What to Watch for in 2025?

While the global economy and financial markets have had a relatively strong year, and economists generally have positive predictions for the year ahead, there are still risks that both economists and investors need to keep in mind.

Optimistic forecasts are certainly welcome, but it’s important to exercise caution when analysts become overly optimistic in any given area. The gap between economists' and analysts' expectations and actual reality can be significant, and there are still many potential risks to consider.

The latest economic outlook from the OECD predicts that the global economy will remain resilient in 2025, with GDP growth expected to continue at a rate of 3.3% in both 2025 and 2026. On the positive side, the steady decline in inflation, which is nearing central banks' targets in many countries, along with low unemployment and nominal wage growth, is expected to lead to stronger real household incomes.

While differences across regions are evident, they may not pose a major issue. In the US, GDP growth is projected to slow to 2.4% in 2026 after 2.8% growth in 2025. In the euro area, however, GDP is expected to accelerate to 1.5% in 2026, up from 1.3% in 2025. Japanese GDP growth is expected to rise to 1.5% in 2025 before falling to 0.6% in 2026, while in China, GDP growth is anticipated to slow to 4.7% in 2025 and 4.4% in 2026.

 

Ukraine and the Middle East

Ongoing conflicts in Ukraine and the Middle East continue to be a significant concern. With no end in sight for the Middle East conflict, and despite the low probability, there is still a possibility that tensions between Iran and Israel could escalate into a larger regional war, potentially involving more Gulf countries or the United States. Such an outcome could result in limited oil supplies or disruptions to trade routes in the region.

The US may also play a key role in the war in Ukraine, with President Trump’s continued support for the embattled country potentially being a crucial factor, as he may seek a swift resolution. In the worst case, pressure on Ukrainian President Zelensky could lead to a conditional ceasefire, though this might increase the likelihood of future flare-ups. Such a situation could also embolden other authoritarian regimes to pursue their objectives through force.

 

Trade Wars

A major topic in 2025 will be the potential escalation of the global trade war, particularly driven by the tariffs promised by the new US President, Donald Trump. While many economists and investors don’t anticipate Trump will immediately impose these tariffs, the worst-case scenario would involve him delivering on his promises, which could include imposing tariffs of up to 20% on all countries and up to 60% on Chinese goods.

Such measures could have a significant negative impact on the US economy and could potentially lead to a halving of GDP growth or even a possible recession. Trump's next move might be to deport illegal immigrants, which would reduce the labor force in certain industries, potentially leading to higher wages and, consequently, increased inflation.

Internationally, the tariffs could particularly harm countries without free trade agreements, with nations such as China, Germany, Japan, Vietnam, Taiwan, Ireland, India, Italy, the UK, and Thailand being among the most affected. While some countries may respond with moderate countermeasures to avoid direct conflict with the US, retaliation is likely to be more aggressive, fueling further protectionism. Weakened currencies against the dollar or actions targeting US tech companies could prompt the US to introduce even more measures, escalating the situation into a full-blown trade war. This could result in a global GDP reduction of between 2% and 3%.

 

Stock Market Bubble

Stock markets have had an exceptionally strong year, with many investors anticipating potential growth of more than 10% this year. Aside from the risk of Trump’s tariffs and the looming global trade war, one of the most frequently discussed risks is the long-predicted bubble, especially concerning large tech companies. These companies have recently benefited from the expansion of artificial intelligence capabilities, the full benefits of which should increasingly be realized in the real economy.

However, if the opposite occurs, and it turns out to be a dead end or if the real impact of AI in the economy proves to be a long-term process, the resulting disappointment could cause a bubble to burst—possibly leading to a scenario similar to the tech bubble collapse in 2000.

In addition to these risks, there are numerous other factors that could significantly impact the global economy and markets, though they are harder to predict. These include the possibility of major natural disasters, another pandemic, or less visible conflicts such as China potentially pursuing its interests in Taiwan through military force. The growing threat of large-scale cyber-attacks, as geopolitical tensions rise, is also a significant concern, as is the risk of a major IT blackout, which could have profound global effects.

Trade safely!