Leading Indicators | Navigating the next stage of the recovery
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Here we look at the leading indicators in the world of economics.
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INTEREST RATES: WHAT’S NEXT FOR 2025?
The past year was one of overall economic resilience. The global battle against inflation has largely been won, and central banks have shifted gears, commencing their monetary easing cycles. The Bank of England (BoE), European Central Bank (ECB) and the US Federal Reserve (Fed) have each implemented interest rate reductions, cutting rates within a range of 50 – 100bps. These moves have brought benchmark rates to 3.25% in the Eurozone, and 4.75% in the UK and US.
With a lower inflationary environment, markets widely expect further rate reductions going into next year. However, the question remains, how far will policymakers go in 2025? There are still a few major monetary policy decisions pending before the year's end. One view from Capital Economics is that the ECB and Fed will cut rates by -25bps in December, whilst the BoE will see no change. Looking ahead, Capital Economics anticipate four 25bps rate cuts from the BoE next year, the first as early as February, bringing rates to 3.75% by Q4 2025. Meanwhile, money markets are currently pricing in 75bps of rate cuts next year, leaving the UK’s base rate at 4.00%.
CRE INVESTMENT: WILL MOMENTUM RISE?
Against a backdrop of improving economics and shifting geopolitical dynamics, 2024 marked a steady, albeit moderate year for global commercial real estate (CRE) investment. Q1-Q3 global CRE investment totalled $552 billion in 2024, up +1% on the same period as last year. Meanwhile, UK CRE investment reached £29.4bn in the first three quarters of the year, up +8% y/y.
Looking ahead to 2025, we expect investment to improve further for a few key reasons. Firstly, interest and market rates are forecast to fall further in H1 2025, which will create a more favourable investment and CRE lending environment. Debt origination activity is already showing an upward trend, reflecting growing investor appetite. Additionally, the expected compression in the risk-free rate, from 4.24% currently to 4.00% by the end of next year, should help create a more attractive CRE market. Together, these factors suggests that 2025 could usher in a stronger phase of recovery, with increased capital flows and renewed momentum in the CRE sector.
THE GEOPOLITICS FACTOR
Global geopolitical tensions emerged as a dominant force impacting financial markets in 2024. Disruptions to supply chains and heightened volatility in commodity prices added layers of uncertainty to global trade and investment flows. The geopolitical risk (GPR) index surged by +10% m/m in November, reaching its highest level since August – highlighting the persistent instability.
As we look to next year, the question is whether some degree of geopolitical stability can be achieved. While there are reasons for cautious optimism, downside risks remain. The rise of protectionist policies continues to threaten cross-border trade and cooperation, whilst the potential for uneven regional recoveries could further strain economic stability.
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