A view from London

US interest rate expectations also rose as markets priced in higher inflation on the back of promised tax cuts and increased tariffs on imports. Although the Federal Reserve reduced US rates by 25bp last week, the pace of easing is expected to slow from here, with markets pricing in the fall from the current level of 4.5%-4.75% to 3.75% at the end of 2025, up from last month’s expectation that rates would fall to 3.4% late next year. Yields on US Treasuries, or government bonds, also edged higher on the expectation that interest rates would stay higher for longer and the possibility of higher government borrowing under the new administration.

Last Friday the Chinese authorities unveiled a $1.4tn fiscal stimulus package, the latest in a series of measures, including interest rate cuts and increased government borrowing, designed to bolster flagging growth. Some commentators speculate that the Chinese authorities also want to support domestic activity in anticipation of new US tariffs on Chinese exports. The loosening of fiscal and monetary policy has helped boost Chinese equities which, having more than halved in value between early 2021 and late 2023, have risen by over 20% this year. However, the measures undertaken in the last year have not had the desired effect on activity, which remains lacklustre. It seems likely that the Chinese authorities will announce further stimulus next year.

Last week the Bank of England cut UK interest rates by 0.25% and noted that recent UK budget measures will add 0.75 percentage points to GDP and around 0.5 percentage points to consumer price inflation in a year’s time. The main driver is large increases in government consumption and investment, which will pump up demand in the near term. Any improvements in the supply capacity of the economy from higher levels of investment will take much longer to materialise.

As in the US, higher inflation expectations have led markets to price in a slower and shallower easing of monetary policy. Markets now expect UK rates to fall from 4.75% to 4.0% by the end of next year, 50bps higher than the 3.5% markets expected at the beginning of October.

The impact of the biggest tax change – the £26bn increase in employers’ national insurance contributions (NICs) – is harder to assess. Bank of England governor Andrew Bailey said firms could deal with higher costs through some combination of raising prices, accepting lower profits, improving productivity, making smaller increases in employment or cutting jobs. The Office for Budget Responsibility, which forecasts the impact of tax changes, has a more straightforward view. It estimates that in the long term 76% of the total cost of higher NICs will be passed on to employees in the form of lower wages. As a result, the OBR has reduced its previous forecasts for wage growth in this parliament.

Some retail firms, including Sainsbury’s and M&S, have said they will raise prices to cover the cost of higher NICs while pub chain Wetherspoons said "all hospitality business" will increase prices because of the tax changes. Shares in UK bakery chain Greggs fell 8% on Friday morning after Deutsche Bank predicted that the chain faces an extra £97m in costs over the next two years as a result of budget measures.

On the face of it, 2025 should be a positive year for the US and the UK, with good growth and falling interest rates. The economy of the euro area is also picking up, albeit with Germany lagging. After last week’s emphatic Trump victory, the new unknown relates to US policy. We will get a clearer idea of the administration’s intentions on taxes, tariffs and industrial policy as Mr Trump makes his key appointments over the coming weeks.