The topics that will shape the financial markets in 2025

How will rising national debt affect fiscal policy?

Fiscal policy in both the US and Europe faces significant challenges in 2025. Weak economic growth, political uncertainties, and high debt levels characterize the landscape, while necessary budget consolidations must be implemented. A key aspect is the challenge of spending cuts, which are likely to significantly dampen economic impulses in both regions for 2025.
In the US, fiscal policy is burdened by enormous deficits and political polarization. The budget deficit is expected to exceed 7.5% of GDP, while the total debt-to-GDP ratio could rise above 120% by 2026 (Bloomberg, January 10, 2025). Interest payments are already the second-largest expenditure, severely restricting fiscal flexibility.
In Germany, adherence to the debt brake remains a focus despite the weakest economic outlook in years. Resulting spending cuts leave little room for growth-promoting measures. France plans to reduce the budget deficit to 5.0 to 5.5% of GDP in 2025 with savings of 50 billion euros. Additionally, a supplementary budget of 11 billion euros for 2024 has been approved. Austria faces an increased consolidation need of 15 billion euros by 2028. Economic contraction since 2023, extensive pandemic-related aid programs, and climate protection investments burden the state budget. The new government faces unpopular decisions necessary for long-term stability. Here too, growth-promoting impulses are limited, as the focus is on budget discipline. In the UK, uncertainty prevails in the bond markets. Planned tax increases have heavily burdened businesses and consumers. High bond yields reflect investor distrust, further pressuring the British pound.
Both Europe and the US face complex fiscal challenges requiring profound reforms and political consensus. While Europe attempts to implement growth-friendly austerity measures, the US struggles with structural issues and a lack of fiscal discipline. Investors should prepare for volatile financial markets and potential risks while awaiting the effects of these fiscal uncertainties on long-term economic stability. (Harald Besser)

What can we expect from central banks?

The enthusiasm for further interest rate cuts has waned, particularly regarding the American central bank. A rate cut for the USD is currently priced in, with the expectation that there may not be one in 2025, given the strong economic conditions in the US and current inflation rates. Inflation in the US has risen again; values were lower in September 2024. Additionally, core inflation (excluding food and energy) is even higher and has never been pushed below 3%.

The situation is somewhat different for Eurozone countries: Yes, inflation rates in individual Eurozone countries and for the Eurozone as a whole are generally lower than in the US. Nonetheless, core inflation is slightly higher than the overall inflation rate, with tobacco and alcohol excluded from the Eurozone's core inflation alongside food and energy. Both rates currently show an annual change of over 2%. The ECB has still not achieved its inflation target of 2%.
In summary, we believe in a deposit rate of 2% by the end of 2025. This is roughly what the capital markets expect, which see the future somewhat more optimistically, but not as optimistically as three months ago.

Lower interest rates are also priced in for AUD, CAD, GBP, and CHF. The only exception is currently Japan: while higher interest rates are expected there, the rate should remain below 1%. (Andreas Weidinger)