2025-03-17 07:04

Key takeaways Chinese equities have delivered one of the strongest performances in global markets in 2025, helped by surging momentum in technology stocks. There has been a sudden shift in the market mood music surrounding the euro of late. Perhaps more importantly, there is now excitement in FX markets regarding a significant increase in eurozone government spending on energy, climate and, most recently, defence and infrastructure. Frontier markets have been impressively resilient to global volatility this year, with Vietnam stocks – which account for around a quarter of the MSCI Frontier Markets index – advancing 6% in Q1 so far. Chart of the week – The Fed ‘put’ in investment markets US stock markets have fallen sharply in recent weeks, with tech sector shares leading the decline. It’s the latest of several episodic waves of market volatility that investors have endured already in 2025. The latest moves come amid elevated uncertainty over trade and economic policy. Investors are concerned about the growth outlook for US GDP and corporate earnings. And that’s jarring against stretched US stock valuations. It also comes as events outside the US are forcing a reassessment of TINA – “there is no alternative” to US stocks. Plans for fiscal stimulus in Germany have caused a reassessment of Europe’s long-term growth and earnings prospects. Tech sector advancements in China are also catching investor attention. Arguably, the latest sell-off would have been worse without the recent fall in government bond yields, and the rise in 2025 Fed rate cut expectations, to 3-4. But a key question now is where is the “Fed put”? If the Fed stays in wait-and-see mode amid tariff uncertainty and sticky inflation, while growth continues to slide, then markets have a problem. But if inflation can stay low, the Fed has a lot of policy space and could cut rates hard, if needed. So far, inflation progress looks good, with core inflation excluding shelter and used cars now running close to 2%. We think a broadening out of returns can continue across sectors, styles and regions. But the probability that growth “topples over” has clearly risen. So, it could pay to consider which asset classes – like private and securitised credits – can hedge against volatility. It will also be important to remain agile and dynamic in investment portfolios given today’s complex macro reality. Market Spotlight Confidence building in Asian real estate There were signs of growing confidence in the Asia-Pacific real estate market last year. Industry data from JLL shows that regional investment volumes grew by 23% year-on-year to USD131.3bn. In Q4 2024 alone, volumes were up by 10% year-on-year, marking the fifth consecutive quarter of annualised growth. Japan set the pace overall, with a second consecutive year of record-breaking deal volumes propelled by the relatively weak yen and low borrowing costs. Developments in mainland China were also notable – where there was further guidance on policy stimulus and early signs of improving demand in some markets, like Shenzhen, hinting at a pick-up in investor interest. There were also signs of recovery in Hong Kong’s office leasing volumes. But sector risks remain. If policy and geopolitical uncertainty prove to be inflationary, it could disrupt the global rate cutting cycle. And with some Chinese property developers in the headlines over default risk concerns, the country’s property market still faces headwinds. Despite that, there are potential grounds for cautious optimism for a continuing revival in Asian real estate in 2025. While the path to recovery is likely to be patchy, regional supply overhang is easing, leasing markets are improving, and global rate cuts should be a benefit. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 14 March 2025. Lens on… A tale of two tech sectors Chinese equities have delivered one of the strongest performances in global markets in 2025, helped by surging momentum in technology stocks. The pick-up has come just as US markets have weakened – led by a slump in ‘big tech’ names, with Magnificent Seven stocks down a combined 15% this year. So, why are Chinese tech stocks doing so well? Recent industry developments – like the emergence of AI start-up DeepSeek and its R1 model – have reset investor assumptions about Chinese tech’s ability to compete for supremacy in fields like AI and robotics. Chinese authorities have also redoubled their support for the sector. This month’s NPC meetings saw plans to accelerate AI adoption and digital tech, with an expansion of the PBoC’s tech industry re-lending programme and a new bond platform to support innovation funding. For investors, evidence of Chinese tech leadership, government support, and sector valuations that remain at a deep discount to the US, have been enough to fire-up optimism. Evidence of new AI and tech advancements benefitting China’s tech sector and other industries could drive a further re-rating for the sector, and the wider market. Make the euro great again There has been a sudden shift in the market mood music surrounding the euro of late. Until recently, the dominant narrative for the single currency was based on weak growth that prevailed for much of last year even as inflation remained high. Yet, the euro has found a base in recent weeks amid a story of fading US exceptionalism and divergent macro momentum relative to the US, where some recent data has been soft. Perhaps more importantly, there is now excitement in FX markets regarding a significant increase in eurozone government spending on energy, climate and, most recently, defence and infrastructure. In places, it’s reignited speculative talk of more fiscal and strategic cohesion across the bloc. These positives for the euro have shielded it from the impact of global trade policy uncertainty which, until recently, had been holding the euro back from strengthening in line with interest-rate differentials. While escalating trade tensions could complicate the story, those rate differentials should remain supportive of further euro strength as the business cycle outlook for the eurozone and the US is re-assessed. The softening in US CPI inflation last week adds further impetus to this divergence story. Vietnam – leading from the frontier Frontier markets have been impressively resilient to global volatility this year, with Vietnam stocks – which account for around a quarter of the MSCI Frontier Markets index – advancing 6% in Q1 so far. A re-routing of global supply chains in recent years has transformed Vietnam into a major manufacturing hub and a global exporter. Government efforts to simplify regulations, cut red tape, and attract foreign investment have paid off, and the country is now gaining a foothold in more advanced industries like semiconductors and AI. While trade policy uncertainty remains a risk, the latest forecasts from the IMF expect Vietnam’s 6% GDP growth last year to be matched in 2025 – outpacing its ASEAN peers. Its moderate debt-to-GDP ratio of roughly 34% in 2024 is also lower than many regional neighbours. In terms of valuations, Vietnamese stocks command a premium to broader frontier markets – with a PE ratio of 16x for MSCI Vietnam versus 11x for MSCI Frontier Markets. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is Vindicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream, IMF World Economic Outlook. Data as at 7.30am UK time 14 March 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 14 March 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Risk appetite remained weak amid continued trade policy uncertainty, with the US dollar index trading sideways. US Treasuries edged higher as investors digested the latest US CPI data in the run-up to the March FOMC meeting, while European government bonds were range-bound. US investment grade and high-yield corporate bond spreads widened significantly, driven by rising worries over US growth. Among stock markets, US indices weakened across the board, led by a sell-off in tech stocks in volatile trading as negative market sentiment persisted. The Euro Stoxx 50 index fell alongside the German DAX index, while Japan’s Nikkei 225 index rebounded after declines in previous weeks ahead of the upcoming BoJ meeting. In other Asian markets, the retreat in tech stocks weighed on the Hang Seng, whereas China’s Shanghai Composite rose. India’s Sensex index fell, as South Korea’s Kospi index ended barely changed. In commodities, oil prices were stable, with gold and copper extending their gains. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/the-fed-put-in-investment-markets/

2025-03-14 07:06

Rising AI adoption broadens the opportunity set in an uncertain world The start of 2025 has brought the acceleration of major changes in the global landscape. DeepSeek’s breakthrough artificial intelligence (AI) model is not only challenging the established dominance of the US but also drawing everyone’s attention to the potential for mass AI adoption. We now see AI as the key to unlocking opportunities across markets and sectors. Meanwhile, tariffs and frictions are shaking up trade and raising inflation concerns, and international relations and policies are becoming less predictable. However, these unfavourable forces are occurring when the global economy is in good health, interest rates are falling in most developed markets, and many corporates are cash-rich. Economists are projecting a respectable GDP growth rate of around 3% for the global economy and 2.3% for the US. While that should offer strong protection against any surprises, we think diversification is as important as ever in the current environment. What does this mean for investors? The underperformance of US equities year-to-date underlines the need for a broader opportunity set. There are two main reasons for this: first, the run-up in equity valuations driven by the Magnificent 7 stocks is pushing investors to look for other options. Second, accelerating AI adoption will create a rush to invest in software and automation across all industries. Governments, too, recognise the need to invest in electrification and infrastructure to grow strategically important industries to stay competitive and ensure security in all of its aspects, including defence and cybersecurity, as well as access to electricity and resources. This trend is happening around the world. So, while the US remains fundamentally resilient, US exceptionalism is waning, and we’re broadening geographically into Asia, where we continue to favour India, Singapore and Japan, as their domestic drivers remain intact. During Q1 2025, we also added China and the UAE to our preferred list. The story of DeepSeek and the enthusiasm over technological innovation has put previously unloved Chinese tech stocks back in the spotlight. Government support is a shared driver for both China and the UAE, leading to more investment in technology-related capex, and the UAE is further supported by its strong structural drivers and the boom in its housing and tourism sectors. Naturally, technology is a direct beneficiary, but the power of technological innovation, intertwined with supporting policies and structural tailwinds, points to opportunities elsewhere too, across IT, Communications, Financials, Industrials and Healthcare. Outside of the Magnificent 7 stocks in the US, we expect earnings growth momentum in the Forgotten 493 companies in the S&P 500 to be increasingly compelling, and adopt a similar strategy in Asia and Europe to capture broadening earnings growth. A need to diversify through multi-asset strategies and non-traditional assets We think geographical and sector diversification can best be delivered through multi-asset portfolios as we aim to exploit structural and tactical opportunities amid rising uncertainty. As the Fed is expected to cut rates further in the second half of 2025, US Treasuries and quality bonds offer attractive returns at their current yield levels. While we lengthened bond durations in Q1 to lock in attractive yields for longer, we’re also leveraging flexible duration strategies to capture any opportunity that arises. In fact, the market dynamics we see in today’s fast-moving world have prompted us to look for an even higher level of diversification by adding renewables, infrastructure and gold as and when appropriate. To go deeper into some of our investment themes, we’ve included an article about the enthusiasm of AI and its implications, and the role of multi-asset strategies in retirement planning – both from our in-house experts. We hope these insights, together with our four investment themes for Q2, will guide your investment journey in the months ahead. https://www.hsbc.com.my/wealth/insights/market-outlook/investment-outlook/rising-ai-adoption-broadens-the-opportunity-set-in-an-uncertain-world/

2025-03-12 12:02

Key takeaways Uncertainty around US tariffs continues… …creating both growth and inflation risks… …with survey data heading in the wrong direction across the board. Global sentiment, both on the consumer and business fronts, has taken a hit in recent weeks, with uncertainty around tariffs, geopolitics and price spikes starting to show up in the data. Subdued data The post election run up in US survey data, risk asset prices and broader optimism has come off the boil in recent weeks. Almost every survey reading that we follow has dipped, some sharply, and the limited hard data we’ve had since the start of the year point to a US economy that may be slowing sharply. Of course, tariffs are a key part of this, and trade-related uncertainties continue to dominate news headlines, with tariffs on Canada and Mexico and further tariffs on Chinese goods coming into force, as well as plans for a much wider set of tariffs on a variety of goods and economies. The early-April decision on reciprocal tariffs for economies with import taxes on US goods looms large for many across the world. Source: Macrobond Source: Macrobond But equally, for American consumers, some are worried about their job prospects from the cuts across government (and the spillovers to private contracts), while others are getting more nervous about inflation – with expectations rising sharply in the latest surveys. How much of that is tariffs, and how much is egg prices remains to be seen. Source: Macrobond Source: Macrobond Confidence remains soft In Europe, where confidence has been subdued for some time, rising energy and food prices threaten the progress made on inflation. Adding the risk of tariffs in the coming months and uncertainty about the geopolitical situation in Ukraine, it’s no surprise that growth in the region has been sluggish. The hope is that the increased spending from Germany helps to turn this around, and that is being reflected in the strong moves in European equities in recent weeks. In Asia, much will depend on the success of Chinese stimulus measures. Faced with the impact of tariffs from the US, policy has focused on the domestic economy, and the National People’s Congress saw the growth target for 2025 set at 5.0% and more fiscal stimulus measures announced. Source: Macrobond Source: Macrobond There is also a question of how much of any resilience seen in the manufacturing data in early 2025 is just front-loading. US imports surged in January and surveys have picked up. But if the decline in shipping rates post the Lunar New Year are anything to go by, it looks like we may be seeing a pay back in demand – suggesting further downside risks. Policy-related uncertainties aren’t likely to go away in the coming months. That makes for a very uncertain world for policymakers, and we expect central banks to be cautious, even if rate cuts are likely to continue. The world, however, needs the confidence to improve. Source: Bloomberg, HSBC ⬆Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➡ Actual is in line with consensus Source: LSEG Eikon, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/macro-monthly/needing-a-confidence-boost/

2025-03-10 08:05

Key takeaways The EUR has outperformed many other currencies so far in March… …supported by the prospect of Germany’s fiscal boost and higher European bond yields. The ECB cut rates again in March, but the path for future easing is still in doubt; the risk of US tariffs looms ever larger. Following Germany’s moves towards looser fiscal policy, the EUR has become the second best performing G10 currency so far this month (Chart 1) and EUR-USD climbed to a 4-month high (Bloomberg, 6 March 2025). On 4 March, Germany's incoming coalition partners, CDU/CSU and SPD, announced a massive fiscal programme of infrastructure and defence spending, involving constitutional changes. The government aims to table the package in parliament before 25 March. The changes will require two-thirds majority in the lower and the upper house, which seems likely, in our economists’ view. The EU has potentially created EUR650bn of fiscal space for defence by the activation of the escape clause from fiscal rules and could provide EUR150bn of loans for defence investment. Allocating funds is one thing, but governments may find it difficult to spend it within the expected timeframe. It is worth remembering that Germany’s 2022 EUR100bn defence fund has almost all been allocated, but less than 25% had been spent by January 2025. Looser fiscal policy will support growth but by how much and over what period remains uncertain. Meanwhile, the risk of US tariffs looms ever larger. A White House announcement imposing trade tariffs on the EU is expected by 2 April. While the FX market is being dominated by big picture topics, like US trade policy and German fiscal policy, EUR-USD has been basically following what its 2-year yield differential has implied (Chart 2). This means the key to the EUR remains the policy outlook for the European Central Bank (ECB). Source: Bloomberg, HSBC Source: Bloomberg, HSBC On 6 March, the ECB cut its rate by 25bp, taking the key deposit rate and the main refinancing rate down to 2.50% and 2.65%, respectively. The decision came as expected, bringing the total easing since June 2024 to 150bp. The ECB said, “monetary policy is becoming meaningfully less restrictive”, and “especially in current conditions of rising uncertainty, it will follow a data-dependent and meetingby-meeting approach". Over the past few days, markets have focussed on the upside growth and inflation risks from the fiscal boost and now see the ECB policy rate ending 2025 at c2.0%, up from c1.80% (Bloomberg, 6 March 2025). https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/eur-usd-hits-4-month-high/

2025-03-10 07:04

Key takeaways The ECB’s delivery of its widely anticipated sixth 0.25% cut of this cycle was overshadowed by German fiscal developments last week. Amid all the recent noise around global trade policy shifts, there has been some positive macro and market developments for the emerging markets universe. Another bout of episodic volatility in global markets last week continued to weigh on US growth stocks. After a rip-roaring run over 2023 and 2024, the S&P 500 Growth index is down 2.5% year-to-date. Chart of the week – China’s policy space China’s annual National People’s Congress got underway in Beijing last week. Against a backdrop of trade tensions and economic headwinds, all eyes were on further policy support. Premier Li Qiang delivered the government work report outlining fiscal targets and policy priorities for 2025. China is once again targeting GDP growth of “around 5%” this year and has lowered the inflation target to 2%, from 3%, reflecting the country’s low inflation reality. The overall tone was growth-supportive and market friendly, with the reiteration of “more proactive” fiscal policy and “moderately accommodative” monetary policy. Rather than new stimulus, the emphasis was on policy execution and clearing implementation hurdles (especially for the property sector and local government debt management). For now, China looks set to take a wait-and-see approach to elevated global economic and trade policy uncertainty. Chinese policymakers have significant policy space to boost domestic demand, if needed. On fiscal targets, the government raised its general budget deficit target to 4.0% of GDP, the widest in decades (up from 3.0% of GDP in 2024). It also plans to issue CNY 1.3trn in ultra-long special treasury bonds (CGBs) this year (up from CNY 1trn in 2024). Local governments will be allowed to issue CNY 4.4trn of new special bonds, up from CNY 3.9trn in 2024. In terms of policy direction, boosting consumption is now a top priority. There is also a focus on technology innovation and upgrading industry, especially through AI and digital tech. The government also pledged more support for the property sector and the stock market. Overall, the plans confirm a Chinese policy put to support growth. In a global context, it comes amid a fiscal sea change in Europe (see next page) and fading US exceptionalism. Market Spotlight Reading the economic tea leaves in Asia Asian manufacturing PMIs have remained in expansionary territory in recent months, partly reflecting export front-loading ahead of potential US tariffs and some seasonal effects. However, recent surveys also reveal some important country differences. In some cases, the latest sentiment indicators are at odds with stock market performance. In India, for instance, a composite PMI of 58.8 in February remained firmly in expansion territory, boosted by services activity. Yet the MSCI India index has been Asia’s worst performer in Q1. Other Asian economies like Taiwan and Indonesia have also posted modestly improving +50 PMIs, and they too have seen their stock markets in retreat. By contrast, PMI data for South Korea showed a shift to contraction territory in February, despite its stock market delivering positive returns this year. While in mainland China, the average January-February manufacturing and composite PMIs, albeit above 50, were marginally lower than their Q4 averages. But mainland Chinese stocks have rallied hard in 2025. Hong Kong equities have also performed well, despite weaker recent PMI readings. So, while PMIs are a useful check on business sentiment, stock markets are driven by more than just macro momentum – sectoral developments, valuations, profits trends, embedded risks, investor sentiment, and even global fund flows all play a part. * Fund transfers include withdrawals from the stabilisation fund, leftover funds carried forward from past year(s), and transfer from state capital budget and government funds. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. Any views expressed were held at the time of preparation and are subject to change without notice. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 07 March 2025. Lens on… Whatever it takes – German edition The ECB’s delivery of its widely anticipated sixth 0.25% cut of this cycle was overshadowed by German fiscal developments last week. Borrowing a famous line from the former ECB President Draghi, Chancellor-in-waiting Merz vowed to “do whatever it takes” to defend the country. While proposed changes to the German debt brake to allow for more defence spending are part of the package, the potential game changer is a EUR500bn (c. 12% of GDP) special infrastructure fund. This will be spent over 10 years and is not subject to the debt brake. The proposals imply much looser German fiscal policy over the coming years, which should support growth from 2026 (it will take some time for investment projects to get up and running). Bund yields surged by over 0.2% on the announcement, diverging dramatically from the trend in UST yields. Despite this, the Euro Stoxx 50 also jumped by over 2%. Low eurozone growth expectations and eurozone equities trading at a significant discount to the US create a low bar for positive economic and policy surprises to drive further eurozone equity outperformance. Some light relief for emerging markets Amid all the recent noise around global trade policy shifts, there has been some positive macro and market developments for the emerging markets universe. First and foremost, in a reversal of well known “Trump trades”, the US dollar has lost ground since the start of the year and US bond yields fell sharply last month. This eases global financial conditions and dollar-denominated debt burdens, and buoys EM currencies. Increasing speculation of a “Mar-a-Lago accord” to weaken the dollar is a reminder that the direction of the greenback isn’t a one-way bet in 2025. Meanwhile, EM underlying inflation continues to freefall, in contrast to US price trends which are displaying signs of stickiness. EM and US inflation could cross paths later this year. Outside of the covid pandemic, this was last seen in 2006 just before “the age of austerity” in the west contributed to keeping inflation rates depressed. Overall, these factors provide breathing space for EM central banks to enact further rate cuts, providing a bulwark against external shocks, while helping to unlock value in many EM asset classes. But as usual, a one-size-fits-all approach to assessing the outlook for EMs risks over-simplification, and a selective approach will be crucial. The X factor Another bout of episodic volatility in global markets last week continued to weigh on US growth stocks. After a rip-roaring run over 2023 and 2024, the S&P 500 Growth index is down 2.5% year-to-date. Recent Growth weakness is not as extreme as it was in late 2022. Back then, US tech was pummelled by the ramp up in interest rates and the dollar rally that weighed on foreign revenues. The post-pandemic run-up in prices rapidly unwound, with Value proving to be the superior factor, benefiting from higher inflation and rates. So where next for the factors in 2025? While the growth-heavy IT and communication services sectors have seen earnings optimism weaken recently, it could be too early for a material retracement in Growth. AI is likely to remain a significant driver of earnings momentum and interest rates remain on a downward trajectory. But recent trends are a reminder that expensive valuations can be a precursor to market volatility. It may also hint at a potential pick-up for left-behind Value. What’s more, in a complex environment where the only certainty is uncertainty, maybe the more resilient and dependable Quality factor could be the winning style in 2025. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Any views expressed were held at the time of preparation and are subject to change without notice. Source: HSBC Asset Management. Macrobond, Bloomberg, Datastream. Data as at 7.30am UK time 07 March 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 07 March 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Market review Risk markets traded mixed amid ongoing concerns regarding US trade policy, with the US dollar index weakening on questions over US “exceptionalism”. In Europe, the ECB lowered rates by 0.25%, with president Lagarde stating that monetary policy was becoming “meaningfully less restrictive”. While US Treasuries were range-bound, a significant shift in German fiscal policy prompted a surge in 10-year German Bund yields, bear steepening the curve, driven by rising supply worries. Among the stock markets, the US saw widespread weakness and underperformed its global peers. The Euro Stoxx 50 index edged higher, as the German DAX rallied and reached a new high. Japan’s Nikkei 225 edged lower as the Japanese yen strengthened. In emerging markets, Asian equities mostly rose, led by the rallies in Chinese equities as policymakers signalled a pro-growth stance at the 2025 NPC meetings. Major Latin American stock markets were up modestly. In commodities, oil fell on rising supply worries, while gold and copper rose. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/chinas-policy-space/

2025-03-05 07:04

Key takeaways Global geopolitics drives economic uncertainty, adding to fiscal woes. UK economic growth has disappointed and expectations for 2025 have been downgraded. Despite the acceleration in inflation, interest rate cuts should continue over the next year. Source: HSBC Global geopolitics has taken centre stage over the last month, from US tariff announcements, to the possibility of a Ukraine-Russia peace deal, a new German Chancellor, and an increase in UK defence spending. Positively, Prime Minister Starmer appeared to have a constructive meeting with President Trump, perhaps lessening the likelihood of direct tariffs on UK goods exports. That said, the UK remains exposed to broader global trade disruption, notably across Europe. The increase in UK defence spending that brought forward plans to reach 2.5% by 2030 will be fiscally neutral due to a reallocation of overseas development aid funding (chart 1). However, further increases, such as ambitions to increase defence expenditure to 2.65% and then to 3% after the next election would, at this juncture, prove a challenge and likely require further spending trade-offs and/or accounting adjustments, such that defence spending is classified as investment spend and wouldn’t fall under the Chancellor’s fiscal mandate to balance current spending with revenues. Indeed, the UK may also participate in multilateral bond-financed funding programmes. Undoubtedly, further increases in defence spending requirements would add to an already complicated fiscal landscape for the Chancellor further down the line. For the looming fiscal statement on 26 March, disappointing economic data since the October Budget and financial market volatility have raised the prospect that the fiscal ‘headroom’ afforded to Chancellor Reeves a few months ago may have been wholly or partially eroded. One response option would be to impose further ‘efficiency savings’ to unprotected departments, in addition to the 2% already announced. Growth and inflation woes resurfaced UK economic data has been mixed, while GDP data showed growth of 0.9% for 2024 overall, yet the private sector is reported to be in recession. Meanwhile, surveys have continued to point to a subdued start to the year, albeit appear to have stabilised. We recently revised down our UK GDP growth forecast for 2025 to 0.9% from 1.4% previously. For inflation, we have revisited our 2025 outlook and now see headline CPI peaking at 3.8% in September. However, the acceleration in price growth is largely externally driven via higher energy prices, water bills, and indexed linked services (chart 3). In contrast, services inflation – the proportion of inflation of most concern to the Bank of England (BoE) – should continue to moderate. As such the BoE continues to signal a gradual path for interest rate cuts as it looks through the “hump” in inflation. The BoE has judged that the risk of second-round inflationary effects is lower than in the last couple of years. However, uncertainty in labour market data continues to be a headache for policymakers in judging the degree to which structural factors have – and could continue to – influence domestic inflationary pressures. At the most recent monetary policy meeting (6 February 2025), the committee seemed to place greater weight on that scenario and a need to be “careful” in cutting Bank Rate. From our perspective, labour market slack is likely to continue to build over 2025, pay growth settlements should ease, while business investment and consumption growth will be modest as global uncertainty and inflationary pressures drag on activity. Source: Macrobond, NATO Source: Macrobond, ONS, HSBC forecasts Source: Macrobond, ONS, HSBC forecasts https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/global-developments-could-add-to-uk-fiscal-troubles/