The power of geopolitical influence and the economic outlook for the coming times

January 2025 by Luís Sancho

Donald Trump has arrived, with a bang, once again as president of the United States. His victory, combined with Republican control of the Senate and House of Representatives, will surely dictate the political and economic agenda of 2025. However, the path of the main Central Banks seems quite clear: With inflation under control, it is time to boost economic growth. The time is right for interest rate cuts, but it remains to be seen to what extent some of the new US administration's flagship policies could affect the pace of rate cuts. 

As in 2024, next year will continue to be marked by a low growth rate, although the probability of a recession is quite low. The absence of major macroeconomic imbalances combined with more accommodative monetary policies will allow the main economic blocs to converge towards economic rates close to their potential growth.

In the US, the strength of the labor market was one of the main pillars for the North American economy to once again show a higher-than-expected level of growth, materialized by a greater contribution from private consumption. In this context, it will be important to assess the extent to which a more restrictive immigration policy could have a significant impact on migration flows, cooling the labor market and slowing down consumption levels.

The strong demand for Artificial Intelligence is expected to maintain the investment levels observed in 2024 with special emphasis on the areas of infrastructure and energy.

Like immigration control, the introduction of customs tariffs is one of the cornerstones of the new administration. In this sense, the possible increase in tariff escalation will remain an element of uncertainty for next year, even if the effects will only be felt in the second half of the year.

In this framework, we estimate that US GDP could grow around 2% in 2025.

With the two main countries in the Eurozone immersed in a political crisis, the omens for the region do not appear to be encouraging. Still, rising real wages, a decline in the savings rate and a labor market with high employment levels should boost private consumption. Furthermore, the cycle of reductions by the ECB could sustain this dynamic and also boost the increase in investment.

Fiscal policy will still have to remain in budgetary consolidation mode, especially in France, although it can also be expected that Germany will ease the 'fiscal brake' rules and thereby contribute to an increase in investments in structural areas such as defense and energy independence.

The enormous degree of openness of the Eurozone economy will be a vulnerability if the most extreme scenario of the introduction of tariffs by the Trump administration materializes, penalizing external demand. However, we believe that the economy could grow slightly above 2024 at around 1%.

In China, despite the introduction of several fiscal and monetary measures to help the economy, difficulties persist. Problems related to the real estate market, as well as the lack of confidence in the private sector and the problems of youth unemployment continue to condition economic developments with serious repercussions on the evolution of prices, which continue to have no capacity to increase. Furthermore, the likely imposition of tariffs by the US will be an additional brake on the recovery of activity. In this logic, it is expected that China will continue to grow below the 5% levels desired by its authorities. We are targeting 4.5% growth in 2025.

After perhaps excessive caution on the part of Central Banks in reversing the monetary policy cycle, this will be increasingly less restrictive in 2025. However, at this point, it seems more obvious to us that the European Central Bank is in a position to lower its rates more quickly than the Federal Reserve, both because the eurozone economy is experiencing very weak growth levels and needs a monetary boost, and because the FED will want to adopt a 'wait and see' stance in order to calibrate its policy with the new political environment that will begin to take shape over the next year.

In the short term, short-term European credit, especially investment grade, could perform well. With inflation gradually slowing down and a European economy that has still been able to grow, this is a class that stands out for its attractiveness in terms of risk/return.

Assuming, as in the last analysis, a base scenario in which economies will grow modestly and business results will rise, it seems reasonable to assume that stock markets will rise again in 2025, although less significantly. In this context, European stock markets, which in terms of valuation are trading below their historical average, could show interesting recovery potential, even though a strong climate of political uncertainty could reduce appetite for them in the short term. It is also important not to forget that the outcome of the war in Ukraine could take on more concrete consequences in the achievement of a ceasefire, something that would certainly constitute a huge catalyst for the appreciation of European stock markets. The US stock market will continue to extract dividends from MAGA ('Make American Great Again') policies and higher growth levels than its developed counterparts. The small and medium-sized enterprise sector, in the short term, could benefit from economic policy measures such as tax cuts and deregulation that will stimulate sentiment and growth, especially as mergers and acquisitions activity will accelerate throughout the year.

This time, we take a more neutral view of emerging stock markets. For now, it is still difficult to see how China will be able to resolve its problems, particularly those related to its real estate portfolio. On the other hand, the introduction of tariffs in several areas of the world will be an element of uncertainty in distinguishing winners and losers in a new framework of closer supply chains. It is worth mentioning, however, that the set of macroeconomic variables offers a positive reading.

Although we do not foresee any major macroeconomic risks, the budgetary situation of countries such as the USA and France could contribute to some instability among investors.

The lack of interest in correcting these imbalances in the short term could create some moments of tension in the market, with investors being able to demand higher interest rates to hold sovereign debt.