The famous economist John Kenneth Galbraith once remarked: “There are two kinds of forecasters- those who don’t know and those who don’t know that they don’t know.” Galbraith made this remark when experience showed that most forecasts went wrong. Predictions about the short-term trend in the market also fall in the same category. Only the long-term trends can be projected. Therefore, forecasting the likely economic scenario in 2025 and its probable impact on the markets is a tough job, almost an adventure, in the current uncertain global political environment. It would be more discreet, therefore, to project some probable scenarios for 2025.
Global economy did well in 2024
Unlike forecasting, post-mortem is always easy. So, let me start with the easy part. The surprise element in the global economy in 2024 was the resilience of the US economy which is estimated to have grown by 2.7 percent in 2024 against near consensus forecast of mere 2 percent growth. The strength of the US economy will help the global economy to clock a growth rate of 3.2 percent in 2024. The better-than-expected global growth also helped in the growth of global trade.
India’s growth falters in the second half
For India, 2024 was a year of initial optimism giving way to serious concern by the last quarter. The year began with all-round positive news. GDP growth was impressive; fiscal and current account deficits were under control; corporates were deleveraged; the banking system was in the pink of health; FPI inflows were good; and stock markets were performing well. Things started taking a turn for the worse with the announcement of corporate results in Q2. Surprisingly, Q2 earnings growth was flat. This was viewed by some as the beginning of a slowdown in the economy. This fear was confirmed by the worse[1]than-expected Q2 GDP growth print which came at a shocking 5.4 percent, far below consensus estimates.
The debate now is on the nature of this slowdown: Is this a one-off? Or, is this cyclical, which can last a few quarters? The jury is still out on this.
Dip in Q2 GDP growth is a one-off Our view is that the growth slowdown is a one-off caused by the sharp dip in the government capex. This needs some theoretical explanation. From the expenditure side, GDP is expressed in a simple formula:
GDP=C+I+G+(X-M)
where, C=Consumption expenditure, I=Investment expenditure, G=Government expenditure and X-M (exports – imports) is net exports. Of these four elements, only government expenditure declined, that too sharply. In H1 FY25 the central government incurred only 29 percent of its full year’s fiscal deficit target. This was 33 percent lower than the last 10-year median of 62 percent. This sharp decline in government capex was primarily caused by election-related restrictions on expenditure. Regulatory restrictions by the RBI also contributed to a slowdown in credit growth from about 16 percent to 12 percent.
Government capex has picked up since August and this will be reflected in Q3 and Q4 GDP numbers. A bumper harvest can improve rural demand and contain food inflation. The festive season has buoyed up business prospects in many segments. Even then, the final FY25 GDP growth rate will be significantly lower than the initial RBI projection of 7.2 percent. A sharp rebound in GDP growth and corporate earnings growth may take some time.
Trump 2.0 is the biggest known risk
The biggest known risk for the global economy in 2025 may come from Trump 2.0. What President Trump will do, remains to be seen. There are some inherent contradictions in what Trump has declared. If he walks his talk of sharply raising import tariffs on Chinese goods, that will be highly inflationary and will contradict his aim of controlling inflation. If he clamps down on immigrants that will impact his declared program of promoting manufacturing in the US, since labour availability will become an issue. Trump is a pragmatic businessman who is good at striking deals. Perhaps the tall talk by Trump is political posturing to extract concessions from others. It remains to be seen how this will pan out. If Trump 2.0 succeeds in negotiations and striking deals, the economic consequences will be positive. On the other hand, if tariffs on imports from China are raised sharply and China retaliates, it may trigger a trade war, which can have bad consequences for the global economy and global trade.
Watch out for leading indicators
Back home in India, resumption of growth in GDP and earnings will be crucial. Markets are unlikely to rally till we have data indicating resumption of growth and earnings. Q3 earnings numbers will give some clues regarding the trajectory of earnings growth. High[1]frequency data will indicate the strength and direction of economic growth earlier than the release of the official GDP print. Watch out for these macro data.
