The power of geopolitical influence and the economic outlook for the near future

January 2025 by Luís Sancho

Donald Trump came crashing back into the US presidency. His victory, coupled with Republican control of the Senate and the 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 ripe for interest rate cuts, but it remains to be seen to what extent some of the emblematic policies of the new US administration could affect the pace of cuts. 

As in 2024, next year will continue to be marked by a low growth rate, although the likelihood of recession is quite low. The absence of major macroeconomic imbalances combined with more accommodating monetary policies will allow the main economic blocs to move 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 US economy to once again show a higher than expected level of growth, materialized by a greater contribution from private consumption. In this context, it is important to assess the extent to which a more restrictive immigration policy could have a significant impact on migratory flows, cooling the labor market and slowing down consumption levels.

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

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

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

With the two main Eurozone countries mired in political crisis, the omens in the region don't look good. Even so, rising real wages, a falling savings rate, and a labor market with high employment levels should boost private consumption. In addition, the ECB's downward cycle could sustain this dynamic and also boost investment.

Fiscal policy will still have to remain in budget consolidation mode, especially in France, although Germany can also be expected to soften the 'budget 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 in the event of the most extreme scenario of the Trump administration introducing tariffs, penalizing external demand. However, we believe that the economy could grow slightly above 1% by 2024.

In China, despite the introduction of several fiscal and monetary measures to help the economy, difficulties persist. The problems related to the real estate market, alongside a lack of confidence in the private sector and the problems of youth unemployment, continue to condition economic development, with serious repercussions on the development of prices, which continue to be unable to increase. Furthermore, the likely imposition of tariffs by the US will be an additional brake on the recovery of activity. With this in mind, it is expected that China will continue to grow below the 5% levels desired by its authorities. We expect growth of 4.5% by 2025.

After perhaps excessive caution on the part of central banks in reversing the monetary policy cycle, monetary policy will become less and less restrictive in 2025. However, at the moment, it seems clearer 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 showing rather weak growth levels and needs a monetary boost, and because the FED will want to adopt a 'wait and see' approach 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, European short-term credit, especially investment grade, could perform well. With inflation gradually slowing and a European economy that has nevertheless been able to grow, this is a class that stands out for its attractiveness in terms of its risk/return ratio.

Assuming, as in the last analysis, a base scenario in which economies grow modestly and corporate results rise, it seems reasonable to assume that stock markets will rise again in 2025, albeit less significantly. In this context, European stock markets, which are trading below their historical average in terms of valuation, could show interesting potential for recovery, although a strong climate of political uncertainty could dampen their appetite in the short term. It's also important not to forget that the outcome of the war in Ukraine could be more concrete if a ceasefire is reached, which would be a huge catalyst for European stock markets to rise. The US stock market will continue to reap dividends from MAGA ('Make American Great Again') policies and higher levels of growth than its developed counterparts. In the short term, the small and medium-sized enterprise sector could benefit from economic policy measures such as tax cuts and deregulation that will stimulate sentiment and growth, not least because merger and acquisition activity will accelerate throughout the year.

This time, we take a more neutral view towards emerging stock markets. For now, it's hard to see how China will be able to solve its problems, particularly those related to its real estate stock. On the other hand, the introduction of tariffs in various parts of the world will be an element of uncertainty in distinguishing winners from losers in a new framework of closer supply chains. It is worth mentioning, however, that the macroeconomic variables as a whole offer a positive reading.

Although we don't see any major macroeconomic risks, the budget situation in countries like the US and France could contribute to some instability among investors.

The lack of interest in correcting these imbalances in the short term could create some tension in the market, with investors demanding higher interest rates to hold sovereign debts.