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In our Market Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
ECB faces tough start to 2025 with the latest economic challenges
The European Central Bank (ECB) faces a challenging task in 2025 as it navigates shifting economic fortunes across the eurozone.
Nations that bore the brunt of the sovereign debt crisis in the 2010s are now outperforming traditional economic powerhouses like Germany and France, signalling a potential transformation in the region's economic hierarchy.
Economists note that countries on the EU’s periphery, including Portugal, Ireland, Greece, and Spain, have emerged stronger after implementing tough reforms during the last decade’s financial crisis. These nations are expected to grow by at least 2% in 2025, according to the Organisation for Economic Co-operation and Development (OECD)—a rate more than double the projected growth for France and Germany.
In contrast, Germany is grappling with significant economic and political challenges. The country narrowly avoided recession in late 2024 due to declining industrial output, reduced demand for exports in China, and intensifying competition from Chinese carmakers targeting the EU market.
The loss of affordable Russian gas, a crucial resource for Germany’s industrial sector before the Ukraine invasion, and soaring inflation have compounded these struggles. Political instability has further weakened Germany's position, with Chancellor Olaf Scholz losing a confidence vote, triggering early elections scheduled for February 2025. The OECD estimates Germany’s economy stagnated in 2024 and will grow by just 0.7% in 2025.
Meanwhile, France is wrestling with its own economic and political crises. President Emmanuel Macron is striving to pass a budget to avert financial instability, having appointed François Bayrou as his fourth prime minister in a turbulent year marked by the ousting of Michel Barnier through a no-confidence vote. France’s GDP growth is projected to decelerate from 1.1% in 2024 to 0.9% in 2025, as tax hikes and spending cuts to reduce national debt exert pressure on businesses and households.
In stark contrast, the OECD highlights the resilience of Greece, Portugal, and Spain, attributing their positive growth outlooks to the structural reforms undertaken during the 2010s crisis. This recovery underscores their strengthened economic foundations relative to their northern European counterparts.
ECB President Christine Lagarde has indicated that interest rates will be further reduced in 2025, following cuts to 3% in 2024. With inflation easing across the eurozone, the ECB faces growing calls to support the struggling economies of northern Europe while maintaining stability within the broader bloc.
UK house prices rise by 4.7%
UK house prices ended 2024 on a positive note, rising 4.7% compared to the start of the year, according to data from Nationwide.
Despite ongoing affordability challenges, the housing market displayed "remarkable resilience," with the average UK home costing £269,426 by December. However, prices remain below the peak reached in the summer of 2022.
Terraced homes led the price growth for the year, while Northern Ireland recorded the strongest regional increases, followed by northern England. Although all regions experienced price growth, the south of England lagged behind.
Looking ahead, uncertainty surrounding interest rates, mortgage rates, and changes to stamp duty could pose challenges for buyers and sellers in 2025. Experts anticipate a surge in property sales in the first few months of the year, as buyers aim to complete transactions before the April changes to stamp duty thresholds.
From April, buyers in England and Northern Ireland will pay stamp duty on properties over £125,000 instead of the current £250,000 threshold. Additionally, the tax-free limit for first-time buyers will drop from £425,000 to £300,000.
The housing market may also find relief from potential interest rate cuts by the Bank of England, with reductions possibly beginning in February. Lower rates are expected to encourage lenders to reduce the cost of fixed-rate mortgage deals, potentially boosting affordability. Rising wages could further improve conditions for buyers.
UK Finance, the trade body for lenders, has forecast a 10% increase in mortgage lending for house purchases in 2025. However, some analysts question whether this projection is overly optimistic, given ongoing affordability constraints. By 2026, many households may still face difficulties affording moves or new purchases.
US Economy ends 2024 with welcome 3.1% growth boost
The U.S. economy expanded at a robust 3.1% annual rate from July to September, driven by strong consumer spending and a significant increase in exports, according to an updated report from the Commerce Department.
This marked an acceleration from the 3% growth recorded in the second quarter, showcasing continued economic resilience despite high interest rates. Over the past nine quarters, GDP growth has surpassed 2% in all but one.
Consumer spending, which constitutes roughly two-thirds of U.S. economic activity, grew at a brisk 3.7% annual rate in the third quarter, revised upward from the previous estimate of 3.5%. Exports surged by 9.6%, while business investment grew modestly at 0.8%. However, investment in equipment jumped sharply by 10.8%. Federal government spending also saw a substantial increase of 8.9%, including a 13.9% rise in defence expenditures.
The labour market remains robust, with the unemployment rate at 4.2%—slightly above the 53-year low of 3.4% reached in April 2023. Inflation, which peaked at a 40-year high of 9.1% in mid-2022, has moderated following 11 Federal Reserve interest rate hikes in 2022 and 2023. As of last month, inflation stood at 2.7%, still above the Fed’s 2% target but significantly improved. Encouraged by progress on inflation, the Fed reduced its benchmark interest rate for the third time this year on Wednesday.
Within the GDP figures, a key measure of the economy’s core strength—which includes consumer spending and private investment but excludes volatile elements like exports, inventories, and government spending—grew at a 3.4% annual rate in the third quarter, up from 2.7% in the previous quarter.
Inflation data within the report provided further positive signals. The Federal Reserve’s preferred metric, the personal consumption expenditures (PCE) price index, rose at an annualized rate of 1.5% in the third quarter, down from 2.5% in the second quarter. Core PCE inflation, which excludes food and energy prices, edged up to 2.2% but was an improvement from 2.8% earlier in the year.
Looking ahead, the Commerce Department’s initial estimate for fourth-quarter GDP growth will be released on January 30.
Meanwhile, the incoming administration has proposed significant changes to economic policy, including tax cuts, tariffs on foreign goods, and the deportation of millions of undocumented workers. Economists caution that these measures could potentially reignite inflation, presenting challenges to the current economic momentum.
