HAMISH MCRAE: Investors should expect big developments in 2025

So will 2025 be better? The past year has been disappointing for most British companies, for UK 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, the first showing decent growth and the second showing very little. The third quarter was flat and early reports from retailers for November and December suggest that, if anything, things have gotten 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 correct during the year, with the Footsie topping 8,474 in intraday trading in May and the pound reaching over 1, 34 dollars at the end of September. But now they seem desperate.

My other predictions have turned out even worse. Apple’s market value, instead of falling below $3 trillion, has skyrocketed to almost $4 trillion. The 10-year bond yield, far from remaining around 3.5 percent, is now more than 4.6 percent. And as for my expectation that Bitcoin’s value would collapse below $20,000, well, it surpassed $106,000 a few days ago.

The only thing I got more or less right was that UK house prices would rise by 5 per cent. Halifax estimates they were up 4.8 per cent in November and the trend has been increasing, so when we get the 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 hitting it with that terrible Budget. As a result, the reassessment of the UK as a good place to invest has not occurred; in fact, quite the opposite.

But it’s not just about our politics. Inflation went down, but is now rising again. This is driving up long-term interest rates and will hurt growth this year. The continent’s big economies – Germany and France – are in trouble. And the enormous boom in the United States has gained new momentum thanks to Donald Trump’s electoral victory. Why keep your money in bleak Britain when you can get a much better return in buoyant America?

Let’s look forward. Anyone looking to the year 2025 should try to answer two questions. One is: will the UK avoid recession? The other is, when and how will the American boom end?

The official view is that UK growth won’t be too bad. Both the Bank of England and the International Monetary Fund expect it to be around 1.5 per cent, and the Office for Budget Responsibility believes it will be 2 per cent. Well, maybe they’re right, but it’s hard to reconcile this relative optimism with what most companies say. For example, the Confederation of British Industry’s industrial trends survey showed that manufacturing orders are at their lowest level since the Covid pandemic.

What we really don’t know is how small and medium-sized businesses will react to the increase in employers’ Social Security contributions, which will occur in April. These companies employ nearly 17 million people, about 60 percent of the workforce. Will prices increase? Yes of course. Cut staff? Some will, but we don’t know how many.

It’s strange. We hear a lot about the big companies, those whose employees are invited to speak to ministers, but very little about the small ones, which on the whole matter much more. If there is going to be a recession, they will be on the front lines fighting it.

The other great imponderable will be what happens in America. We know that the market boom has to end. It’s already taken on that heady, foamy, over-the-top feeling. But we cannot see when or how that will happen. Nor, even more importantly, how a market correction – or collapse – will affect the real economy. In the long term, the United States will surely dominate the world economy to a greater extent than it does now. In the short term I am worried.

So, some hope. The fact is that the United States will have a calm and measured end to its rise. If it does, the rest of us will survive next year in good shape. If not, great obstacles await us.