HAMISH MCRAE: Investors can expect some big bumps in 2025

So will 2025 be better? The past year has been disappointing for most of British business, for British investors – unless they have a lot of their money in the US – and for those of us who predicted better times a year ago.

We start from an uncomfortable position. It has been a year of two halves, with the first showing significant growth and the second very little. The third quarter was flat and initial reports from retailers in November and December indicate that the situation has become even worse.

My own predictions from a year ago that the FTSE 100 index would rise to 8,500 and the pound to $1.40 looked good over the year, with the Footsie topping 8,474 in interday trading in May and the pound reached over $1.34 at the end of the year. September. But they look hopeless now.

My other predictions have turned out to be even worse. Apple’s market value, instead of falling below $3 trillion, has skyrocketed to almost $4 trillion. Far from remaining around 3.5 percent, the yield on 10-year government bonds is now above 4.6 percent. And as for my expectation that Bitcoin’s value would fall below $20,000 – well, a few days ago it surpassed $106,000.

The only thing I was more or less right about was that house prices in Britain would rise by 5 percent. Halifax calculates they are up 4.8 per cent in November and the trend is upward, so if we get December numbers we should be there.

So what went wrong? The easy answer is that the new government has been far less competent than we could reasonably have expected, saying the economy was in a mess when in fact it was growing very well, and then smearing it with that terrible budget. As a result, the reassessment of Britain as a good place to invest has not taken place; indeed quite the opposite.

But it’s not just our politics. Although inflation has fallen, it is now rising again. That drives up long-term interest rates and will hurt growth this year. The major continental economies – Germany and France – are in trouble. And the enormous boom in the US has been given new impetus by the election victory of Donald Trump. Why keep your money in dreary Britain when you can get much better returns in booming America?

Let’s look ahead. Anyone peering toward 2025 must try to answer two questions. One is: will Britain avoid a recession? The other is: when and how will the American boom end?

The official view is that British growth will not be too bad. The Bank of England and the International Monetary Fund both expect this rate to be around 1.5 percent, while the Office for Budget Responsibility thinks it will be 2 percent. Maybe they’re right, but it’s hard to square this relative optimism with what most companies are saying. For example, the Confederation of British Industry’s Industrial Trends Survey shows that manufacturing orders are at their lowest level since the Covid pandemic.

What we really don’t know is how SMEs will respond to the increase in employer national insurance contributions, which will take place in April. These companies employ almost 17 million people, approximately 60 percent of the workforce. Will they raise prices? Yes of course. Cut back on staff? Some will, but we don’t know how many.

It’s strange. We hear so much about big businesses, whose people are invited to speak to ministers, but very little about small businesses – which matter much more in aggregate. If a recession comes, they will be on the front lines fighting it.

The other big unpredictable thing will be what happens in America. We know that the market boom must end. It has all that heady, frothy, over-the-top feeling. But we can’t see when or how that will happen. Nor, more importantly, how a market correction – or crash – will affect the real economy. In the long run, the US will certainly dominate the global economy to an even greater extent than it does now. In the short term, I’m concerned.

So a lot. It is that the US will have a quiet and measured end to its boom. If that happens, the rest of us will get through the next year in good shape. If not, there are big bumps ahead.