Outlook for China

China’s business cycle used to be highly correlated with the US business cycle because of Chinese exports to the US.

But the business cycles in China and the US have decoupled for three reasons:

1) China’s working-age population is declining. The US working-age population is growing.

2) Chinese home prices are falling. US home prices are rising.

3) The US and Europe have imposed tariffs and want to produce more goods at home. This is negative for Chinese exports.

The bottom line is that the Chinese economy is facing three significant headwinds from demographics, housing, and trade that are weighing on growth.

Our latest outlook for China is available here.

Chinese share of exports to US, EU, and Japan declining
Source: General Administration of Customs, China; Haver Analytics; Apollo Chief Economist
Beijing home prices falling
Source: BIS, Haver, Apollo Chief Economist
China: In 2000, there were 10 workers per retiree. Today there are 5.
Source: UN, Haver, Apollo Chief Economist

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Euro Area Services Inflation Sticky at 4%

Services inflation in the euro area is sticky, driven by labor shortages, solid wage growth, and low productivity. This limits how much the ECB can lower interest rates, even with weaker overall growth, see chart below.

Services inflation in the euro area sticky at 4%
Source: Eurostat, Bloomberg, Apollo Chief Economist

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The US Economy Is in Great Shape

The incoming data continues to show a strong US economy with tailwinds from data center spending, AI spending, defense spending, and government spending via the CHIPS Act, the IRA, and the Infrastructure Act.

Combined with additional tailwinds to growth from high stock prices, high home prices, high crypto prices, Fed cuts, higher animal spirits, and potential Trump policies, the bottom line is that the US economy is entering 2025 on a firm footing. 

With GDP currently at 3.1% and core inflation at 3.2%, we continue to worry more about upside risks to growth and inflation.

Our latest chart book with daily and weekly indicators for the US economy is available here.

Weekly bankruptcy filings
Note: Filings are for companies with more than $50 million in liabilities. For week ending on January 16, 2025.
Source: Bloomberg, Apollo Chief Economist
Announced job cuts remain low
Source: Challenger, Gray & Christmas; Haver Analytics; Apollo Chief Economist

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Giving Homeowners Access to Their Housing Wealth

Home prices have increased significantly across countries, and it is ultimately a political decision in each country if homeowners are able to tap into the high value of their house.

Home equity release products allow homeowners, including retirees, to access their equity to improve their standard of living and have the potential to help households through significant financial shocks.

These products are broadly categorized as reverse mortgages, home reversion, and sell and rent back.

The US and UK are the largest markets for reverse mortgages; home reversion is popular in France, Germany, Italy, and Poland; and sell and rent back is prevalent in Australia, the Netherlands, and the UK. 

Type of home equity release products and payouts possible, by country
 Source: OECD, Apollo Chief Economist

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Where Do Undocumented Immigrants Work?

The two industries with the largest percentage of undocumented workers are construction (14%) and agriculture (13%), see chart below.

More undocumented immigrants in construction and agriculture than in other sectors
Source: American Immigration Council analysis of the 2022 1-year American Community Survey, Apollo Chief Economist

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The Impact of Tariffs on the Fed

The Tax Foundation estimates that if 60% tariffs are imposed on China and 20% on everyone else, the average tariff rate will increase to 17.7%, see chart below.

With imports making up 14% of GDP, the impact will be a jump in inflation, potentially as high as 0.5 percentage points.

With core PCE inflation already too high at 2.8%, significantly above the Fed’s 2% inflation target, this could force the Fed to raise interest rates again.

The Tax Foundation estimates that overall tariffs could rise to 17.7%
Note: The 17.7% figure represents a weighted average of the proposed tariffs, a universal 20% tariff on all imports and an additional 60% tariff on Chinese goods. These tariffs are applied to the current import values, and considering the share of imports from China, the average rate for 2025 has been estimated. Source: Tax Foundation, Apollo Chief Economist

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Long Rates Are Too High

Long-term interest rates have disconnected from Fed expectations, and a simple model of the relationship shows that 10-year rates are now 40 basis points higher than what Fed expectations would have predicted, see chart below.

The rise in long rates above and beyond what has happened with Fed expectations is consistent with the observed increase in both the New York Fed’s measure of the term premium and the San Francisco Fed’s measure of the term premium.

The worry in markets is that the additional premium in long-term interest rates is driven by fears about fiscal sustainability.

Long rates have disconnected from short rates recently
Source: Haver Analytics, Bloomberg, Apollo Chief Economist

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Strong Foreign Demand for US Treasuries

When the Fed started raising interest rates in March 2022, foreign private investors started buying a lot more Treasuries because they liked the higher level of yields, see the first chart below.

Japan is the biggest foreign holder of US Treasuries. With rates higher for longer, the latest data shows continued strong demand from Japan.

Our updated chart book looking at Japanese demand for US Treasuries is available here.

Japanese demand for US Treasuries
Foreign purchases of Treasuries come mainly from the private sector
Source: Treasury, Haver Analytics, Apollo Chief Economist
Japan owns $1.1 trillion in US Treasuries. China owns $760 billion.
Source: Bloomberg, Apollo Chief Economist
USD/JPY has appreciated 10 points less than predicted by US/JP interest rate differentials
Source: Bloomberg, Apollo Chief Economist
Wage growth in Japan at 30-year highs
Source: Bureau of Labor Statistics, Haver Analytics, Ministry of Health, Labor and Welfare Japan, Bloomberg, Apollo Chief Economist
Japan: Long run inflation expectations rising. This is a problem for the BoJ.
Source: Bloomberg, Apollo Chief Economist
Japanese net purchases of foreign bonds
Source: Ministry of Finance Japan, Bloomberg, Apollo Chief Economist

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2025 Credit Outlook: Defying Gravity

  • Following the strong performance of 2024, credit markets are entering 2025 in a solid position. While at first glance, it may appear that risks are one-sided given spreads are near multi-year tights across several segments of the credit market, we expect the fundamental and technical backdrop to remain strong.
  • Still, we believe there could be some headline risk associated with the implementation of the incoming US administration’s policies—from tariffs, immigration, and fiscal policy—which could potentially inject more volatility into markets.
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Other Key Takeaways

  • We expect the relationship between banks and private credit firms will continue to turn more symbiotic through strategic alliances. Initially targeted at the sub-investment grade market, we expect these partnerships will eventually extend to investment grade (IG) companies as well: While public IG funding is widely accessible, the lack of flexible financing solutions available today can create an opportunity for private credit providers.
  • Another key theme for the new year will likely be the rising demand for data center capacity and associated infrastructure, which we estimate will require more than $2 trillion over the next five years. Given the sheer size and unique characteristics of many of these projects, we think that bespoke, privately originated, IG financing will be part of the capital solution to finance this investment.
  • As 2025 progresses, we expect investors will turn their attention to the next sub-investment grade maturity wall with over $620 billion of high yield bonds and loans set to come due in 2026 and 2027.¹ We saw some notable differences in the way many of the 2024/25 maturities were addressed which could suggest a large opportunity for private credit to reprise its role as alternative financing option for companies with upcoming maturities.

1Sources: JPMorgan, Bloomberg, S&P/IHS Markit

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The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the end of this document for important disclosure information.


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