenarios(p.12)2025 World Economic Outlook3Global growth is expected to slow down to 3.0 percent in 2025 alongside Trump 2.0Global Economy Set to Slow Down41.Real GDP ForecastComposition of each region/group is based on IMF.Global shares are calculated based on purchasing power parity(PPP).Source:Marubeni Institute(Actual:IMF)Real GDP Growth Forecast(YoY,%)Global economic growth in 2025 is expected to be 3.0%,down from 3.1%in 2024.While lower inflation and gradual monetary easing will support economic growth,further global fragmentation will significantly weigh on the global economy.The policies of the new US President Trump,the most important factor in 2025,will inject more uncertainty not only in the US but also in the global economy as a whole.Although Trumps trade policies will likely hit the Chinese economy most significantly,other trading partners in the existing value chains will also be affected negatively.Sentiments for trade and investment stagnates as uncertainty deepen,which could make global economic growth much lower.Inflation continues to contract worldwide,but disinflation pace in the US will be slower due to the impact of additional tariffs as well as concerns about labor supply related to new immigration policies.The Federal Reserve Board should become more cautious on monetary easing,while the European Central Bank will keep on lowering its policy rate.The Bank of Japan will continue to raise interest rates,but the range of rate hikes will be limited amid a lackluster economic recovery.Among developed economies,the US economy will be slowing,but sustain a rather high growth rate,mainly due to a base effect.While the recovery in the European economy weakens,Japans economic growth will rebound from the contraction in 2024.As for emerging economies,Chinas growth will be slower due to the worsening relations with the United States.ASEAN and other economies which have strong ties to China will also come under downward pressure amid weaker external demand.On the other hand,economies led by domestic demand,such as India,will maintain a relatively robust growth pace.Commodity prices are set to decline mainly due to weaker demand caused by the global economic slowdown,particularly in China.Risks to the baseline scenario are generally tilted to the downside,including greater-than-expected global fragmentation,recurring inflation,turmoil in regional conflicts,and serious debt crises in fragile economies.Global Share20232024202520262023(%)ActualEstimate Forecast ForecastWorld1003.33.13.02.9Advanced Economies40.71.71.71.61.5United States15.02.92.82.22.0Euro Area11.90.40.80.70.9United Kingdom2.20.30.90.90.9Japan3.51.70.31.00.6(FY)-0.80.20.80.5Emerging Market and Development Economies59.34.44.23.93.9China18.75.24.84.23.9India7.97.76.86.56.3ASEAN-55.14.04.54.24.2Emerging and Developing Europe7.83.33.22.02.2Latin America and the Caribbean7.32.22.12.32.4Middle East and Central Asia7.32.12.43.73.7Sub-Saharan Africa3.23.63.64.04.1Overall,Trump 2.0 has a negative impact on both US and global economies in 2025Trump 2.0:Baseline Scenario52.Trump 2.0:Policies and Impacts Assessment of the impact on the US and global economiesMain Scenario in 2025US EconomyGlobal EconomyTariffAdditional tariffs on China:Average 60%to be implemented in the first half of 2025Universal additional tariffs:Average 10%will be implemented in the second half of 2025China retaliates by restricting exports of critical minerals and adding US companies to the Entity List.The EU imposes additional tariffs as a countervailing measure.Japan and other countries avoid direct retaliation while negotiating with the US.ImmigrationHalf a million illegal immigrants are deported each year*Pew Research estimate(24/7):As of 2022,there are 11 million illegal immigrants in the United States of which 8.3 million are employed.TaxThe following will be implemented in 2025:Extension of the Trump Tax Cuts of 2017(TCJA)(which expires at the end of 2025)Corporate tax cuts(21 %,15%for companies manufacturing in the US)De-regulationThe following deregulation measures were implemented in 2025:Relaxation of emission regulations for thermal power generation and automobiles Relaxation of methane emission regulations LNG exports Resumption Postponement of the implementation of the final international banking regulations(Basel III)(originally scheduled for July 2025)Climate ChangeThe following will be implemented in 2025:Withdrawal from the Paris Agreement Cancellation of unimplemented funds from the Inflation Reduction Act(IRA),amendments to the EV tax credit,etc.Total(Economy)US:Effects of tax cuts and deregulation are limited while Tariffs and immigration restrictions weigh on economy.World:Additional tariffs hurt global trade and Chinese economic sentiment(Inflation)US:Additional tariffs,tightening labor market due to immigration restrictions has an upward inflation pressure.World:Strong dollar puts upward pressure on import prices in some countries while global economic slowdown puts downward pressure on prices(positive)(negative)Source:Marubeni InstituteSpillover from the US economySpillover from the US economySpillover from US economy and impacts on neighboring countriesDownward pressure on international trade and the Chinese economyCautious stance on decarbonization investmentsAdditional tariff policies put downward pressure on businessInflationary pressures and increased burden on companiesDecreasing labor supplyReducing corporate tax burdenExpansion of the energy industry,etc.Renewable energy business(-)/Fossil fuel business( )The effects of tax cuts and deregulation are limitedThe re-election of the US President Trump is the most important factor for the global economy in 2025.Below is our assumption on Trump 2.0s policies along with our evaluation on the impact of these policies over both the US and global economies.While the effect of supporting the economy is limited in 2025,fiscal concerns may keep interest rates highIncreased corporate value,rising stock prices,investment stimulation,supporting personal consumption(US)Improving corporate performance and investment/supporting employment(US)Interest rates remain high due to the rise of concerns about worsening governments finance(US)Spillover from US economy(World)Tariffs will raise import prices in the United States,while possible disruption over the trade of intermediate goods will damage the export industry.Immigration policies will put pressure on the U.S.economy in the medium term from both the direct impact on production due to labor shortage,and the upward pressure on prices through raising wages.These impacts are not limited to the United States,but will spread to closely related economies.Tax cuts and deregulation have a certain effect in supporting the US economy,but if there is a significant cut in government spending,the positive effect may be partially canceled out.On the other hand,there remains a risk of fiscal loosening,and there is a possibility that interest rates will remain high.Trump 2.0 will damage the US economy in the medium to long term and go against global climate control trendsTrump 2.0:Pathways of Impact on Economy and Industry62.Trump 2.0:Policies and ImpactsTaxThe negative impact of rising prices in the U.S.is spreading overseasSwitching of suppliers and disruption of domestic and international logistics(US/World)Rising import prices put downward pressure on consumption(US)Rising intermediate product prices put pressure on corporate performance(US)Retaliatory tariffs by other countries(US/World)Deteriorating performance of export industries,particularly agriculture and energy sectors(US)International trade stagnates(World)Sentiment worsens in exporting countries(esp.developing countries)(World)Economic slowdown caused by labor shortage due to tighter immigration policy spreads overseasLabor supply declines in sectors employing large numbers of illegal immigrants(US)Labor shortage leads to lower production,investment,and further reduction in productivity(US)Rising labor costs and potential upward pressure on prices(US)Domestic economic slowdown spreads to neighboring countries(World)Positive impact from reduced corporate costs and increased exportsCost reductions in related sectors(energy,automobiles,finance)(US)Energy(esp.LNG)exports increase(US/World)Expansion of cryptocurrency market(US)Lowering prices and economic support(US)Positive impact of the US economy on other countries(World)Reconsidering policies on Climate change and fossil fuelsIRA-related cases stalled or stopped(US)Climate change investment and employment stagnate(US)Energy Stocks Rise(US)Auto manufacturing performance improves(US)Downward effect on energy prices(US)Climate change investments stagnate in various countries(World)MajorPoliciesInflation 12 10 8 6 4 202420202021202220232024米国圏日本(%)Policy Rate(real)Policy Rate(nominal)1012345620202021202220232024米国圏日本(%)TighteningEasingTrumps main pledges&Impact on pricesTax cutsCustoms DutiesImmigra-tionEnergyMaking Trumps tax cuts permanent,lowering corporate tax rates,etc.(Boosting demand)General tariffs(10-20%),tariffs on China(60%),etc.(Pushing up import costs)Restrictions on entry of illegal immigrants,deportation of illegal immigrants,etc.(Shortage of goods supply,pushing up labor costs)Deregulation of oil and gas production,etc.(Energy prices pushed down)Trump 2.0 will keep inflation higher than expected and slow the pace of rate cutsInflation and Monetary Policies72.Trump 2.0:Policies and ImpactsIn most countries,inflation rates are expected to gradually decline toward their central bank targets as economies slowdown.The United States,on the other hand,will likely face relatively sticky inflation due to the policies proposed by President Trump and an unexpectedly robust domestic economy.Although the level of inflation will not reach to that of 2022,tighter labor markets will keep inflation higher than expected.The US will continue to cut interest rates towards the neutral interest rate,but the pace will be slow in order to assess the impact of Trumps policies on prices and employment.The ECB will cut interest rates faster amid growing concerns about an economic downturn.On the other hand,Japan will raise interest rates but only cautiously due to uncertainty of the economic situation.Real interest rates,which are nominal interest rates minus the inflation rate,are declining gradually in Europe and the US,but a tightening environment will continue,while Japan is expected to maintain an accommodative environment for the time being.*Inflation indicator:(US)PCE deflator,(Euro area)HICP,(Japan)CPI.Real policy interest rate is the policy interest rate minus inflation rate(YoY).The dotted line shows neutral interest rate caluculated by the central banks(there is a range of estimated values and it is not a uniquely determined value in reality).Sources:BEA,Eurostat,FRB,ECB,Bank of Japan,Japanese Ministry of Internal Affairs and Communications.202468101220202021202220232024米国圏日本(YoY,%)2%targetUSEuroJapanUSEuroJapanUSEuroJapanTrump 2.0 will accelerate the change in the flows of global trade and investmentTrade and Investment2.Trump 2.0:Policies and Impacts0246102030401990199520002005201020152020輸出額直接投資受入額（右軸）*Arrows:Trend linesSource:Macrotrends,UNCTAD,IMF,Marubeni InstituteGlobal exports and direct investment(Nominal GDP ratio,%)(Same as left)*Measures include tariffs,import quota,export controls,export subsidies,etc.,which the source judges to be harmful.Source:Global Trade AlertTrade and investment intervention measures(Number of installations)*Top 10 countries exporting to the U.S.in 2023,excluding China:Mexico,Canada,Germany,Japan,South Korea,Vietnam,Taiwan,India,IrelandSource:ITCChanges in trade flows*Down arrow indicates downward pressureSource:Marubeni Institute Major trade policies of the new US administrationIn recent years,amid the US-China trade war,the COVID-19 pandemic,and the Russia-Ukraine war,the ratio of global trade to GDP has stagnated,while foreign direct investment to GDP has also declined.Under the new US administration,it is likely that the fragmentation of the international community and the disruption of global trade and investment flows will accelerate.US imports from China have already declined due to high tariffs(around 20%on most imports)which has been already implemented since 2018.If an additional 60%tariff is implemented,imports are likely to fall further.Strict anti-circumvention measures will likely be implemented on countries like Mexico and Vietnam,which will make related trade decline as well.It is well recognized that China has huge excess production capacity that far exceeds domestic demand,and if access to the US market is restricted,it may intensify its aggressive export to other markets which could cause other trade conflicts.ChinaUSThird Country(77.7)( 577.7)( 297.3)20172023Billion(USD)02,0004,0006,0008,00020092011201320152017201920212023中国米国他MeasuresGlobal TradeGlobal FDITariffs60%on China10%of the worldMeasures on export circumventionMexico,Canada,etc.ExportControlAdvanced Technology,Mainly ChinaInvestmentRegulationMainly ChinaOther issuesCurrency manipulator,revocation of MFN status,etc.Mainly China8Mainly ChinaMainly ChinaChinaUSOthersExportFDI(right)Baseline(Japan and the US economy,inflation,and monetary policy)US interest rate cut,Japan interest rate hike Japan-US interest rate gap shrinks Buy yen,sell dollarsDollar DepreciationTariffsIntroduction of additional tariffsRising import prices Inflation Feds pace of interest rate cuts slowsDollar AppreciationPressureImmigrationDeportation of illegal immigrant workersLabor shortage wage increases rising corporate costs worsening performance of US companies weak dollarDollarDepreciationPressureTax cutsCorporate tax cuts(Economic stimulus)Increased demand Inflation(Increase of US financial risk)Selling of government bonds Rising US interest ratesDollar AppreciationPressureDe-regulationDeregulation of fossil fuel businessesAs the United States becomes a net exporter of crude oil,the relationship between crude oil prices and the dollar becomes more complicated.This has an impact on domestic prices in the United States,but the impact on the exchange rate is neutral.NeutralTotalThe economic and inflationary trends in Japan and the United States,and the accompanying direction of monetary policy,aim for a stronger yen and a weaker dollar,but Trumps policies are generally creating stronger pressure for the dollar.LimitedDollar DepreciationThe pace of JPY appreciation will be slower than expected due to Trump 2.0FX Market(JPY/USD)92.Trump 2.0:Policies and ImpactsThe underlying economic and inflationary trends in Japan and the US,and the accompanying revisions to monetary policy,tend to strengthen the yen and weaken the dollar through narrowing the Japan-US interest rate gap.Trumps policies including additional tariffs,however,will raise concerns about high inflation in the US and slow the pace of interest rate cuts by Federal Reserve Board(FRB).Although President Trumps priority of reducing trade deficit implies reversal of dollar appreciation,the policies he advocates indicate pressure for a stronger dollar on the contrary.JPY/USD and*Rate gap:US 2-year bond yield-JP 2-year bond yieldSource:LSEG01234561001101201301401501601702022/12022/42022/72022/102023/12023/42023/72023/102024/12024/42024/72024/10円2年物金利差(右軸)JPY Depreciation(JPY/USD)JPYAppreciationJPY DepreciationJPYAppre-ciationImpact of Trump policies JPY/USD and Trump 2.0Source:Marubeni InstituteJPYDepreciationJPYAppreciation(22/2)Fed begins interest rate hike(23/4)Mr.Ueda becomes BOJ Governor(24/7)BOJ interest rate hike(24/9)Fed interest rate cut(22/12)Fed reduces interest rate hike(23/9)Fed stops raising interest rates(%points)JPY/USDRate gap(right)024682000200420082012201620202024対米輸入額対米貿易黒字額対米輸出額First Trump AdministrationSecond Trump Administration(Expected)China tariffs20%for most imports60%for all imports(Early after assuming office)China RetaliationRetaliatory tariffsTargeted tariffs,yuan depreciation,export subsidy,export restrictions on critical minerals,etc.Trade DealPhase One trade deal in 2020Unlikely to reachGoods related to Climate ChangeLimited impact due to Chinas immature supply chainSignificant impact due to Chinas reliance on climate change measures&goodsInfluence on ChinaRelatively smallSignificantly higher than the last timeTrump tariffs will be the biggest downside factor while the room for Chinese policy narrowsChina in trouble3.Chinese Economic SlowdownSource:General Administration of Customs of China,National Bureau of Statistics Chinas trade with US(%of nominal GDP,USD)Source:Marubeni InstituteImpact of Trump tariffs*2024 to 2026:Marubeni Research Institute forecastSource:National Bureau of Statistics of China Real GDP growth rate(YoY,%)0408012020002004200820122016202020242028IMF推計：地方政府関連債務公式統計：地方政府公式統計：中央政府IMF：公的債務残高*The 14.3 trillion yuan of local government-related debt announced in November 2024 is included in local government debt for 2023.Source:IMF,Ministry of Finance of ChinaPublic debt outstanding(%of nominal GDP)Chinas exports to the US(share of nominal GDP)have declined through the period which included the first Trump administration.They recovered once after the COVID-19 pandemic,but again fell to 2.8%in 2023.China is expected to retaliate against Trumps tariffs in a way that does not hurt its own economy seriously,such as imposing retaliatory tariffs limited to US agricultural products and devaluing the yuan.Nevertheless,if the announced high tariffs and restrictions on indirect exports are implemented,the negative impact on the Chinese economy is likely to be much greater than last time.In China,government debt(share of nominal GDP)has doubled over the past 10 years,due in part to the accumulation of past economic measures and the room for stimulus with additional government spendings is now much narrower than ever.Partly affected by Trumps tariffs,Chinas real GDP growth is expected to depreciate to below 4%YoY in the coming couple of years,which makes Chinas real challenge to manage economic policies while avoiding fiscal risks.5.2 4.8 4.2 3.9 012345678910201820192020202120222023202420252026実質GDP成長率政府目標101st Trump Admin.Import from USTrade surplusExport to USReal GDP growthGov.targetLocal Gov.relatedLocal Gov.Central Gov.Public debtDownward pressure continues from lacking demand and more than ample supplyFurther decline in commodity prices114.Commodity MarketCommodity Price Index(Note)Each index is based on the World Banks classification and is composed of all commodities;coal,crude oil and natural gas;agricultural products such as beverages,food and timber;and base metals,iron ore and precious metals.Source:World Bank,Commodity Market Outlook,October 2024Commodity prices are expected to remain under downward pressure into 2025,falling to their lowest levels since 2020 for most goods.With ample inventory and supply capacity for major commodities,selling pressure is increasing due to a lack of demand caused by the slowdown in global economic growth,particularly the slump in the Chinese economy.In spite of more than ample supply globally,trade fragmentation may weaken the price adjustment function across economic blocs,which may induce localized price hikes.Note that price sensitivity to the changes in situations such as the Middle East situation(crude oil),Russia-Ukraine situation(natural gas and grains),and U.S.-China relations(all products)may increase.Major factors for commodity marketEnergyGeopolitical risks(Middle East,Russia and Ukraine)Without actual supply chain disruption,the impact will be limitedOPEC out of step,production cuts eased(crude oil)How long can OPEC tolerate non-OPEC production increases?US energy policy(LNG,fossil fuels,renewable energy)-Policy to strengthen development and export of fossil fuelsShortage of demand due to decarbonization(fossil fuels)metalChinas economic downturn The countrys policies(economic stimulus measures,measures to curb excess production capacity)US-China relations(Chinas imports shrink ,exports shrink )FoodWeather(especially in North and South America,Russia):Good harvest La Nia expected to weaken in early spring in the Northern HemisphereRussia-Ukraine War(decrease in exports from the Black Sea coast)The effects of war and weather have made the conditions for growing crops along the Black Sea coast the worst theyve ever been.US-China relations(Chinas imports shrinking )40608010012014016020102011201220132014201520162017201820192020202120222023202420252026総合農産品金属*Arrows:the direction in which prices will be affected.*Bold:Factors to be particularly focused on in 2025.Source:Marubeni Institute(2010=100)TotalAgricultureEnergyMetalsUncertainty over U.S.policy is the biggest issueRisks Tilted to the Downside5.Risk ScenariosDownside ScenarioUpside ScenarioEscalation beyond expectationsIn response to the large-scale tariff hikes by the US,major countries will take more aggressive retaliatory measures.The US is to set even higher tariffs on those countries that do not offer favorable terms to the US in their deals.Sudden turbulenceThe pace of interest rate cuts will slow as inflation concerns resurface in the U.S.The Chinese economy will deteriorate sharply due to Trump tariffs,while policy room has been narrowed by the housing slump and years of economic stimulus measures.In emerging countries,economic uncertainty is growing as a result of factors such as higher U.S.tariffs and a strong dollar,which are causing capital outflows from countries that are highly dependent on the U.S.or have weak fundamentals.Trade DecouplingEconomy,FinanceGeopoliticsFurther prolonged conflictsRussia,seeing the stagnation of US support and the decline of morale on the Ukrainian side,will step up its offensive against Ukraine.Ceasefire talks are proving difficult,and instability continues in the surrounding region.the Middle East,Israel may intensify its offensive against neighboring countries.Anti-Iran hardliners are gaining a voice within the U.S.administration,escalating conflict with Iran.Risks to maritime traffic increases.Non-Inverventionism brings“Peace without Justice”President Trump,who is reluctant to intervene militarily overseas,is to urge various countries to seek ceasefires and resolve regional conflicts,easing geopolitical risks in Russia,Ukraine and the Middle East.A robust US economy overcomes several negative factorsMost of the tariff hike will be absorbed by corporate efforts,and a serious resurgence of inflation can be avoided.Major countries continue to lower interest rates as disinflationary trends returned.Uncertainty pertaining to the Trump risk will also be gradually resolved.Pragmatic“Tariff Man”The United States will postpone raising tariffs depending on the“deals”reached with each country.As for China,the impact on the domestic economy will be reduced by adjusting the tariff rates and on specific items.Each country will maintain a passive stance on retaliation in order to avoid tit-for-tat measures with the United States.121-4-2 Otemachi,Chiyoda-ku,Tokyo 100-8088 Japan https: material was created based on publicly available information and as such Marubeni Institute cannot guarantee the accuracy,correlation or thoroughness of this material.Any conclusions made or action taken based on the contents of this material is strictly up to the discretion of the user of this material with all outcomes the sole 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Important disclosures are in the disclosure appendix.For other important disclosures,please refer to the disclosure&disclaimer at the end of this Standard Bank February 2025 2 Contents Contents.2 G10 outlook for 2025.3 EM outlook for 2025.8 Resilient ambitions:Africas economy in a volatile global climate.16 SA politics in 2025:risks,and opportunities,abound.39 SA:Slowly heading into the right direction.45 Standard Bank February 2025 3 G10 outlook for 2025 Stability at risk 2025 looks set to be another year of steady,if unspectacular,growth amongst developed nations.Advanced countries are likely to grow by just short of 2%in aggregate,much like the likely 2024 outcome.While growth might be modest,we still should remember that most economies have enjoyed a relatively soft landing after the surge in policy rates in 2022 threatened to tip the advanced economies over a cliff.But risks abound,most of which are associated with the new US administration under Donald Trump.For the spectre of damaging tariffs has come back to haunt global policymakers and financial markets alike.Optimists will point to the fact that the last surge in US protectionism,which started in 2018 during the first Trump administration,did not prevent robust global growth.However,the tariffs were far less draconian than those being talked about by the second Trump administration.At the same time,it is difficult to disentangle the impact tariffs had on the global economy after 2020 because Covid decimated the world economy.Most projections relating to the effects on the US of new tariffs now point to weaker growth,higher inflation,less Fed policy easing(and possibly rate hikes),and a stronger dollar.In short,it does not look good,and it could be even worse for other countries,especially those that trade heavily with the US such as Canada,Mexico,and China.Many policymakers and investors will hope that the Trump administration holds tariffs back as a threat rather than a policy of choice.But the Trump administration sees tariffs as a source of revenue,and this cannot be realised if tariffs remain a threat and no more.And with tax cuts in the pipeline,the Trump administration looks as if it could use all the revenue it can muster given that the budget deficit is set to remain a very high 6%of GDP or so for as far as the eye can see,and debt has soared to around 100%of GDP.With this in mind,and given how Trump threatened,and then delivered,tariffs during his first term,we suspect that new tariffs will be delivered during this period in office,even if only sporadically.Will these be sufficient to blow advanced countries off course?We doubt it,but we also suspect that advanced countries will fail to achieve potential growth as fast as they could if tariff threats were absent.A difficult last mile Advanced countries made further progress in reducing inflation last year.For after the recent peak of around 7.5ck in 2022,inflation is likely to have been around 2.75%last year and is seen slightly lower still,at around 2.5%in 2025.The slowing in the rate of decent illustrates what policymakers have said for some time;that achieving the last mile of inflation reduction to the 2%target level desired by most major central Figure 1:Trade uncertainty surges again Source:Bloomberg 01234562005 2006 2007 2008 2009 2011 2012 2013 2014 2015 2016 2018 2019 2020 2021 2022 2023World trade policy uncertainty index Standard Bank February 2025 4 banks would be the hardest.The difficulty relates largely to the fact that labour markets have remained quite tight,even in countries where economic growth has been meagre,such as the UK.This tightness has,in turn,limited the reduction in wage growth.While this is welcome,as the fall in inflation below wage growth prompts the sort of rise in real income that should aid economic growth,central banks could be left facing the fact that sustainable on-target inflation remains just out of reach.In addition,new inflation risks are arising,not least in the US,from the triple threat of tariffs,deportation of illegal migrants and tax cuts.But it is not just in the US.Should governments hit by US tariffs retaliate with tariffs of their own on US imports,which seems very likely,we could see global price pressures rise.And,as far as migration policy is concerned,we are also seeing far tougher policies from many European governments as they face political pressure from far-right parties that campaign on anti-migration platforms.On balance,we do not expect these factors to spur notable reversals in the progress towards target-level inflation,but achieving this last mile of inflation reduction down to 2%may prove elusive.Even though central banks have admitted that achieving the last mile of inflation reduction is proving the hardest,they have still cut policy rates.This is something we would expect.Only Norway and Australia have held out,but this should end soon,while the Bank of Japan continues to drive in the other direction by lifting policy rates as it seeks to exit the unconventional easing that has been in place for many years.Only in the US have questions arisen about further easing as the Federal Reserve has entered a pause period.The desire to pause is partly related to the policy uncertainty associated with the new Trump administration.As already mentioned,policies that include tariffs,deportations and tax cuts can serve to lift inflation and so complicate the Feds path to bring the Fed funds target rate down to what the bank considers as neutral,which is 3%,according to the median projection of Fed members.Many,including us,believe that the neutral rate is higher than the Feds estimate.We put the rate at around 3.5%and expect the Fed to get to this level in the first half of 2026.Many other central banks would seem to have a clearer path to bring policy rates down to more neutral levels,and some may even have to go below neutral.In the euro zone,for instance,many members seem to point to the 2%region as neutral and a level that can be achieved this year.We believe that the paucity of growth,falling wage growth and sub-target inflation can combine to bring policy rates down to 1.75fore the end of 2025.Bond market problems Given that most developed country central banks are easing policy,we might have expected longer-term bond yields to fall.This is what usually happens in an easing cycle.But it has not happened this time around,at least not yet.For instance,US 10-year Figure 2:Labour market tight despite modest economic growth Source:Bloomberg-6-4-2024684,04,55,05,56,06,57,07,58,08,59,0198119841987199019931996199920022005200820112014201720202023Advanced countries unemployment rate(%)Advanced countries GDP(%yr)(RHS)Standard Bank February 2025 5 treasury yields have risen by just over a percentage point since the Fed started to cut rates last September.A part of this is down to the adjustment of future expectations about Fed easing as the Fed started to cut rates.For instance,when the Fed first cut the policy rate by 50bps,to 5%,in September 2024,the Fed funds futures market was priced for the bank to trim rates down to just below 3%by the end of 2025.But now,after another 50bps of rate cuts from the Fed,the market is priced for the Fed funds rate to be just under 4%at the end of the year.In other words,the more the Fed cut rates,the less optimistic the market became about future reductions.This has helped lift treasury yields and other bond yields have moved in sympathy even though none of those that have eased policy appear to have paused yet.However,the rise in yields does not just seem to reflect less dovish expectations for Fed policy;it also reflects a rise in the US term premium.The 10-year US term premium has turned positive again as investors demand to be paid more for holding 10-year treasuries than from rolling over shorter maturities.A positive term premium has been largely absent over the past decade,having been dragged down by factors such as Fed bond purchases.But now quantitative easing has turned to tightening and,although the Fed may stop this process later this year,there are new concerns to contend with,primarily associated with rising government debt which is now around 100%of GDP.It is projected to rise by a further 20%of GDP over the next decade by the bipartisan Congressional Budget Office,even before allowance is made for the deficit-boosting policies of the Trump administration.In all,it could create an environment in which the Fed eases,but longer-term bond yields continue to rise,while higher yields are also seen outside of America,even though debt concerns lie mostly in the US.Given that budgetary concerns in the UK back in September 2022 provoked a dramatic surge in UK gilt yields,there have been concerns that the so-called bond vigilantes could come for the US next.We do not take this view.So,while there are undoubted risks that yields rise further in the short term,to 5%for 10-year treasuries,we do not see such levels as likely over the longer term,provided the Federal Reserve brings the policy rate back to our estimate of the neutral rate of around 3.5%.In this event,wed expect 10-year treasury yields to ease down to the 4.0%region,and possibly just below,over the next year or so.Such declines should help encourage lower bond yields in other developed countries.Indeed,yield declines could be more rapid elsewhere given the absence of any pause in policy easing,the better inflation outlook,and fewer government debt strains.The tariff question The pausing of Fed easing has contributed to a rise in the dollar in recent months,although it seems clear that the biggest contributor to the greenbacks rise has been the election victory for Trump last November.Just like his first victory in November 2016,Figure 3:Term premium is positive again Source:Bloomberg-2-10123456198019831986198919921995199820012004200720102013201620192022US 10-year bond market term premium Standard Bank February 2025 6 the dollar has risen based on the likely consequences of a very similar policy combination of tariffs,tax cuts,and tougher migration laws.However,what was notable about Trumps first term in office between 2017 and 2021,was that the post-election surge in the dollar quickly evaporated and,if we take the four years as a whole,Trump left the dollars value against other major currencies 10%lower than the level he inherited.In other words,this policy combination of tariffs,tax cuts and tough migration laws seemed to contribute to a fall in the dollar,not a rise.In fact,the greenback never managed to reach the heights seen immediately after his 2016 victory through his first term.Whats more,we should remember that 2017 and 2018 saw the Fed tightening policy while all other major central banks left policy unchanged.And then there was the Covid pandemic in early 2020 which did not produce new highs for the dollar in spite of the greenbacks supposed safe-asset allure during times of such severe global economic stress and asset-price meltdown.One final point to note was that the dollar rose during the pre-Trump years,under Obama and again in the post-Trump years under Biden.In short,Trumps arrival appeared to reverse the dollars appreciation temporarily.Can we expect history to repeat itself,or is history only a good guide to the past?We suspect it will be the former and that Trump will leave office with a lower dollar than where he found it.We take this view for several reasons.On tariffs,we should remember that tariffs are bad for the US economy,as well as those targeted by tariffs.Both theory and evidence suggest that the imposition of tariffs leads to a stagflationary combination of weaker growth and higher inflation.It is true that US importers may need to buy fewer Canadian dollars,Mexican pesos and Chinese renminbi if tariffs are levied but trade flows account for such a small proportion of FX turnover that they really do not matter.Another argument,that tariffs and other policies such as tax cuts and mass deportations could keep the Fed on hold while others ease,is not a surefire way to create dollar strength.For a start,these policies threaten to lift inflation,and if that reduces US real(inflation adjusted)rates relative to others,the dollar is more likely to fall than rise.For it is real interest rates that count for currencies,not nominal rates.If nominal rates were most important,FX investors would buy the currencies of the highest interest rate countries but that does not happen because these countries usually have the highest inflation as well.In fact,the countries with the highest nominal interest rates tend to find that they have the weakest currencies on average.Another issue to consider is that tariffs,along with many other policies of the Trump administration,such as pulling out of multilateral institutions and embracing crypto currencies,undermine US hegemony and the dollars safe-asset status.In our view,these things seem likely to provoke more diversification away from the dollar.The US should remember that it is beholden to the rest of the world to provide the dollars that allow the country to maintain such low levels of saving(the large budget deficit,for instance)relative to investment.Americas so-called exorbitant privilege,of owning the worlds dominant currency,means that it can accumulate huge external debt,which Figure 4:The dollar stalled in the Trump years Source:Bloomberg 7075808590951001051101152009201020112012201320142015201620172018201920202021202220232024Dollar index(DXY)Trumps first term Standard Bank February 2025 7 stands at close to USD24tn,without incurring the sort of currency weakness and bond-market vulnerability that other countries would be expected to endure.In fact,evidence rather suggests that the US has attracted too much overseas savings because it has led to a potentially dangerous concentration of risk.The US stock market,for instance,has seen its weight rise from just over 30%of the global aggregate(MSCI World index)back in 1990 to around 70%today and thats despite the US share of global GDP having declined over the period.This increased weighting,as reflected in US stock market outperformance,has sucked foreign capital into the US and probably lifted the dollar in the process.This could certainly continue in the future,but we regard the situation as increasingly fragile.This does not mean that we expect some sort of huge reversal in capital flows to the US and dollar collapse,but we do think that those sending capital the USs way may require some cheapening of assets,via a weaker dollar,to continue supplying the ever-increasing amount of capital that the US requires.Another key component here is whether other developed countries can make their own economies and financial assets more attractive.In the past,the growth deficit and the asset price deficit to the US has been large and seemingly responsible for the dollars rise.This year should bring some reduction in the USs growth advantage.We see the US economy growing by closer to 2%than the near 3%from 2024.At the same time,the euro zone and UK are more likely to see growth this year of 1%,or above,compared to the sub-1%figures from last year.That might not be a big closure of the growth gap but,when it comes to the dollar,it does appear that market participants are heavily invested in the theme of US economic exceptionalism such that only a modest unwinding of this advantage is required to weigh the dollar down.In the near term,we think that the Trump-led dollar euphoria can continue for a bit longer,pushing euro/dollar,for instance,down into a 0.95-1.0 range.But as this euphoria fades,wed expect the euro to be back up to the 1.10 level in a years time,with similar improvement for other currencies,such as 1.35 for the pound and 140 for the yen.Steven Barrow This material is non-independent research.Non-independent research is a marketing communication as defined in the UK FCA Handbook.It has not been prepared in accordance with the full legal requirements designed to promote independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.Figure 5:US growth advantage expected to narrow Source:Standard Bank Research-0,50,00,51,01,52,02,53,0USEurozoneJapanUKCanadaAustraliaNZGDP forecast 2024GDP forecast 2025 Standard Bank February 2025 8 EM outlook for 2025 Introduction As we kick off 2025,the outlook for emerging markets might seem rosy at first glance.Sure,there are some solid fundamentals in play:decent economic growth,stable inflation,and low debt levels.But lets not get too carried away.This optimism could very well be misplaced.The real story lies in the intricate dance of monetary policy,trade dynamics,and broader economic conditions.Much is riding on a few key factors:Will the Federal Reserve cut rates?Will the US dollar weaken?And can we trust that Chinas growth wont falter under the weight of its own complexities?And obviously,the looming threat of an ever-escalating trade war and elevated geopolitical tension.On each of these scores the jury is still out.The markets may be putting on a brave face,whilst forecasts seem to be erring on the side of optimism and ignoring some a significant pivot from Beijing towards a less circumspect response.At this juncture,it seems that the balance of risks certainly leans more toward the downside.Buckle up!Relatively benign forecasts As we look ahead to 2025,IMF(2025)projections indicate a global economic growth rate of 3.3%,mirroring the pace of the past three years.While both developed economies and emerging markets are expected to expand at similar rates as last year,advanced economies will likely grow at less than half the speed of their emerging counterparts.This baseline forecast suggests a“smooth landing,”as described by the Bank for International Settlements(BIS,2024),fostering conditions favourable for rising stock markets,tighter credit spreads,and more relaxed financial environments.However,these seemingly optimistic projections mask significant challenges for emerging markets.The trajectory of the US dollar,fluctuations in commodity prices,shifting global risk appetites,and increasing macroeconomic uncertaintyparticularly due to slowing growth in China,their most critical trading partnerpose serious threats.Compounding these issues are escalating geopolitical tensions among major economies,raising alarms about potential global economic fragmentation(IMF,2023).Such fragmentation could undermine financial market stability(Boungou&Urom,2025)and drive up borrowing costs(Nguyen&Thuy,2023).The growth rate of emerging markets is not nearly as lofty as it once was The growth trajectory of emerging markets is markedly less robust than it once was.Current projections indicate that around two-thirds of the worlds emerging economies are expected to expand faster than their five-year pre-pandemic trendsa slight improvement over 2024.However,only three of the ten largest emerging marketsIndonesia,the Philippines and Polandare anticipated to accelerate in 2025.This small group of larger economies,primarily driven by China and to a lesser extent India,represents a staggering 80%of the overall economic growth in this category.When expanding the analysis to include the 20 largest emerging market economies,only India,Indonesia and the Philippines are forecast to achieve growth rates near or above 5%in 2023 fewer than in previous years.Overall,these economies are projected to grow by an average of 3.5%in 2025,significantly below the pre-pandemic average of 4.5%per year.Regionally,Sub-Saharan Africa is expected to see a boost,with growth accelerating from 3.5%to over 4.2%in 2025.This growth places it between the lagging performances of Latin America and Emerging Europe,driven largely by Asias dynamic economies.While these forecasts underscore the resilience of emerging markets,they also highlight the headwinds facing several larger economies that could derail their growth trajectories.Much like the uneven impacts felt during the pandemic and subsequent Geopolitical tensions,the US dollars strength,and inflation trends,pose challenges for emerging markets Fewer and fewer large emerging markets are expanding at rapid rates Standard Bank February 2025 9 recovery,2025 is likely to reveal a mixed bag of performances across the board.Growth rates will vary due to factors such as differing initial conditions,reliance on commodities,sensitivity to US interest rates and dollar fluctuations,levels of institutional maturity and resilience,and the overarching influence of geopolitical dynamics.In essence,while some emerging markets may show signs of strength,the overall landscape is fraught with challenges that could hinder progress and create a patchwork of growth across the globe.Inflation trend and rates still up in the air too The trajectory of inflation remains uncertain,with forecasts suggesting a decline to 4.2%in 2025,followed by a further drop to 3.5%in 2026.This reduction will be a welcome respite after the inflationary surge that marked the post-pandemic recovery.However,its crucial to note that advanced economies are expected to reach target inflation rates more swiftly than their emerging market counterparts.Major central banks,including the US Federal Reserve,are likely to shift toward easing restrictive monetary policies in 2025.Yet,the spectre of increased tariffs from the Trump administration loom ominously over these inflation forecasts.Such tariffs could stifle growth and exacerbate inflationary pressures(McKibbin et al.,2025).Coupled with the risks posed by potential inflationary effects stemming from US tax cuts and deregulation,these factors are likely to keep the Fed cautious for much of the year.In contrast,other central banks are expected to continue easing their policies,with some that have yet to do so likely to follow suit.This general trend toward easing will provide much-needed support for economic growth.However,the influence of treasuries may act as a headwind,preventing yields from declining as much as they otherwise might.Therefore,while the forecasted decline in inflation is encouraging,the interplay of tariffs,fiscal policies,and central bank strategies will be critical in shaping the economic landscape.The outlook remains complex,and stakeholders must navigate these uncertainties carefully.USs path biased towards strengthening albeit uncertain The trajectory of the US dollar appears biased toward strengthening,albeit with significant uncertainties.Wider yield spreads between the US and other countries,combined with punitive US tariffs,are likely to sustain a robust dollar.Analysts generally predict a strong US dollar relative to other currencies,particularly given the dimmer prospects for many advanced economies.These dynamic influences investor psychology and capital flows,often resulting in adverse effects on emerging market asset prices,especially equities(Mouffok et al.,2023).Research by Druck et al.(2018)and others highlights the negative correlation between dollar strength and the real economy,underscoring the challenges ahead.The primary mechanisms driving this relationship include:(i)an income effect stemming from the dollars impact on global commodity prices,(ii)increased costs for importing capital and inputs necessary for domestic production,and(iii)heightened inflationary pressuresparticularly for emerging markets already burdened by substantial levels of USD-denominated debt,which has doubled to USD 4 trillion as of Q3 2024 over the past decade(BIS,2024).While we anticipate that this dollar strength may diminish later in the year as the growth gap narrows and the Federal Reserve resumes easing,the current robust dollar complicates the outlook for emerging markets.A pressing concern is whether the dollars ascent may fuel further protectionist sentiments within the US administration.Although a deliberate devaluation of the dollar seems unlikely,its consequences would undoubtedly send shockwaves through the global economy.Emerging markets face complexities from US dollar fluctuations,commodity market changes,and geopolitical tensions that could affect growth Standard Bank February 2025 10 Commodity prices Commodity and oil markets are poised to be pivotal battlegrounds that will shape our economic landscape in the coming years.While oil prices may stabilize or even decline due to increased global production,a stronger dollar could exacerbate inflationary pressures in oil-importing nations.This challenge will be particularly pronounced in countries experiencing dwindling demand from China,which is anticipated to have a lasting impact on global commodity exports.It is crucial to recognize that commodity markets have yet to fully adjust to the reality of Chinas ongoing structural slowdown.For instance,China recently added an impressive 277.2 GW of new solar capacity,reflecting a staggering 28%year-over-year growthan amount that is almost double the entire installed capacity of the United States.Renewable energy has evolved beyond a mere driver of decarbonization efforts;it is now an integral component of Chinas economic framework.As we look ahead,many emerging markets remain heavily dependent on Chinese demand for their commodities.This reliance underscores the critical role of advanced economy long-run bond yields and commodity prices as key determinants of capital flows to emerging markets(Byrne&Fiess,2016).The stakes are high:should trade tensions escalate into a full-blown conflict,the repercussions could be catastrophic,not just for the regions involved but for the global economy.In essence,the interplay between commodity prices,currency strength,and geopolitical dynamics will be crucial in navigating the uncertain economic waters ahead.Reasons for some optimism in emerging markets Before delving into the significant challenges facing emerging markets in 2025,its essential to recognize the reasons for cautious optimism.However,for investors to shift more decisively toward emerging market assets,a compelling narrative highlighting potential recovery and growth is necessary.This narrative should be supported by factors such as plausible US rate cuts(though not guaranteed),a weaker US dollar(dependent on the Feds actions),favourable economic indicators especially from China(which seems less likely)and signs of easing geopolitical tensions(which appear very unlikely).Despite these concerns,emerging market growth is expected to surpass that of developed markets,suggesting greater opportunities for returns.In China,growth expectations have notably increased,largely due to existing stimulus measures.Its important to note that cross-country correlation studies do not robustly support the assumption that higher equity returns are exclusive to faster-growing economies.Gajdka and Pietraszewski(2016)argue that stock price returns are primarily driven by company earnings,which do not necessarily correlate with GDP growth.Encouragingly,earnings in emerging markets are projected to be relatively supportive,with a forward price-to-earnings(P/E)ratio of 14.5x,lower than that of advanced economies.Mayur(2015)finds that while the P/E ratio can serve as an effective performance proxy,it is most relevant for firms with substantial market capitalizations.Additionally,emerging market assets remain relatively under-owned,still below pre-COVID levels where they had been oversold especially in markets with smaller capitalizations(Harjoto&Rossi,2023).Moreover,similar to most advanced economies,many emerging market central banks are adopting an easing bias,creating a favourable environment for equity markets.Should the US Federal Reserve lower rates later this year,it could further bolster equities and temper US dollar strength(Lakdawala&Schaffer,2019).It is notable,however,that the impact of Fed policies on emerging markets can vary significantly(MacDonald,2017),influenced by the depth of domestic financial markets and Emerging markets are projected to grow faster than developed markets,presenting attractive investment opportunities.The diversity of contributing countries enhances this potential Standard Bank February 2025 11 stronger macroeconomic fundamentals(Mishra et al.,2018).This variability can create tensions between macroeconomic and financial stability(Kolasa&Wesoowski,2023).China economic prospects For the full year,Chinas GDP growth settled at 5%,slightly down from 5.2%in 2023,yet still aligning with Beijings targets.However,doubts linger regarding the reliability of economic data amidst sluggish stimulus efforts and persistent growth challenges(Rosen et al,2025).Looking ahead to 2025,Beijings primary mission is to elevate domestic consumption to address these entrenched economic disparities and sustain growth momentum,even amid deteriorating trade relations with the US.The December Central Economic Work Conference emphasized the urgent need to vigorously spur consumption to combat weak domestic demand and reduce reliance on exports.Beijing has indicated a substantial uptick in government spending as authorities ramp up efforts to rejuvenate the economy.The Politburos December economic work meeting underscored the necessity for unconventional counter-cyclical adjustments to stabilize growth.We project that Beijing will target GDP growth of around 5%for 2025,mirroring the 2024 target.However,with the property sector facing headwinds and exports unlikely to provide substantial support,government spending will be pivotal.We anticipate a fiscal deficit target of 4%,up from 3%target in 2024.Beyond the expanded budget deficit,we expect further measures to enhance fiscal support,including increased issuance of special-purpose bonds by local governments and special treasury bonds by the central government.We project GDP growth of 4.5%for 2025,heavily influenced by the impact of potential tariffs from the incoming Trump administration and the extent of fiscal and monetary support required to sustain growth.To foster enduring improvements in consumer confidence,policymakers must prioritize increasing household incomes and revitalizing the property sector.With external uncertainties looming,it is imperative to mitigate systemic risks and avert shocks to domestic demand that could result from declines in real estate or stock markets.The Peoples Bank of China(PBoC)is adopting a proactive approach to stabilize the yuan.While speculation suggests that Beijing may permit yuan depreciation in response to Trumps tariffs,the PBoC remains vigilant against potential capital flight,aiming to reassure the public that any depreciation will be modest,thus alleviating concerns about the necessity of moving funds offshore.Importantly,with the gradual liberalization of Chinas exchange rate system,shocks from the renminbi markets contribute more to fluctuations more currency markets than before(Chow,2021).Risks to the emerging market outlook Beyond the idiosyncratic challenges facing individual nations,we must confront the formidable geopolitical risks that overshadow the emerging market landscape.The Trump administrations trade policies will be crucial,likely injecting volatility into the market.During his first term,Donald Trump threatened significant tariffs,including a staggering 60%on Chinese goods,and has already implemented a 10%tariff on imports from China.The imposition of such tariffs is poised to inflate prices across a wide array of goods,potentially reigniting inflation in the US economy(McKibbin et al.,2025).A resurgence of inflation diminishes the likelihood of interest rate cuts this year,further complicating the economic environment.The spectre of destructive trade wars looms not only with China but also with key US allies,including Mexico,Canada,the United Kingdom,and Taiwan.Such conflicts could fracture the foundational economic and security arrangements that have long underpinned the global multilateral system,leading to heightened uncertainty in global markets.The repercussions of these trade wars would ripple through emerging markets,undermining their growth prospects and stability.We expect growth of 4.5%in China,but much will depend on geopolitical tensions and the corresponding fiscal response The outlook for emerging markets in 2025 is significantly affected by a range of risks,particularly geopolitical tensions and the potential for trade wars Standard Bank February 2025 12 The prevailing trend of mutually antagonistic policies has fostered a worldview where competition is viewed in zero-sum terms.During his previous tenure,Trumps withdrawal from international institutions weakened global multilateralism(Sullivan de Estrada,2023),prompting debates about the efficacy of a“multilateralism minus one”approach to pressing global challenges like climate change and trade(Fehl&Thimm,2019).Trumps America First doctrine could precipitate significant market fluctuations in the year ahead.While a shift towards a multipolar world is likely unavoidable(Krishnan&Kassab,2024),the journey ahead is fraught with uncertainty.Emerging markets may find themselves caught in the crossfire as the contours of this new geopolitical landscape begin to take shape.Chinas response In response to escalating US restrictions,Chinese authorities are intensifying their use of export controls and other retaliatory measures.Following the expansion of US export controls targeting Chinas chip industry in December 2024,Beijing acted swiftly,banning exports of critical dual-use minerals and launching an anti-monopoly investigation into Nvidias acquisition of Mellanox.Similarly,after the US enacted an additional 10%tariff on all Chinese goods,China responded with a multifaceted strategy,imposing tariffs of 15%on coal and liquefied natural gas(LNG),and 10%on crude oil,agricultural machinery,large-displacement vehicles,and pickup trucks.Moreover,Chinas response extends beyond tariffs.The Ministry of Commerce has enacted export controls on essential materials and added companies like PVH Group and Illumina,Inc.to its Unreliable Entity List.Furthermore,the State Administration for Market Regulation(SAMR)has initiated an investigation into Google for suspected antitrust violations.This suggests that Chinese officials are fully prepared to leverage their lawfare toolkit,indicating a shrinking number of potential offramps for de-escalation.As tensions rise,the potential for miscalculations and misunderstandings increases,creating a more volatile and unpredictable environment for emerging markets.Confirms a less circumspect Beijing in 2025 In the coming weeks and months,Beijing will be grappling with critical questions about its future trade relationship with the US.Trumps broader commitment to impose tariffs on all imports to the US might inadvertently encourage other major economies to strengthen their trade relations with China,creating a complex environment that Beijing must navigate carefully(Polk,2024).Technology and export controls presents another layer of uncertainty as it remains unclear whether Trump will revert to the less systematic approach he employed during his first term.Back then Xi Jinping successfully engaged in personal diplomacy to persuade Trump to lift restrictions on companies.Additionally,Trumps potential alienation of other key chip-producing nations,such as Taiwan,might open the door for China.Related,a shift in US diplomacy could alienate traditional allies undermine global multilateralism a spot China has been eager to full.At the World Economic Forum in 2017,President Xi stated,Pursuing protectionism is like locking oneself in a dark room Wind and rain may be kept outside,but so is light and air.Consistent with Chinas evolving foreign policy China is committed to promoting a partnership model that emphasizes development while rejecting a one-size-fits-all approach to human rights,advocating instead for respect for sovereignty and national contexts.A significant change in the past decade has been the introduction of Major Power Diplomacy with Chinese Characteristics.Previously,Chinas foreign policy language was carefully crafted to reassure the global community,emphasizing that China had no intention of challenging US primacy and would not export its political ideologies or development model.During Hu Jintaos era,the narrative of Chinas peaceful rise emerged,with leaders preferring to refer to China as the largest developing country rather than a power.With Xis leadership,Chinas swift retaliation to US tariffs and restrictions,including export controls on critical materials and investigations into foreign companies,indicates a readiness to engage in tit-for-tat economic strategies Standard Bank February 2025 13 China has begun to identify itself as a new major country,aiming for new major country relations.What is new in this approach?First,China has sought a leading role in shaping the new world order and international security.Although the narrative of peaceful rise persists,Xi conditions his vision of Asian harmony on the acceptance of Chinas regional supremacy(Thornton&Thornton,2018).In Africa,China has actively engaged in peace and security initiatives(Alden&Jiang,2019).Etyang and Oswan Panyako(2020)note that the principle of non-interference is undergoing a deliberate transformation,reflecting Chinas changing role in global geopolitics.Also,the ambition to tell Chinas stories well,introduced by President Xi in August 2013,aims to counter negative perceptions of China(Mattingly et al.,2024).Goals and strategies in Chinas global positioning The higher-level objective involves restoring Chinas standing in the world and calibrating its influence in global affairs to align with its economic status as an emerging superpower.The latest Government Work Report(GWR)reflects this aim,explicitly calling for a multipolar world and a new type of international relations,while affirming Chinas opposition to bullying tactics.In the broader context,President Xi has re-established confidence in Chinas Party-led political system after decades of ideological drift.This reassertion is aimed at revitalizing the Chinese Communist Party as a Leninist entity capable of delivering comprehensive leadership,fostering party-centric nationalism,and enhancing legitimacy(Tsang&Cheung,2022).A new model of governance Chinas previous stance of“no export”has evolved into the export of the China model of development and governance,particularly to the developing world.China aims to present a distinct approach to modernization and governance which emphasizes growth,stability,and effective leadership,offers compelling lessons for other nations(Alterman,2024).Simultaneously,China is advocating for reforms to increase its influence and representation in international institutions,framing this as the democratization of international relations.Importance of the Global South and Africa China is strategically positioning itself to champion the discourse power of developing economies within international organizations,aspiring to lead the Global South(Xu,2020).This involves a transformation described by Wang et al.(2022)as a matriculation from participant to practitioner to leader in multilateral settings.Herein,Chinas diplomatic and commercial engagement in Africa plays a crucial role providing a platform for China to act as a responsible power on the global stage(Mthembu&Mabera,2021).Overall,unlike in many other regions,perceptions of Chinas influence on African development are relatively positive,often more so than those of the United States.In many respects,China has cultivated a constructive narrative on the continent.This positive reception is bolstered by deep and robust diplomatic and commercial ties,supported by substantial multilateral frameworks like the Forum on China-Africa Cooperation(FOCAC),high-level visits,proactive diplomacy,and increasingly strong bi-directional commercial relationships.Conclusion The outlook for emerging markets is relatively benign.As 2025 kicks-off,emerging markets exhibit a relatively robust fundamental backdrop characterized by decent economic growth,stable inflation,and relatively low debt levels and default rates.However,the interplay of monetary policy,trade dynamics,and broader economic Chinas foreign policy is undergoing a significant transformation,which adds another layer of uncertainty to the emerging market outlook Standard Bank February 2025 14 conditions will be crucial in determining the trajectory of growth in 2025 and in the coming years.Much seems to orbit around expectations for Fed cuts,USD weakness,a decent level of growth in China and Trump proving to be more bark than bite.At the very least,the jury is out regarding each of the above,and the balance of risk on each of these scores seems to tilt to the downside.Jeremy Stevens ReferencesReferences Alden,C.Jiang,L.2019.Brave new world:debt,industrialization and security in ChinaAfrica relations.International affairs(London),2019-05,Vol.95(3),p.641-657 Alterman,J.B.2024.The China Model in the Middle East.Survival(London),2024-03,Vol.66(2),p.75-98 Byrne,J.P.Fiess,N.2016.International capital flows to emerging markets:National and global determinants.Journal of international money and finance,2016-03,Vol.61,p.82-100 BIS(2024).BIS Quarterly Review.Bank of International Settlements.December 2024.Boungou,W.Urom,C.2025.Geopolitical tensions and banks stock market performance.Economics letters,2025-02,Vol.247,p.112093,Article 112093 Chow,H.K.2021.Connectedness of Asia Pacific forex markets:Chinas growing influence.International journal of finance and economics,2021-07,Vol.26(3),p.3807-3818 Druck,P.Magud,N.E.Mariscal,R.2018.Collateral damage:Dollar strength and emerging markets growth.The North American journal of economics and 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dynamics&control,2023-04,Vol.149,p.104631,Article 104631 Krishnan,A.Kassab,H.S.2024.The twilight of us dollar hegemony and the coming multipolar world.Austral(Porto Alegre),2024-03,Vol.12(24)Lakdawala,A.Schaffer,M.2019.Federal reserve private information and the stock market.Journal of banking&finance,2019-09,Vol.106,p.34-49 MacDonald,M.2017.International capital market frictions and spillovers from quantitative easing.Journal of international money and finance,2017-02,Vol.70,p.135-156 Mayur,M.2015.Relationship between PriceEarnings Ratios and Stock Value in an Emerging Market.Paradigm(Ghziabd,India),2015-06,Vol.19(1),p.52-64 This material is non-independent research.Non-independent research is a marketing communication as defined in the UK FCA Handbook.It has not been prepared in accordance with the full legal requirements designed to promote independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.Standard Bank February 2025 15 Mattingly,D.Incerti,T.Ju,C.Moreshead,C.Tanaka,S.Yamagishi,H.2024.Chinese state media persuades a global audience that the China model is superior:Evidence from a 19-country experiment.American journal of political science,2024-07 McKibbin,W.Hogan,M.Noland,M.2025.The international economic implications of a second Trump presidency,PIIE Working Paper 24-20.Mouffok,M.A.Mouffok,O.Bouabdallah,W.2023.Emerging markets economies sensitivity to us dollars strength during Russia-Ukraine war.Journal of Social Sciences,Vol.6(3),p.6-19 Mishra,P.NDiaye,P.Nguyen,L.2018.Effects of Fed Announcements on Emerging Markets:What Determines Financial Market Reactions?IMF economic review,2018-12,Vol.66(4),p.732-762 Mthembu,P.Mabera.,F.2021.Africas changing geopolitics:towards an African Policy on China.Africa China Cooperation.International Political Economy Series.Nguyen,T.Thuy,T.2023.Geopolitical risk and the cost of bank loans.Finance Res.Lett.,54(2023),Article 103812 Rosen,D.Wright,L.Smith,J.Mingey,M&Quinn,R.2025.After the Fall:Chinas Economy in 2025.Rhodium Group.Available online at:After the Fall:Chinas Economy in 2025 Rhodium Group()Sullivan de Estrada,K.2023.US retreat,Indian reform:multilateralism under Trump and Modi.India review(London,England),2023-03,Vol.22(2),p.139-149 Thornton,W.H.Thornton,S.H.2018.Sino-globalisation:The China Model After Dengism.China report(New Delhi),2018-05,Vol.54(2),p.213-230 Tsang,S.Cheung,O.2022.Has Xi Jinping made Chinas political system more resilient and enduring?Third world quarterly,2022-01,Vol.43(1),p.225-243 Polk,A.2024.Trivium Markets Macro.Trivium Advisory.Washington.Wang.,L.Zhang.,Y.Xi.,H.2022.The political economy of Chinas rising role in the BRICS:strategies and instruments of the Chinese way.Chinese Academy of Social Sciences.Beijing.Standard Bank February 2025 16 Resilient ambitions:Africas economy in a volatile global climate The global outlook for 2025 remains modestly optimistic,with growth projected at 3%.Central banks in advanced economies are expected to maintain an easing bias,supporting consumer spending and global risk appetite.However,geopolitical tensions and domestic political risks,such as potential US tariff policies and Europes fiscal struggles,could disrupt this stability.Against this uncertain global backdrop,Sub-Saharan Africa(SSA)faces a mix of external headwinds and internal opportunities that shape its growth prospects.Growth in SSA is forecast to recover to 4%in 2025,from 3.6%in 2024,with domestic consumption remaining a stabilizing force for many economies.However,reliance on exports to China makes countries such as Angola,DRC and Zambia vulnerable to any economic slowdown in China.US tariffs could exacerbate these risks by dampening global trade flows,further pressuring commodity-dependent economies.Despite these challenges,several SSA countries are demonstrating resilience,driven by robust private consumption.Climate-related shocks continue to weigh heavily on the region.Severe droughts in 2024 reduced agricultural yields and hydropower generation in Zambia and Malawi,exacerbating economic challenges.La Nia conditions in 2025,though less intense than initially feared,may not provide the rainfall relief necessary to fully replenish resources and support recovery in these economies.As climate risks intensify,the need for investment in resilient infrastructure and diversified economic activity becomes more pressing.The global transition to clean energy presents a significant structural opportunity for SSAs critical minerals sector.Rising demand for minerals such as copper,cobalt and nickel,driven by electric vehicles,solar energy and battery technology,positions Zambia and the DRC as key suppliers.The DRC,with 70%of the worlds cobalt reserves,and Zambia,with vast copper deposits,stand to benefit immensely.Infrastructure projects,such as the Lobito Corridor and the TAZARA rail line,aim to address logistical inefficiencies,reduce transportation costs,and enhance mining profitability.However,policy consistency and regulatory clarity are crucial to attract the long-term investment needed to unlock this potential fully.Fiscal consolidation remains a central theme for many SSA economies as they navigate high debt burdens.While governments increasingly rely on raising revenue rather than cutting expenditure,this approach has its limitations.For instance,Kenyas tax hikes since 2023 have triggered public protests even as revenue collection growth eases,highlighting the challenges of implementing fiscal reforms in economies with large informal sectors.Broader tax bases and improved governance are essential for sustainable fiscal health.Mozambique exemplifies the fiscal pressures facing the region,with rising domestic debt and liquidity constraints increasing the risk of defaults.External ratings agencies have downgraded this country,reflecting growing investor concerns.Monetary policy in SSA is expected to remain largely accommodative in 2025,with central banks in countries such as Angola and Malawi likely maintaining cautious stances.Egypts declining inflation provides room for further easing,while Kenya plans new infrastructure bonds to address significant maturities.Zambia and Nigeria face challenges related to exchange rate pressures.Ugandas rising government bond yields,driven by increased domestic borrowing due to large local debt maturities,offer potential opportunities for duration trades despite fiscal risks into the January 2026 elections.Standard Bank February 2025 17 The political landscape in 2025 is less crowded than in 2024 but includes significant elections in Cte dIvoire,Malawi and Tanzania.Cte dIvoires elections could see unrest if President Ouattara seeks a fourth term,while Malawis political landscape has been reshaped by the dissolution of key alliances and the passing of Vice President Chilima.Tanzanias ruling CCM party is expected to retain power,leveraging infrastructure achievements and economic reforms.These elections will influence governance,stability and economic trajectories across the region.Despite external challenges,SSA economies will likely continue to show resilience,with several countries approaching,or surpassing,pre-pandemic growth levels.This regions ability to capitalize on opportunities,such as the rising demand for critical minerals,while managing risks from climate shocks and fiscal pressures,will be crucial for sustaining its recovery and long-term growth.Climate-related shocks frequency increasing GDP growth in SSA is likely to recover to around 4.0%y/y in 2025,from an expected 3.6%y/y in 2024.Our assessment,that SSA growth will likely prove resilient from the January 2024 AMR(African Markets Revealed)publication,amid sluggish global growth and fading external demand,seems to have transpired.We had emphasized back then that,since private consumption expenditure comprises a notably larger share of overall GDP,subdued external demand from weaker global growth wasnt likely to majorly disrupt economic activity in many of the SSA markets in our coverage.But still,SSA economies that are reliant on robust external demand from China for their key exports may still face downside risks to growth over the coming year,should US tariffs become detrimental for economic activity in China.Of the markets in our coverage,DRC,Zambia and Angola have a sizeable concentration of their exports that are routed to China.In Angola,around 45%of their total exports of goods go to China,while in DRC this is higher,at around 48%.In Zambia this ratio is also elevated,at around 28.7%.However,this is lower in other economies such as Botswana at c.7.2%,Ethiopia c.8.4%,Ghana c.8.7%,Kenya c.2.8%,and Nigeria at c.3.3%.Nonetheless,oil-exporting economies such as Nigeria may still be susceptible to a slowdown in the Chinese economy,as this may coincide with a decline in international oil prices and worsen the external position.In the past,this has exacerbated FX liquidity conditions and weighed on growth in the non-oil sector too.However,recent pledges by Chinese authorities,to ramp up their stimulus support,may underpin economic activity in China and thereby support prices for both oil and copper.Figure 1:Exports to China%total exports Source:UNCTAD 0102030405060MauritiusUgandaEgyptKenyaNigeriaSenegalMalawiTanzaniaCote dIvoireRwandaBotswanaEthiopiaGhanaNamibiaMozambiqueZambiaAngolaDRC Standard Bank February 2025 18 But as weve stressed in previous AMR editions,more than shocks to external demand,domestic shocks that drain personal consumption expenditure such as prolonged weather shocks,aggressive monetary policy tightening from an overheating of the economy and entrenched political disruptions,are likely to have a larger and durable negative impact on economic growth in our markets.In fact,over the better part of the past decade or so,economic growth in SSA has increasingly been influenced by climate-related shocks.For instance,droughts and floods are not only becoming acute,but the frequency has also increased.Extreme La Nia drought conditions in 2024 weighed heavily on GDP growth in both Zambia and Malawi.The drought,described as a humanitarian catastrophe by the United Nations,destroyed key crop harvests,reduced hydropower production and drained livelihoods in Zambia,Malawi and other southern African economies.As we have highlighted in our previous edition of the AMR,hot on the heels of the El Nio weather conditions experienced in 2024,which resulted in severe droughts in Zambia and Malawi and heavy rainfall in Kenya and Uganda,a transition towards La Nia conditions is now being widely expected by weather experts.This would likely reverse the weather trend experienced in 2024,with the East Africa region expected to face drier conditions,while southern Africa,including Zambia and Malawi,could now face increased rainfall.La Nia conditions were expected to begin in H2:24,although,per the International Research Institute for Climate and Society(IRI),this will likely only transpire around Q1-Q2:25.But,more importantly,the intensity of La Nia conditions is likely to be milder,compared to earlier expectations from climate experts.While the weaker than expected La Nia may be a point of celebration for economies in East Africa,economies such as Zambia and Malawi may now potentially experience lower rainfall than was previously envisaged.This would in turn not aid the expected replenishing of the hydropower dams and would also not underpin any rapid improvement in agricultural productivity.However,with base effects expected to unwind,GDP growth in Zambia is likely to receive a statistical boost in 2025.Notwithstanding the risks of below-average rainfall from the weaker-than-previously expected La Nia,we see GDP growth recovering to 5.8%y/y in 2025,from an expected outturn of 2.2%y/y in 2024.In fact,the mining sub-sector could add an additional 75k MT in copper production in 2025,based on guidance from listed mining firms.This would equate to about 10.3%y/y growth in copper output for 2025.But of course,there are notable downside risks to this forecast,should agricultural productivity and hydropower generation remain subdued.Figure 2:IRI probabilistic seasonal rainfall forecast for Africa Source:IRI Standard Bank February 2025 19 In Malawi,too,GDP growth will likely recover to 2.5%y/y in 2025,from an expected 1.8%y/y in 2024.Despite a weaker intensity La Nia being expected,the governments meteorological department expects above-normal rainfall in Q1:25.Should this transpire,food harvests will likely improve,which may reduce cereal imports and thereby likely underpin net exports and GDP growth.Furthermore,government expenditure could also increase ahead of the September 2025 elections,which could support growth.However,in addition to the downside risk of below-average rainfall for growth,too much rainfall can also create flooding and destroy crops in key food-growing regions of the country.The agriculture sub-sector accounts for around 22.0%of GDP.Climate-related shocks have also increased in frequency in Mozambique.Following the detrimental effects of Cyclone Freddy back in 2023,Cyclone Chido has already hit parts of northern Mozambique,resulting in notable damage to infrastructure.But the cyclone is also likely to weigh down agricultural output,considering that the agrarian sector accounts for nearly 25.0%of GDP in Mozambique.We have slashed our GDP growth forecast for Mozambique to 2.5%y/y in 2024,from our initial expectation of 4.6%y/y.For 2025,we now expect growth of 3.0%y/y(3.8%y/y previously).Growth may have contracted in Q4:24 due to post-election protests and,with the risk of entrenched domestic political disruptions,growth may even potentially contract in Q1:25.Moreover,aside from the risks of protests becoming durable,economic activity may be dragged lower by FX liquidity pressures that may persist,intensifying fiscal pressures,and recurring episodes of insecurity in Cabo Delgado which will further delay FDI in the LNG sector.GDP growth in Kenya will likely be lower at 4.6%y/y in 2024,from our earlier forecast of 4.9%y/y.This downward revision was largely due to economic disruptions during the Gen-Z led protests in mid-2024.Growth in Q3:24 eased to 4.0%y/y,from 4.6%y/y in Q2:24,and 5.0%y/y in Q1:24.Due to this slower impetus from 2024,we now see GDP growth rising to 5.0%y/y in 2025,lower than our earlier expectation of 5.3%y/y.Interestingly,despite the torrential El Nio rainfall in Q2:24,growth in the agricultural sub-sector remained resilient,at 4.8%y/y,from 6.1%y/y in Q1:24.In fact,positively,it appears that the Kenya Kwanza governments increased emphasis on agriculture sector reforms could be bearing fruit.Growth in the agricultural sub-sector averaged 5.0%y/y in the 9-m to September 2024 and 6.4%y/y in 2023.This exceeds the average growth of 2.2%y/y in the sector between 2018-2022.The government has been providing fertiliser subsidies to farmers,while also providing seeds to spur cotton cultivation.Of course,favourable base effects should help overall GDP growth recover in Kenya in 2025.However,the risk of drier weather conditions from the La Nia drought may still weigh down agrarian output.Additionally,personal consumption expenditure may also remain sluggish over the coming year due to still elevated taxes and higher statutory deductions from salaried employers.However,declining KES interest rates may help spur private sector credit(PSC)lending and underpin consumer spending in 2025.However,with government arrears owed to suppliers and contractors still in excess of KES700bn(c.4.4%of GDP),PSC growth could remain subdued as banking sector non-performing loans(NPLs)typically dont decline when arrears are also increasing.The government still has plans to issue local bonds to roads contractors to clear part of these arrears.However,should arrears remain elevated,public investment in infrastructure may also decline further,likely weighing down growth.Growth in Uganda has been impressive,in line with our expectations.This has largely been on the back of higher investment spending around the oil sub-sector.We see GDP growth rising further,to 6.5%y/y in FY2024/25 and 7.5%y/y in FY2025/26,from 6.2%y/y in FY2023/24.We expect the government to secure and finalise all the Standard Bank February 2025 20 funding requirements for the East Africa Crude Oil Pipeline(EACOP)in 2025.However,on first oil,we see this being delayed into H2:26,while the government still sees first oil by the end of 2025.But again,as we have highlighted before in previous editions of the AMR,even should first oil be delayed beyond our 2026 baseline assumption,FDI in the oil sector will probably remain robust and thereby support GDP growth.Furthermore,government spending outside the oil sector will also likely increase in 2025 ahead of the January 2026 elections.This could also support growth.However,with Ugandas external position looking weak,should the UGX come under pressure from either a stronger USD globally or looser fiscal policy,the Bank of Ugandas MPC is likely to tighten monetary policy conditions again,which could drag down consumption expenditure.Also,should a stronger-than-expected La Nia occur in H1:25,growth in the agrarian sector will likely decline and drag down overall growth too.In West Africa,growth in Nigeria will likely recover to 3.5%y/y in 2025,from an expected 3.2%y/y in 2024.With most of the reforms,such as removing fuel subsidies and adjusting the NGN drastically to address overvaluation and USD liquidity concerns now behind us,consumer growth could gradually recover.We see 7.6%y/y growth in crude oil production in 2025,which equates to an average of 1.63m bpd.Notwithstanding sluggish new investment in the oil sub-sector,the authorities continue to focus on curbing oil theft and pipeline vandalism.Moreover,commencement of operations at the Dangote refinery should also boost growth in the oil refining sub-sector and support overall growth through linkages with other sectors such as construction and transport.Further,the improvement in FX liquidity will also likely continue to bode well for growth in the non-oil economy.However,should oil production falter or should exchange rate pressures re-emerge,growth will likely be dented,particularly as inflationary pressures remain elevated.Growth in Ghana has surprised to the upside in 2024.We now expect GDP growth to rise to 6.2%y/y in 2024,from our initial view of 3.8%y/y.Despite a poor performance from the cocoa sub-sector,the mining sector outperformed in 2024.We expect this trend to continue in 2025 following the commissioning of the Cardinal Namdini mine in Q4:24,and a new mine Ahafo North is also expected to commence production in mid-2025.The authorities expect these two mines to cumulatively contribute around 600k ounces to gold production.Hence,this development may also result in higher GDP growth in 2025 than our current core scenario.Figure 3:Nigeria oil production Source:CBN;NUPRC-20,0%-15,0%-10,0%-5,0%0,0%5,0,0,0 ,0%1,001,201,401,601,802,002,202,402,6020062007200820092010201120122013201420152016201720182019202020212022202320242025fOil Production(mbpd)y/y growth(RHS)Standard Bank February 2025 21 In Botswana,we forecast 3.7%y/y GDP growth in 2025,from an expected contraction of 3.5%y/y in 2024,driven largely by a slower decline in net exports and an increase in domestic spending,courtesy of increased monetary and fiscal stimulus.The likely contraction in growth in 2024 was worsened by domestic supply-side constraints,particularly in the utilities sector where the Morupule B power plants maintenance works created significant energy supply shortages,while the agricultural sectors performance remained subdued due to drought conditions in the broader southern Africa region.Our baseline scenario for 2025 includes a slower decline in natural diamond prices as the market stabilizes,with production cuts potentially easing price pressure from lab-grown alternatives and 20-y high inventories.Laying the tracks for a structural shift The long-term demand for critical minerals such as copper,cobalt and nickel may surge over the coming decades,driven by electric vehicle growth,solar power expansion,artificial-intelligence(AI)data centers,and robotics.This battery-technology super-cycle represents a major structural tailwind for electrification metals,with estimates by the SBR mining and resources team indicating global annual copper demand as likely to double,from currently 25m MT,to 50m by 2050.Zambia and the Democratic Republic of Congo(DRC)are ideally positioned given their hefty high-grade deposits.According to the United States Geological Survey(USGS),DRC has approximately 70%of the worlds cobalt reserves,and copper reserves of approximately 80m MT(USD750bn at current prices).Zambias copper reserves are estimated at 21m MT(USD189bn).Critical minerals demand growth creates a structural growth opportunity,not only for these two countries but also for Angola by way of the Lobito Corridor,and for Tanzania by way of the TAZARA rail line,which,respectively,connect the Zambia-DRC Copperbelt to the US export market via the Atlantic facing Lobito port,and to China via the Dar es Salaam port on the Indian Ocean.The Lobito corridor investment project,funded by the Partnership for Global Infrastructure and Investment(PGII),is a USD10bn rehabilitation and development of rail,road,bridges,and energy infrastructure.Angola is the primary beneficiary given that 90%of the rail line falls within its borders,as does the Lobito port.Figure 4:SBR vs IMF GDP forecasts 2025 Source:Standard Bank Research;IMF 0,02,04,06,08,010,012,0AngolaBotswanaCote dIvoireDRCEgyptEthiopiaGhanaKenyaMalawiMauritiusMozambiqueNamibiaNigeriaRwandaSenegalTanzaniaUgandaZambiaIMF 2025fSBR 2025f Standard Bank February 2025 22 In Zambia,the refurbishment of the Lobito corridor may boost efficiency and throughput of existing mines,while simultaneously laying the foundation for broader economic growth.Local contractors can see immediate benefits in track rehabilitation and station upgrades,while secondary towns near the rail corridor may develop bonded warehouses and other services for metals and general cargo.From a mining perspective,long-term investment decisions tend to be based on long-term copper demand and sustained high prices.As such,for mining,the benefits of the Lobito corridor are likely to stem from wider margins by way of logistical efficiency gains.Currently,much of Zambias and DRCs copper travels up to 2,000 kilometers by truck from mines to Durban or Richards Bay ports in South Africa,along the way facing border delays,security risks,and high insurance costs.Turnaround can be up to 60 days from mine to port.Therefore,streamlined logistics from trucking should improve margins for mining operators.Beyond mining,an optimized Lobito and TAZARA corridor can reduce truck congestion on existing road networks throughout Zambia,expedite delivery of capital goods imports,and enable Zambias non-traditional exports(including agricultural products)to reach regional markets faster and cheaper.To maximize the opportunity presented by critical minerals demand,a consistent and transparent regulatory framework is as important as infrastructure investment.Frequent changes to mining taxes or royalty rates,and uncertainty over production-sharing agreements,may erode investor confidence and deter the long-term capital needed to develop large-scale mining projects.By upholding regulatory clarity,Zambia and DRC should attract reliable investment and fully capitalize on the structural opportunities provided by copper,critical minerals,and the infrastructure supporting their extraction.Is revenue-driven fiscal consolidation failing?Fiscal consolidation,the term increasingly commonly referred to when discussing SSA debt sustainability and/or public finance management dynamics.Often,when there is a concern about public debt vulnerabilities,reducing the fiscal deficit invariably becomes an urgent requirement.However,it is becoming habitual for economies in Africa to increasingly focus on mobilising higher revenue,rather than cutting back on expenditure notably,in order to advance fiscal consolidation and restore public debt on a more sustainable trajectory.Figure 5:Lobito and TAZARA corridor Source:Standard Bank Research Standard Bank February 2025 23 Arguably,many would assert that African governments prefer revenue-based consolidation as they have a limited propensity to scale back on exorbitant and bloated government costs.But,in many instances,even the IMF frowns on expenditure-based fiscal consolidation,arguing that it can increase inequality.The IMF has been proponents of not cutting back on capital expenditure or critical social spending programmes,believing that this could dent long-term growth.In essence,the IMF prefers a balanced approach that combines spending cuts and revenue increases which can help ensure both fairness and economic development.However,there is substantial support for expenditure-based consolidation in OECD research papers,which emphasizes that reducing government spending,particularly on current expenditure,has a greater likelihood of achieving long-term debt stabilization.The World Bank also agrees that reducing spending typically has a smaller negative impact on economic growth than would raising taxes.Tax hikes,according to the World Bank,can lower private sector activity by reducing disposable income and discouraging investment,while well-targeted spending cuts can maintain investor and consumer confidence,keeping an economy stable.Indeed,many countries probably rely on raising revenue to address fiscal problems because their ability to cut essential spending is limited.However,focusing too much on increasing tax rates can push these economies beyond the point where higher taxes generate more revenue.Of course,this has been well documented by the Laffer Curve theory.However,based on empirical research,the Laffer Curve doesnt always necessarily hold in developing countries,with results being mixed.While there isnt much recent research conducted on this,studies from the 1980s found some evidence of increased tax revenue in Jamaica after tax rates were reduced,although this wasnt the case in India.Interestingly,in Jamaica,when tax rates were cut,the number of taxpayers grew significantly.But still,other factors,such as improved tax administration,may have influenced this outcome.For instance,Kenyas recent tax policy adjustments which eventually resulted in youth protests in mid-2024,such as the VAT revision on fuel to 16%from 8fective July 2023,and the introduction of new individual personal income tax rates and bands,provide valuable insights into revenue dynamics.Interestingly,VAT collections rose by 17.3%y/y in FY2023/24,compared to the 10-y average of 12.6%y/y(20102019).Similarly,income tax collections grew by 10.74%y/y in FY2023/24,falling below the 10-y average growth rate of 14.2%y/y(pre-2019).Admittedly,one must acknowledge that other factors may have either dampened or underpinned economic growth during these periods.However,we suspect that the Laffer Curve probably doesnt hold in this instance due to the large informal sector in Kenya,which accounts for around 86%of total employment statistics.In fact,despite recent improvements,Kenyas tax as a%GDP remains below the levels seen between 2015 and 2018,perhaps signalling a decline in the efficiency of tax mobilization relative to economic growth.Standard Bank February 2025 24 But then again,notwithstanding a misalignment of the Laffer Curve theory in this case,we find it unsurprising that the return on the VAT increase is higher than the hike in personal income tax.This is likely due to the large magnitude of the informal sector workforce where VAT increases,as an indirect consumption tax,would probably capture the vast informal sector.On the other hand,the increase in personal income tax rates wouldnt necessarily tap into the large informal sector.In fact,there clearly appears to be a relationship between the size of the informal sector and the revenue collections as a%of GDP for VAT and income tax.For example,per data from the International Labour Organisation(ILO),economies in SSA such as South Africa,Mauritius and Namibia,have a relatively smaller share of the informal sector as function of total employment statistics,at 39.8%,46.9%and 58.6%respectively.Ergo,unsurprisingly,VAT collections as a percentage of GDP are higher in South Africa at around 6.2%,7.3%in Mauritius,and 6.7%in Namibia.This would be in comparison to Kenya at 4.1%,Ghana at 4.2%and Uganda at 3.8%all economies with informal sector workforces reported at between 85%and 95%.In some economies,such as Nigeria where the VAT rate is the lowest amongst the economies in our coverage at 7.5%,while the informal sector size is reported at over 90%by the ILO,an increase in the VAT rate(which is widely expected by the market this year)may boost collections not just because of the large informal sector but also as the VAT rate is perhaps just way too low.Figure 6:Kenya tax revenue VS GDP growth Source:Central Bank of Kenya Figure 7:Relationship between informal employment and tax revenue Source:Various ministries of finance,IOL -1012345678-10-5051015202530200220042006200820102012201420162018202020222024%y/y%y/yIncome TaxVATTotal tax revenueGDP growth(RHS)AngolaBotswanaBrazilCte dIvoireDRCEgyptEthiopiaGhanaKenyaMalawiMauritiusMozambiqueNamibiaNigeriaPakistanRwandaSenegalSouth AfricaTanzaniaTrkiyeUgandaZambia203040506070809010011005101520253035Informal employment%total employment Tax revenue%GDP Standard Bank February 2025 25 Moreover,Mozambique,has the highest corporate tax rate amongst the countries in our coverage,at 32%.They collect around 6.6%of corporate tax as a percentage of GDP,while in Mauritius and Egypt,where the corporate tax rate is 15%and 22.5%(some of the lowest in our coverage)respectively,they collect around 3.6%and 3.9%of GDP respectively.However,the corporate tax rate in Uganda and Kenya is at 30%,yet these economies collect corporate tax of around 1.9%and 1.0%of GDP respectively,perhaps reflecting deficiencies in the investment climate.Ugandas 20122013 personal income tax reform,which raised the top marginal rate from 30%to 40%,while adjusting lower-income thresholds,also highlights interesting dynamics.Personal income tax revenue rose by 21.4%during 20122013,only marginally above the 8-y average of 21fore the reform.But again,Ugandas informal sector is large,estimated at nearly 95%of total employment statistics,per the ILO.In Ghana,when VAT was cut to 12.5%,from 15.0ck in 2018,y/y growth of VAT collections averaged just 4.5%during 2018 and 2019,from 22.6%in the 3-y to 2017.This isnt surprising given that Ghanas informal sector is c.85%.But,crucially,while there is probably enough evidence to suggest that VAT increases will likely grow tax revenue faster in most economies in SSA given their large informal sectors,some economies may have their tax rates way lower than is optimal.Hence,in this scenario,any increase in tax rates off a low base will likely spur tax revenue Table 1:Tax rates vs tax revenue%GDP CIT VAT Personal income tax rates Tax revenue%GDP Angola 25 14 25 15.4 Botswana 22 14 25 13 Cte dIvoire 25 18 32 13.6 DRC 30 16 40 7.1 Egypt 22.5 14 27.5 12.9 Ethiopia 30 15 35 6.8 Ghana 25 15 35 13.1 Kenya 30 16 35 14.5 Malawi 30 16.5 35 10.8 Mauritius 15 15 20 22 Mozambique 32 16 32 21.9 Namibia 30 15 37 30.3 Nigeria 30 7.5 24 1.5*Rwanda 28 18 30 15.4 Senegal 30 18 43 19.8 South Africa 27 15 45 24.5 Tanzania 30 18 30 11.4 Uganda 30 18 40 12.6 Zambia 30 16 37 17.9 Source:Various tax authorities;Various ministries of finance;Standard Bank Research*Tax revenue refers exclusively to revenue streams allocated to the federal government Figure 8:Uganda tax revenue vs GDP growth Source:OECD;Uganda Bureau of Statistic 0,002,004,006,008,0010,0012,00-50510152025302004200620082010201220142016201820202022%y/y%y/yTotal Tax revenueTaxes on income,profits and capital gains of individualsGDP growth(RHS)Standard Bank February 2025 26 collections in the near term at least.But,more importantly,as it is becoming increasingly difficult to formalise informal sectors in SSA,authorities perhaps need to relentlessly focus on broadening the tax base,instead of relying solely on increasing tax rates.Of course,hiking VAT rates,regardless of the size of the informal sector,is politically challenging.Thus,perhaps utilisation and leveraging off technology will likely be a quicker way to broaden the tax base and thereby improve tax compliance.Although,various studies suggest that growing non-tax compliance in SSA is perhaps less to do with inefficient tax administration,but rather strongly linked to the perception amongst citizens that the government isnt providing adequate and quality public services such as health,transport and education.This change in perception,along with efforts to continue broadening the tax base,will be central in reviving tax revenue durably for economies in SSA.Mozambique:higher risk of domestic debt default,and poor prospects of any improvement in sovereign ratings We examine Mozambiques domestic debt performance as this economy faces recurrent episodes of government bond arrears and a large increase in bond maturities in 2025 and 2026.Before,arrears were partly attributed to poor debt management office(DMO)capacity,which saw the Ministry of Economy and Finance(MEF)completing in 2024 the migration of external debt data to the Meridian IT system,from CS-DRMS,with a similar process being followed for domestic debt,to help improve debt management.However,we foresee administrative issues as well as entrenched liquidity pressures culminating in a higher risk of a domestic debt default in 2025.Indeed,external rating agencies too have been flagging Mozambiques sovereign debt pressures.In October 2024,S&P downgraded Mozambiques local currency(LCY)long-term sovereign rating to CCC,from CCC ,while affirming the short-term LCY rating at C,with a stable outlook or both LCY and FCY.In August 2024,Fitch has affirmed Mozambiques foreign currency(FCY)rating at CCC .This rating agency has not assigned LCY ratings on Mozambiques sovereign since August 2023.The agency decided to withdraw due to a dearth of reliable information on the resolution of late coupon payments on domestic bonds.Moodys however has kept Mozambiques LCY and FCY sovereign debt at Caa2,but with the outlook downgraded from positive to stable in September 2023.We see little chance of this economy garnering any material improvement in sovereign ratings soon unless a speedy resumption of LNG investment can manage to lift economic growth.An alarming rapid rise in domestic debt in 2024An alarming rapid rise in domestic debt in 2024 We estimate central government domestic debt to have grown by an alarming 30%y/y in 2024,to just over MZN400bn(c.USD6.4bn),or 29%of GDP,from 23%of GDP in 2023.This may be due to poor revenue performance during 2024 and general election overspending.Mozambiques rapid rise in domestic debt began in 2016 when over USD2bn in previously undisclosed publicly guaranteed loans came to light,resulting in the suspension of an IMF programme at that time.This has also limited access to external borrowing in the meantime.Therefore,central bank financing to the government rose to more than double of the legal limit of 10%of revenue of the previous fiscal year.Standard Bank February 2025 27 More recently,the implementation of the governments unique salary(TSU)in the latter part of 2022 saw the wage bill rising by a staggering 40%y/y in that year,partly financed by a 24%y/y increase in central government domestic debt,with part of that in the form of domestic bonds issued which are now maturing in 2025 and 2026.The wage bill in 2024,targeted at MZN199.4bn(c.USD3.1bn),or 14.1%of GDP,consumes over 70%of government revenue,forcing the government to continue borrowing aggressively in the domestic market.Data reported to Q3:24 shows central bank financing corresponding to 18%of central government debt balances,with T-bills carrying a 31%weight,bonds representing 44%of the exposure,and other term-facilities accounting for 7%.A material rise in bond repayments in 2025 and 2026A material rise in bond repayments in 2025 and 2026 We have been flagging an 88.7%y/y increase in government bond repayments in 2025,to MZN37bn(c.USD580m),from MZN19.6bn in 2024,then rising further,by 19.1%y/y in 2026,to MZN44.1bn(c.USD690m).Poor government bond subscriptions meant that the government has had to increase its reliance on T-bill issuances to fund the Treasury.Figure 9:Central government domestic debt balances Source:Banco de Moambique;Ministrio da Economia e Finanas;Standard Bank Research Figure 10:Government domestic bond principal repayment Source:Bolsa de Valores de Moambique;Standard Bank Research 05101520253035050100150200250300350400450201620172018201920202021202220232024e%of GDPMZN bnOtherBondsT-billCentral bankCentral government domestic debt(MZN bn)Central government domestic debt(%of GDP)024681012141618Jan-25 Mar-25 May-25 Jul-25Sep-25 Nov-25 Jan-26 Mar-26 May-26Jul-26Sep-26 Nov-26MZN bn Standard Bank February 2025 28 Rolling over these bonds,most likely via switch auctions,was the strategy of the previous cabinet to help in dealing with large domestic bond repayments and avoid defaulting.The new cabinets approach is not known.Mozambiques capital markets remain underdeveloped,implying a heavy concentration of government T-bill and bonds exposures in commercial banks balance sheets,pension funds and insurance companies,as well as limited participation from other companies and the public.Notably,investment by foreigners in these instruments is also minimal.Per the latest published commercial bank financials reported to December 2023 and June 2024,the top five commercial banks hold over 50%of government debt exposures in the form of T-bill and bonds,with pension funds,including the National Social Security Institute(INSS),also holding a large portion of these instruments,which could range at 20-30%.Such heavy concentration may assist the government because it implies managing a limited number or stakeholders in performing switch auctions.Debt service metrics now alarming,in the context limited fiscal spaceDebt service metrics now alarming,in the context limited fiscal space At face value,per the 2025-2027 medium-term fiscal framework,Mozambiques domestic debt service(interest plus principal)ratio,seen at 17.4%of revenue in 2025 and 14.9%in 2026,with external debt service(interest plus principal)to revenue ratios at respectively 11.6%and 10.8%in 2025 and 2026,does not look particularly alarming,especially when compared with the debt service ratios of economies that have defaulted.However,Mozambiques wage bill,consuming over 70%of revenue,translates into severe liquidity constraints for this sovereign,which does raise deep concern about domestic debt service levels.Still,Mozambique compares favourably from an inflation perspective.Monetary policy being kept tight,by means of high real interest rates,and high cash required reserves(CRR)at 39%for LCY deposits and 39.5%for FCY deposits,has helped to sterilize the impact of fiscal slippage on inflation.This,alongside the USD/MZN pair being kept stable since mid-2021,has seen inflation outcomes low,last reported at 4.2%y/y in December 2024,and remaining in single digits since April 2023.We forecast inflation closing 2025 at 6.1%y/y because of constrained aggregate demand and a stable metical limiting imported inflation.Easing inflation has allowed the Banco de Moambique to cut the MIMO policy rate by a cumulative 450 bps in 2024,to 12.75%,from 17.25%,which helps in lowering the cost of financing,especially for the government.This goes a long way in helping to reduce the governments domestic debt interest bill.Further,the central bank could use the LCY CRR to help in releasing some LCY liquidity and thereby entice commercial banks participation in the likely government debt reprofiling exercise this year and next.We view domestic debt defaults risks as having increased,especially due to the Treasurys severe liquidity constraints.The measures announced by President Daniel Chapo during his inaugural speech on 15 January may not relieve the governments liquidity pressure.The president announced expenditure cuts of MZN17bn(c.USD266m)by reducing the size of the government,dealing with ghost workers,improving the governments procurement process,and dealing with corruption.Standard Bank February 2025 29 However,low government bond subscriptions in some 2024 issuances,and the already high concentration of bond repayments in H1:25,implies an imminent domestic debt crunch unless the new cabinet can successfully implement some switch auctions.Fixed income and currency strategy Except for Zambia and Ethiopia,we expect most central bank Monetary Policy Committees in our coverage to maintain an easing bias in 2025.However,the Committees in Angola and Malawi will likely keep rates on hold over the coming year.Of course,should guidance from the US Federal Reserve on future expected rate cuts change,some MPCs will likely turn cautious and perhaps not ease as much as we currently expect.Admittedly,high beta markets,where the concentration of foreign portfolio investment in local debt has risen over the past year,will likely be more cautious if the global inflation outlook changes.However,in a market such as Egypt,where headline inflation is likely to decline sharply from February 2025 onwards,the MPC should have room to ease its policy stance during 2025,even if the Federal Reserve were to further scale back its expectations of rate cuts.The carry trade that we recommended back in March 2025 has returned 13.3%since inception.The EGP came under pressure into Q4:24 as T-bill maturities fell due in Dec,resulting in higher USD demand.In addition,previous restrictions on USD demand for certain sectors were lifted,which also placed upside pressure on USD/EGP in Q4:24.But,with inflation likely to materially ease from February 2024,in large part due to unwinding base effects,T-bill yields have begun edging lower.However,roll-over risks remain large,particularly in March 2025 when a large chunk of the 1-y T-bill investments from last year will fall due.Hence,these roll-over risks towards March 2025 will likely keep nominal T-bill yields elevated.However,as real EGP yields likely improve notably from February 2025,we could still see more investors add exposure to the 3-y government bond.Figure 11:Mozambique government domestic bond subscription rates Source:Bolsa de Valores de Moambique;Standard Bank Research 050100150200250300350400mandAllocation Standard Bank February 2025 30 But,even as our trade in our shadow portfolio matures in March 2025,we would still extend this trade with another carry trade.We still view the EGPs valuation on a REER basis as favourable,undervalued by around 26%,per our estimates,while current account dynamics may also improve after the recent ceasefire deal which may revive Suez Canal receipts.In fact,even before the ceasefire deal,despite a large current account deficit(exacerbated by increased gas imports),and elevated external debt service(between USD15.0-20.0bn per annum)in both 2025 and 2026,the Egyptian governments external funding sources remained ample to cover this.Kenya will issue another infrastructure bond(KENIB)in February 2025.In fact,the government may even prefer to issue new KENIBs in the months where there is a coupon reinvestment risk,being February and August 2025.But also,in April 2025,cumulative maturities of T-bills and government bonds rises to KES254.7,from KES174.9bn in March 2025 and KES128.2bn in February 2025.Thus,with this large roll-over risk,the government may also look to potentially issue another KENIB closer to April.Recall that the government had initially communicated the intention to conduct a switch auction to deal with this large redemption in April 2025 but then decided to delay these liability management plans on the expectation that KES yields may fall further.With KENIB yields having fallen to around 13.5%in the secondary market at the time of writing,there is probably limited scope for further large duration gains right now,considering that KENIB yields havent historically been lower than c.12.0%.In addition,we dont expect the KES to rally sharply from current levels.However,we also dont expect the KES to sharply depreciate in 2025,which would imply that the KENIB trade may still provide an attractive avenue for the carry.The KENIB 2032 position,that we had opened in our shadow portfolio last year,has returned 36.1%in USD terms.We took profit on this trade in early September 2024.But,looking ahead,we will only re-enter the KENIB trade if new primary issuances provide entry level yields of 15-16%.Of course,there is always the risk that offshore investors take profit,and move to other markets such as Nigeria and Egypt.Further,if Kenya doesnt secure a new IMF programme in 2025,portfolio investors may become nervous,particularly if this coincides with a volatile global risk environment.Indeed,while FX reserves have risen to above USD9.0bn,Kenyas external debt service remains elevated over the medium term,which perhaps makes it appropriate for the government to secure a funded,rather than a precautionary,programme.Figure 12:Inflation forecasts(%y/y period end)Source:Standard Bank Research 0510152025303540Cote dIvoireSenegalMauritiusBotswanaNamibiaUgandaTanzaniaRwandaKenyaMozambiqueDRCZambiaGhanaEgyptEthiopiaMalawiAngolaNigeria2025f2024e Standard Bank February 2025 31 The government is keen to secure another funded programme,although may potentially have to tap into exceptional access again to receive a sizeable IMF arrangement because the government is already close to the SDR quota ceiling.But also,should the government increase uptake of new non-concessional financing,such as the recently discussed UAE financing beyond the USD675m agreed limit with the IMF under the current fiscal framework,the pending ninth,and final,review under the current IMF programme may not transpire.This may then complicate the remaining disbursements under the RSF tranche of the arrangement.Nevertheless,real KES yields remain relatively attractive,with inflation also unlikely to become troublesome for the MPC.KES liquidity at primary debt auctions may also be anchored by further increases in the National Social Security Fund(NSSF)contributions.However,a La Nia drought may still increase food inflation but the MPC will still probably look to cut the CBR further in H1:25.In Uganda,the 5-y bond yield is now approaching 17.0%.The government has ramped up domestic borrowing over the last few months due to large redemptions in January 2025 as well the requirement to clear the remaining overdraft at the BoU.Recall that the government had to clear UGX7.8tn of the BoU overdraft through issuance of marketable securities to the apex bank,with a further UGX1.3tn expected to be cleared in cash.Positively,as of Q4:24,the government had already issued UGX7.8tn in securities to the BoU and cleared that portion of the overdraft.This will likely improve the governments chances to secure a new IMF programme,which they aim to finalise by June 2025.We still expect further upside for UGX bond yields over the next 3-m due to upcoming large maturities in May 2025,which rise to UGX2.45tn,from UGX722bn in February 2025 and UGX547bn for March 2025.The yield on the 5-y government bond could reach 17.0-17.5%,a range that may well see us recommending the duration trade in Uganda again,more so if the USD/UGX pair reaches 3800-3850 levels in Q1:25,typically a period where USD demand spikes due to dividend repatriation.However,the risk of supplementary budgets being issued would normally increase UGX bond yields.Also,with elections expected in January 2026,government domestic borrowing and issuance of supplementary budgets could increase in 2025.However,we will closely track whether any tactical duration opportunities arise between March and May 2025.Figure 13:Real 3-m rate Source:Bloomberg;Various central banks -20-15-10-5051015AngolaNigeriaZambiaRwandaBotswanaMauritiusEgyptNamibiaGhanaTanzaniaKenyaUgandaMalawiMozambique%Standard Bank February 2025 32 The carry trade via the 364-d T-bill that we recommended in Zambia will mature in August 2025.The trade is down 0.9%due to ZMW weakness in Q4:24.This weakness was largely on the back of increased seasonal agricultural input demand,in addition to looser ZMW liquidity.We expect moderate upward pressure on USD/ZMW to persist in H1:25,with ZMW liquidity conditions expected to remain loose,in large part due to concerns that domestic funding pressures would deteriorate if ZMW liquidity were tightened,amid the still elevated increase in social spending from the severe drought in 2024.ZMW pressure in 2024 was also exacerbated by the El Nio drought which increased both food and electricity imports,thereby widening the trade balance.Admittedly,the resumption of favourable rains will be crucial in easing these trade account pressures by replenishing the Kariba Dam and boosting agricultural productivity.However,even if La Nia rains were weak,as is widely expected,which would imply weaker rains in Zambia,we would expect an improvement in the trade account largely due to a significantly lower base from 2024.Looking ahead,a large portion of the local debt maturities in 2026 is skewed towards foreign portfolio investors estimated at around USD800m.This is more likely to be a balance of payments challenge,rather than a debt sustainability issue,according to us,as non-resident holders are likely to increase USD demand.We believe that the authorities would benefit from signalling to the market how this potential large capital outflow in the financial account would be funded,particularly given that 2026 is in an election year and the current IMF funded programme expires in October 2025.Such signalling would perhaps help alleviate challenges for the government to roll over ZMW debt,which would also anchor investor confidence.Given our entry point at a 19%yield,we maintain our shadow portfolio position in the carry trade.Our base case is that Zambia will muddle through the high maturity wall both in 2025 and 2026 as the banking system maintains high levels of liquidity.That said,likely looser ZMW liquidity may place further upside pressure on USD/ZMW than we currently envisage in our baseline assumption.But crucially,we also believe that it is likely that Zambia extend,or enter,a new IMF programme once the current one expires in October 2025.However,the authorities are keen to extend the current programme before the October expiry,which would then also make them eligible for the Resilience and Sustainability Facility(RSF).In Nigeria,our carry trade recommendation is down around 12.6%since inception in April 2024.The NGN came under pressure in Q3:24 largely on the back of both seasonal(college fees)and speculative USD demand.The NGN appreciated in Q4:24 Figure 14:Real 10-y rate Source:Bloomberg;Various central banks-20,00-15,00-10,00-5,000,005,0010,0015,0020,00NigeriaEgyptGhanaMauritiusZambiaBotswanaNamibiaTanzaniaUgandaKenya%Real 10-y rate Standard Bank February 2025 33 due to an increase in FX reserves from the USD2.2bn Eurobond issuance.This was further complemented by the introduction of the B-Match system,which has aided price discovery in the FX market.However,as USD/NGN declined from late last year,we have seen right-hand-side USD demand also pick up.In fact,the NGN started 2025 on the back foot,with structural USD demand still persisting.The NGN has been under pressure despite the CBN selling USD536m in December 2024 and USD360m so far in January 2025.Hence,we will now cut our losses and exit the 364-d T-bill in our shadow portfolio.However,we will wait for better entry levels for USD/NGN between 1600-1700,as OMO yields will likely continue to range around 30.0%for the better part of 2025.Our expectation for an IMF-sponsored,stepped-up depreciation of the Ethiopian birr(ETB)against the USD has materialized.Our recommendation to buy a 24-month USD/ETB NDF in January 2023 proved highly effective,delivering a strong return of 53.73%upon maturity on 21 January 2025.Table 2:Open trades Positions Entry Date Entry Yield,%Entry FX Latest yield,%Latest FX Total return,%Since inception Egypt:buy Egypt 364-d 28-Mar-24 25.9 47.40 25.43 50.31 13.4 Zambia:buy Zambia 364-d 22-Aug-24 19.00 26.11 15.50 27.8-0.9 Source:Bloomberg,Standard Bank Research Standard Bank February 2025 34 Glossary For brevity,we frequently use acronyms that refer to specific institutions or economic concepts.For reference,below we spell out these and provide definitions of some economic concepts that they represent.1414-d d 14-day,as in 14-d deposit,which denotes 14 day deposit 1010-y y 10-year 16 Jan 1316 Jan 13 16 January 2013 3 3-m m 3 months 3m3m 3 million,as in USD3m,which denotes 3 million US dollars 3bn3bn 3 billion,as in UGX3bn,which denotes 3 billion Ugandan shillings 3tr3tr 3 trillion,as in TZS3.0tr,which denotes 3 trillion Tanzanian shillings AOAAOA Angola Kwanza BAMBAM Bank Al Maghrib BCCBCC Banque Central du Congo(Central Bank of Congo)BCEAOBCEAO Banque Central des tats de LAfrique de lOuest(Central Bank of West African States)BCTBCT Banque Central de Tunisie BMBM Banco de Moambique BNABNA Banco Nacional de Angola BOBBOB Bank of Botswana BOGBOG Bank of Ghana BOMBOM Bank of Mauritius BONBON Bank of Namibia BOPBOP Balance of payments a summary position of a countrys financial transactions with the rest of the world.It encompasses all international transactions in goods,services,income,transfers,financial claims and liabilities.BOTBOT Bank of Tanzania BOUBOU Bank of Uganda BOZBOZ Bank of Zambia BRBR Bank Rate(Reserve Bank of Malawi)Standard Bank February 2025 35 BRVMBRVM Bourse Rgionale des Valeurs Mobilires(Regional Securities Exchange)BWPBWP Botswana Pula C/AC/A Current account balance.This is the sum of the visible trade balance and the net invisible balance of a country.The latter includes net service,income and transfer payments.Capital Capital accountaccount Captures the net change in investment and asset ownership for a nation by netting out a countrys inflow and outflow of public and private international investment.CBECBE Central Bank of Egypt CBKCBK Central Bank of Kenya CBRCBR Central Bank Rate CDFCDF Congolese Franc CPICPI Consumer Price Index An index that captures the average price of a basket of goods and services representative of the consumption expenditure of households within an economy.Discount Discount raterate Policy rate for Bank of Uganda DisinflationDisinflation A decline in the rate of inflation.Here prices are still rising but with a slower momentum.Disposable Disposable incomeincome After tax income DMDM Developed markets ECBECB European Central Bank EGPEGP Egyptian pound EMEM Emerging markets ETBETB Ethiopian Birr EurobondEurobond A bond denominated in a currency other than the home currency of the issuer.ExportsExports The monetary value of all goods and services produced in a country but consumed broad.FMDQFMDQ FMDQ OTC Securities Exchange,Nigeria FXFX Foreign Exchange FY2016/1FY2016/17 7 2016/17 fiscal year GCEGCE Government Consumption Expenditure-Government outlays on goods and services that are used for the direct satisfaction of the needs of Standard Bank February 2025 36 individuals or groups within the community.This would normally include all non-capital government spending.GDEGDE Gross domestic expenditure,the market value of all goods and services consumed in a country both private and public including imports but excluding exports.This is measured over a period of time usually a quarter/year.GFCFGFCF Gross Fixed Capital Formation this is investment spending,the addition to capital stock such as equipment,transportation assets,electricity infrastructure,etc to replace the existing stock of productive capital that is used in the production of goods and services in a given period of time,usually a year/quarter.Normally,the higher the rate of capital,the faster an economy can grow.GDPGDP Gross Domestic Product the monetary value of all finished goods and services produced in a country in a specific period,usually a year/quarter.GHSGHS Ghanaian Cedi H1:16H1:16 First half of 2016 ImportsImports The monetary value of goods and services produced abroad and consumed locally.InflationInflation The rate at which the general level of prices of goods and services are rising.It is usually measured as the percentage change in the consumer price index over a specific period,usually a month/year.Invisible Invisible trade trade balancebalance The value of exports of services,income and transfers,less imports of same.Jan 16Jan 16 January 2016 KBRRKBRR Kenya Bankers Ref
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