2025 Credit and Economic Outlook
Full speed ahead in a turbulent political landscape
European resilience shines through as Spain, Portugal, and Italy achieve credit rating upgrades, reflecting stronger financial stability and growth opportunities.
Introduction
Despite political uncertainty expected to increase in 2025, we expect corporate results to continue achieving strong growth and investors to have a higher appetite for risk and exposure to longer-term investments than in 2024.
New leaders have taken positions in government, and the physical and trade wars currently active seem to have no intention of slowing down. After one of the busiest years in history for presidential candidates, with 70 countries holding elections, the global political landscape is expected to remain under significant uncertainty, with conflict strengthening and increasing.
Corporate Credit Outlook: Stable Growth Despite Moderate Conditions
In Europe, the credit landscape in 2025 reflects cautious optimism. Inflation levels are back on target, signalling the end of interest rate hikes, inspiring more confidence and a more stable financing environment for companies. On the other hand, global tension and conflict creating tepid macroeconomic conditions may limit revenue growth by companies. However, lower financing costs and improved market stability are expected to help businesses navigate and cushion this environment.
The narrowing of credit spreads for investment-grade and high-yield corporate bonds is a trend supported by the positive rating actions of European economies like Spain, Portugal and Italy. Overall, these three economies have shown resilience in navigating the economic landscape. Rating upgrades in this region highlight their ability to stay strong and leverage market and fiscal stability.
With the interest rate cut cycle concluding, companies are expected to use these improved financial conditions for M&A activity. Covenant-light lending is likely to become more prevalent as a reflection of lender competitive pressures and confidence in the improved borrowing market.
European Banking Outlook: Resilience Amid Change
Given the rating upgrades in countries such as Italy, Spain and Portugal, banks across Europe seem to be entering 2025 with positive momentum. As the interest rate cycle comes to an end with the return of inflation to its target, leading to an increase in stability across Europe, the market risk level decreases.
With non-performing loan ratios coming back to their pre-crisis levels, particularly in the Southern regions of Europe, asset quality across banks remains solid. Despite the positive rating momentum, which highlights the banking sector’s resilience, exposures like commercial real estate still demand attention and vigilance.
The adoption of the Final Basel III Rules signifies minimal immediate impact but can be seen to emphasise long-term stability and comparability of capital ratios. Regarding declining APRs, their competitive pressures will increase, driving banks to optimise and innovate operations to retain and attract new customers while sustaining profits.
Global Sovereign Outlook
Global severing ratings indicate stability and resilience in 2025, thanks to a target level of inflation and low and stable interest rates across Europe. Supported by a more stable microeconomic environment with lower expected market risk and more favourable financing conditions, countries such as Spain, Portugal and Italy have seen improved credit fundamentals, all of which increase sovereign debt sustainability.
GDP growth forecasts expect Spain and Portugal to outpace the broader EU averages. As a result of low and stable inflation and the cutting of interest rates, the emergence of more competitive borrowing costs creates opportunities for sovereigns to refinance their debt while also stimulating foreign growth-oriented investment.
GDP Growth - Outlook 2025
United States: GDP growth expectations for the U.S. are projected to decelerate from 2.8% in Q4 2024 to 2.1%, stabilising around 2% through 2025. While market forecasts for Q4 2025 range from 0.7% to 3.4%, with a median of 2%, we anticipate growth trending toward the upper end of this range, closer to 3%. This optimism is supported by robust corporate confidence in executing growth strategies, underpinned by strong liquidity conditions facilitating M&A activity and long-term capital expenditure.
United Kingdom: UK GDP growth is forecast to rise modestly from 0.2% in Q4 2024 to 0.3%, maintaining this pace until a slight uptick to 0.4% in Q4 2025. We align with the market's 2025 expectations of 0.3%, within a range of 0.2% to 0.6%. Government-led infrastructure and social investments are likely to provide foundational support for economic growth, albeit within the bounds of modest expansion.
European Union: EU GDP growth is expected to decline from 0.4% in Q4 2024 to 0.2%, with a partial recovery to 0.3% by the end of 2025. We expect growth to gravitate toward the lower end of market projections, ranging from 0.1% to 0.2%. Political risks are anticipated to dampen investment and liquidity in Eastern Europe, while Germany’s core industries, particularly automotive, may face headwinds from Chinese competition and elevated U.S. tariffs. However, Nordic and Southwestern European countries are likely to offset some of these challenges, driven by strong corporate performance in international markets and ample liquidity supporting entrepreneurship and innovation.
CPI - Outlook 2025
United States:
The United States CPI is expected to follow a stabilising trend throughout 2024 and 2025, starting at 2.6% in Q4 2024 due to steady core inflation, wage growth, and holiday-driven consumer spending. Inflation is projected to ease to 2.2% in Q1 and Q2 2025 as post-holiday spending decreases, energy demand moderates and supply chains normalise, though summer food prices may create slight upward pressure. In Q3 2025, CPI is forecast to rise to 2.4%, driven by increased summer spending and potential oil price hikes, and remains at this level through Q4, supported by a strong labour market and resilient consumer demand.
United Kingdom:
In the United Kingdom, inflation is projected to fluctuate modestly from Q4 2024 to Q4 2025, shaped by energy costs, wage dynamics, and household demand. CPI is expected to rise from 1.7% in Q3 2024 to 2.4% in Q4 2024, driven by higher winter energy costs and wage pressures. Stability in energy and food prices will maintain inflation at 2.4% in Q1 2025, before marginally increasing to 2.5% in Q2 due to continued wage growth. A further rise to 2.6% in Q3 reflects recovering household demand and discretionary spending, while stabilisation in prices and slower wage growth is expected to bring CPI back to 2.4% by Q4 2025.
European Union:
In the European Union, inflation is forecasted to follow a gradual recovery and stabilisation pattern from Q4 2024 to Q4 2025. After rising to 2.2% in Q4 2024, driven by higher energy demand and tight labour markets in key member states, inflation is expected to decrease to 2.0% in Q1 2025 due to lower post-winter energy prices, increased renewable energy use and weak consumer demand. This 2.0% level is anticipated to persist in Q2 2025 as easing energy and food prices offset wage-driven service sector inflation. By Q3 2025, CPI may dip to 1.9%, reflecting continued disinflation in goods and weaker external demand for exports. Inflation is projected to stabilise at 2.0% in Q4 2025, with holiday-driven spending balancing overall economic normalisation.
Interest Rate - Outlook 2025
United States:
The Federal Reserve is projected to cautiously lower interest rates from Q4 2024 to Q4 2025 as inflation stabilises and economic activity moderates. Starting at 4.375% in Q4 2024, rates are reduced gradually to foster controlled growth while avoiding an overheated economy supported by a resilient labour market. In Q1 2025, disinflation in goods and a need to support economic activity led to a further cut to 4.125%, though persistent core inflation tempers the pace of reductions. By Q2 2025, easing supply chain pressures and lower post-winter energy costs could allow for a drop to 3.875%. As inflation nears the Fed's target, rates are further adjusted to 3.625% in Q3, signalling a shift towards a neutral monetary stance. This level is maintained through Q4 2025 as the Fed prioritises economic stability with inflation aligned with its target.
United Kingdom:
The Bank of England (BoE) is expected to gradually lower interest rates from Q4 2024 to Q4 2025 as inflation stabilises and economic growth remains suboptimal. Starting at 4.75% in Q4 2024, high inflation in the service sector moderates the pace of cuts. By Q1 2025, easing food and energy inflation post-winter, along with sluggish economic growth, prompts a reduction to 4.5%. As inflation aligns closer to the BoE’s target in Q2, rates are further cut to 4.25%, with weak consumer demand driving the need for continued easing. In Q3, inflation stabilises within the 2.4-2.6% range, allowing for a cut to 4.0% as growth becomes the central focus. By Q4 2025, rates will reach 3.75% to support borrowing, consumer spending, and investment, aiming to bolster economic recovery.
European Union:
The European Central Bank (ECB) is expected to progressively lower interest rates from Q4 2024 to Q4 2025 as inflation eases and growth stimulation becomes a priority. Starting at 3.15% in Q4 2024, rates are cut in response to declining inflation and weaker economic activity in member states. By Q1 2025, reduced energy costs and a focus on stimulating growth, particularly in southern EU countries, will bring rates down to 2.65%. With inflation stabilising at the ECB’s 2% target, further cuts to 2.40% in Q2 and 2.15% in Q3 aim to boost consumer spending and investment. By Q4 2025, rates could be maintained at 2.15%, balancing inflation control with gradual signs of economic recovery and sustainable growth.
USD: The November payroll report reflected a rebound following temporary disruptions from hurricanes and the Boeing strike. The U.S. labor market remains at full employment with solid wage growth. Although the dollar initially weakened on a higher unemployment rate, it recovered on stronger-than-expected job and earnings data. While the Fed is likely to cut rates next week, further easing may be constrained by core inflation hovering near 4%.
APG anticipates continued USD strength against G10 currencies unless the Trump administration's initial foreign policies prompt trade tariffs from other countries, which could exacerbate inflationary pressures in the U.S.
EUR/USD: The collapse of the French government was largely priced in by markets, with the euro posting a modest rebound against the dollar by week’s end. However, significant challenges remain, particularly given the government's inability to pass a 2025 budget, placing the responsibility for economic stimulus firmly on the European Central Bank.
This week’s ECB meeting is critical, though institutional resistance to a 50 bp cut has significantly reduced expectations for such a move. Staff forecasts for growth and inflation will be pivotal. The euro is already at historically low levels, and any further downside would likely require a notable downward revision in these forecasts, particularly for inflation.
APG anticipates continued euro weakness through 2025 due to the EU's ongoing struggle to generate meaningful growth. Trade in Germany and France may be adversely affected by Trump’s policies, while political uncertainty in Eastern Europe could undermine the ECB’s efforts, despite stronger performance expected from Nordic and Southern European economies.
GBP/USD: Last week saw limited volatility for sterling due to the absence of significant macroeconomic news. Bank of England Governor Andrew Bailey’s remarks conveyed mixed signals. While he suggested the potential for quarterly rate cuts in 2025 — slightly more aggressive than the three cuts currently priced in by swap markets — he also cautioned that the inflationary effects of the recent budget may necessitate a slower pace of easing.
Survey data remains soft, but hard data shows more resilience. Markets anticipate no rate change at the BoE’s upcoming meeting but are pricing in an 80% likelihood of a cut in February, with a terminal rate projected near 4%, one of the highest among G10 economies. The combination of resilient economic performance and relatively high rates is expected to provide continued support for the pound through 2025.
APG anticipates that increased infrastructure and long-term investment in the British economy will drive job creation, reduce investor uncertainty, and help return inflation to target levels, supporting further GBP strength against G10 currencies.
FX – Outlook 2025
Despite global political uncertainty, robust corporate confidence and favorable financing conditions drive sustained innovation and M&A activity.
Conclusion
In conclusion, APG expects interest rate cuts to continue in most of the world economies, supported by positive GDP growth, contained inflation, and strong business confidence. Due to a positive macroeconomic environment, we expect corporates to benefit from stronger performance metrics and balance sheets, resulting in better leverage ratios and capacity to finance inorganic growth strategies.
During 2025-2026, corporate investment grade maturities are expected to reach 20% of total principal outstanding combined, with 50% of them taking place in 2025, while for High Yield, 17% of total principal outstanding combined, with only a third of them taking place in 2025. As we see stronger performance of companies during 2025 and a higher likelihood of M&A activity to take place during the year, APG expects a significant increase in principal outstanding, predominantly with subordinated debt supporting senior loans for acquisition finance transactions.
Lastly, even though the global economic outlook is positive, it also suggests that the market agents will become more competitive, resulting in financial institutions and private lenders facing lower Net Interest Margin spreads, this puts significant pressure on investors to cherry-pick the ones managing risk proactively and avoiding moving into a covenant light environment that could impact Non-Performing Loans in the future.