Market Research

Macro House View 2025

February 11, 2025

Aerial view of a bridge

Introduction and Key Calls

Author

Wei Luo

Global Research Director, Senior Economist – Insights & Intelligence

Photo of wei-luo

Since the beginning of the year, bond markets have seen dramatic volatility, caught between policy uncertainty and persistent inflation. The U.S. economy remains robust as a result of consumer spending, while the European economy is stabilizing and China is deploying aggressive economic stimulus measures. Inflation has proven sticky, with core inflation seemingly bottoming in the U.S., U.K. and Eurozone, yet supply bottlenecks like housing shortages and supply chain pressures persist.

Policy uncertainty in the U.S., where the Trump administration is rapidly reshaping policies on tariffs, immigration, energy and government spending, is creating ripple effects throughout the global economy. This shift is likely to fuel further volatility, as markets and policymakers react to evolving trade and political dynamics, potentially reinforcing a broader turn toward protectionism.

This outlook presents our latest assessment of the year of economic crossroads ahead. We focus on long term trends, major policy developments and their economic impacts despite significant uncertainty.

  1. Global growth divergence

    Supercharged near-term growth in the U.S. given supply-side deregulation and robust confidence contrasts with sluggish growth in Europe and Asia Pacific.

  2. Sticky inflation and tight labor markets

    Inflation will remain sticky because of wage pressure, robust consumer spending (in the U.S.) and increased tariffs.

  3. Sovereign risks under scrutiny

    Nominal interest rates stay higher for longer, excluding China, as post-QE markets price in sovereign risks. Many economies, especially in Europe, struggle with weak growth and poor demographics.

Keeping Track of Trump’s Policies

The Trump administration has introduced policies to reshape trade, immigration, energy development and government spending. We assessed the most significant policies and made estimates based on current data, historical trends and policy intentions. However, it is crucial to recognize that these projections are inherently fluid and subject to changes:

New Forecasts

Supercharged near-term growth with long-term demographic downside

Our five-year average annual GDP growth forecasts are shown in Figure 1. They are largely unchanged from the previous November forecasts. China's GDP outlook slightly brightens given the government's "whatever it takes" approach to fiscal and monetary stimulus. The U.S. GDP growth is revised upward for 2025-2026, reflecting expectations of fiscal loosening. The five-year average growth has only a marginal increase due to long-term concerns, including larger deficits and potential market distortions if stimulus outpaces productivity gains.

Figure 1: GDP growth, 2025-2029, average % year-over-year (Y-o-Y)

Source: CBRE Investment Management and Oxford Economics as of January 22, 2025. For illustrative purposes only Based on CBRE Investment Management's subjective views and subject to change. There can be no assurance any targets or business initiatives will occur as expected. Forecasts are inherently uncertain and subject to change.

One of the greatest advantages that set the U.S. growth apart from other developed economies was immigration that helped population grow steadily in support of a strong services-driven economy. The greatest downside to our strong U.S. growth forecast is weakened population growth due to low and possibly negative net migration.

We estimate that over the next four years, the Trump administration will deport millions of unauthorized migrants (Figures 2 and 3). The immediate impact on employment will likely be concentrated on the construction, hospitality and agriculture sectors. The continued underbuilding of housing will likely be extended further, causing renter demand to increase and household formation to slow.

We are seeing a global trend of developed economies grappling with an aging population and anti-immigration sentiment. The challenge lies in balancing urgent economic needs with investments in productivity-enhancing sectors, ensuring today's consumption-driven growth does not compromise long-term fiscal resilience. This delicate equilibrium—between addressing current demographic and electoral imperatives and safeguarding future fiscal health—is a defining dilemma for economies worldwide.

Figure 2: Unauthorized immigrant population (millions)

Figure 3: Deported* migrant population (millions)

*Excluding Title 42 expulsions due to the COVID-19 public health order. Deported represents yearly repatriations including administrative returns, enforcement returns and removals.
Source: U.S. Homeland Security, Customs and Border Protection as of 2023, forecast from CBRE Investment Management as of January 22, 2025. For illustrative purposes only. Based on CBRE Investment Management's subjective views and subject to change. There can be no assurance any targets or business initiatives will occur as expected. Forecasts are inherently uncertain and subject to change.

Higher for longer explained

Regular readers will know that we have long been in the higher for longer camp on interest rates and inflation. This perspective has become more relevant as trade barriers, such as tariffs, are rising. Our previous forecasts in November incorporated higher inflation for the U.S. and this time we have moved expected inflation up for most other markets (Figure 4).

The rate-cutting cycle will continue, but at a slower pace. Most central banks believe interest rates are still too restrictive. The European Central Bank, in particular, is looking at more rate cutting to revive growth. For 2025, we expect to see four rate cuts of 25bps in the Eurozone, three cuts in the U.K., three cuts in Australia and two cuts in the U.S. (Figure 5).

Japan is again the exception. The Bank of Japan hiked the policy rate from 0.25% to 0.5% in January 2025, on the back of wage growth momentum, inflationary pressure from trade barriers and a strong need to stablize its currency. We forecast another hike of 25bps in the second half of 2025, marking one more step towards Japan's monetary policy normalization.

Figure 4: CPI inflation, 2025-2029, % Y-o-Y

Source: CBRE Investment Management and Oxford Economics as of January 22, 2025. For illustrative purposes only. Based on CBRE Investment Management's subjective views and subject to change. There can be no assurance any targets or business initiatives will occur as expected. Forecasts are inherently uncertain and subject to change.

Figure 5: Central bank policy rates, % end-of-month

Source: CBRE Investment Management and Oxford Economics as of January 22, 2025. For illustrative purposes only. Based on CBRE Investment Management's subjective views and subject to change. There can be no assurance any targets or business initiatives will occur as expected. Forecasts are inherently uncertain and subject to change.

Before introducing our new bond yield forecasts, it might be helpful to take a closer look at the U.S. 10-year Treasury yield which bears significant implications for others. We decomposed the 10-year Treasury yield into four components:

Expected inflation
This is the break-even inflation implied by the 10-year inflation-linked swaps. Compared to 2019 levels, the market has priced in an increase of more than 50bps, due to concerns of tariffs, aging demographics and large government deficits.
Inflation risk premium
A measure of the premium investors require for the possibility that inflation may rise or fall more than they expect. According to a model developed by the Cleveland Fed, this measure has risen by 20bps from pre-pandemic levels.
Future real short rate
According to the Fisher Effect, this is calculated as the perceived long-run equilibrium rate, or known as the nominal neutral rate, minus expected long-term inflation. Based on our calculation, this factor has narrowed by more than 30bps mainly due to higher expected inflation.
Real term premium
A measure of the premium investors require for holding long-term versus short-term bonds. We use this factor to capture the remaining risk premium implied by the pricing of the 10-year Treasury yield.

Figure 6 demonstrates that the latest volatility in 10-year Treasury yield has been primarily driven by shifts of the real term premium and expected inflation. Expected inflation has largely stablized near 2.5% for an expected five- to ten-year period. Figure 7 maps the real term premium, which explains the majority of yield expansion in the last three years and has underpinned our long standing view of higher rates for longer.

Figure 6: Decomposing the U.S. 10-year Treasury, % yield

Source: CBRE Investment Management, Federal Reserve Bank of Cleveland and Oxford Economics as of January 2025.

In the last three years, the Treasury market went through three periods of rapidly rising term premiums. The first time was in 2022, when the hiking cycle started and the yield curve inverted. The second time was in 2023, when strong economic growth pushed up required yields while concerns mounted over high debt costs and long-term fiscal health. The latest and third time was after the U.S. election, when policy uncertainties regarding inflation and interest rates prompted the Fed's cautious and slightly hawkish tone.

Figure 7: Real term premium, %

Source: CBRE Investment Management, Federal Reserve Bank of Cleveland and Oxford Economics as of January 2025. For illustrative purposes only. Based on CBRE Investment Management's subjective views and subject to change. There can be no assurance any targets or business initiatives will occur as expected. Forecasts are inherently uncertain and subject to change.

In the foreseeable future, we anticipate the level of real term premium to stay in the range of 0.5% to 1%. The estimate leads to a five-year forecast average of 4.25% for 10-year Treasury yields. Risks lean toward yet higher rates as policy surprises may cause the market to overreact and oversell.

The rationale behind the U.S. higher for longer case is conveyed and mirrored in other markets. Figure 8 shows our global bond yield forecasts. Australia and the U.K. are particularly affected with near-term increases in their 10-year government bond yields. In the U.K., investors demand a higher risk premium due to similar inflation and fiscal concerns.

We expect the U.K.'s long-run bond yield to compress more than others based on future rate cuts, as shown in Figure 9. We expect Chinese and Japanese bond yields to trade at similar levels in the long run, due to rate hikes in Japan and major monetary loosening in China.

Figure 8: 10-year government bond yields, 2025-2029, % average

Source: CBRE Investment Management and Oxford Economics as of January 22, 2025. For illustrative purposes only. Based on CBRE Investment Management's subjective views and subject to change. There can be no assurance any targets or business initiatives will occur as expected. Forecasts are inherently uncertain and subject to change.

Figure 9: 10-year government bond yields, %

Source: CBRE Investment Management and Oxford Economics as of January 22, 2025. For illustrative purposes only. Based on CBRE Investment Management's subjective views and subject to change. There can be no assurance any targets or business initiatives will occur as expected. Forecasts are inherently uncertain and subject to change.

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Macro House View 2025