Global Outlook 2025: Between Normalization and Geopolitical Risk

Trump 2.0: what are the consequences for the US and global economy? Fiscal sustainability and political tensions: Europe between a rock and a hard place? Central Banks normalization: where and when does it stop? What will be the best market and asset allocations? Who will be the winners and losers in emerging markets? Is the energy transition at a turning point in 2025?

These are some of the topics addressed by Jean-François Robin and his team of economists last Tuesday in a 100% digital conference. French and English sessions available.

2024 will have been the year of elections, with 2 billion inhabitants called to vote across more than 70 countries, and that of a pivot towards rate cuts and lower inflation.  2025 will be one of normalization and divergence.

Macroeconomic normalization, with global growth expected to remain robust at around 3%, slightly down from 2024. Indeed, the two main engines of the global economy, the United States and China, are expected to stay on track, with anticipated growth rates of 2.7% and 4.5%, respectively.

Divergence, particularly due to the election of Donald Trump as the 47th President of the United States, which appears as a game changer, and geopolitical uncertainties.

This time, Donald Trump is invested with a very clear mandate, with the popular vote and a majority in Congress and the Senate. He should therefore be more assertive than in 2017: "promises are made, they will be kept."

The measures announced by Donald Trump focus on three main positions: massive people deportation; tariffs on trade; deregulation and fiscal stimulus, with an increase in public spending.

He has just confirmed applying 25% tariffs on his two main trading partners, Canada and Mexico, and is starting with 10% for China. He has not yet positioned himself on Europe.

These measures will be inflationary, which will prove, in the long term, negative for growth. A fall in immigration, and as a result in the labor force, will weight on wages and consumption. The tariffs will weigh on the trade balance. If we add other parameters, such as consumer and market confidence, and a declining savings rate, we have raised our forecasts for the Fed's landing rate from 3% to 3.5%.

What are the consequences for the rest of the world? The IMF has announced a 0.8% reduction in global growth in 2025, and -1.3% in 2026 if all of Trump's tariffs are implemented.

Trump's announcements are primarily aimed at China. Even though China’s trade exposure to the US has declined to 2.8% of its GDP from 3.5% in 2017, this adds to a somewhat weak period for the country. In response, China will likely gradually depreciate the yuan to gain a competitive advantage. It will also pursue a favorable budgetary policy especially for SMEs.

China will also seek alternative markets to export its surpluses, to begin with Europe, as its main trading partner, which will likely respond to Chinese imports with tariffs. Chain reactions are expected.

Europe will therefore find itself between a rock and a hard place. Between the United States, which are likely to impose tariffs, and China trying to export its surpluses to Europe. On the geopolitical front, Europe will also have to organize itself without Trump, who will stop aid to Ukraine.

France will have to deal with a rising debt trajectory that is expected to stabilize at 120% of GDP and the excessive deficit procedure opened by the European Commission. This could weigh on its credit rating outlooks, while it should not be downgraded in 2025, except possibly by Moody’s, to align with other agencies. We are forecasting a growth rate of 0.9%, slightly down from 2024.

We might witness a convergence between French and German deficits, as the later, appealed to the polls in February, might initiate a wide range of supply side measures and reform its “debt brake”.

Southern European countries are doing well, particularly Spain, the European success story, which is expected to record 3% growth on the back of a strong labor market fueled by migration flows, tourism benefiting from a shift in destinations due to COVID, and export growth.

How does this translate on government bond markets: the BTP-Bund spread has decreased by 40 basis points since the beginning of the year, while the OAT-Bund has increased by 40 basis points. The political risk premium is currently borne by France.

We are projecting a spread of 65 basis points at the end of 2025 on the OAT, with a risk of a peak at 80 in June, as the market might anticipate a risk of dissolution of the National Assembly, while the BTP spread is expected to end the year at 110 basis points.

In the face of this rather weak growth in the eurozone, with inflation contained more quickly than expected, and the threat of US tariffs that could take away 0.25 points of growth, the ECB is expected to accelerate the rate cuts initiated in 2024.

We expect a rate cut of 25 basis points at each ECB meeting, to end the year at 2%. The markets are even more pessimistic, pricing in a policy rate of 1.75%.

In this context, what assets should be prioritized? Starting with the forex market, the king dollar is asserting itself as the big winner of the US elections, showing an impressive rise since the arrival of the new occupant of the Pentagon.

These levels seem difficult to sustain: even though Donald Trump has reaffirmed his desire for dollar to remain the world's primary reserve currency and threatens to impose 100% tariffs on anyone seeking to de-dollarize, it weighs on the competitiveness of US exports. We should land at 1.08 against the euro by the end of 2025.

The losers will be those with which the US economy has a large trade deficit. We have seen that China will likely depreciate the yuan to maintain its competitiveness. India and its rupee should benefit from Trump's policies. The Mexican peso will suffer.

Will US Tech be the other big winner of the arrival of the business-friendly president and fervent supporter of deregulation, closely advised by Elon Musk? Trump has promised to roll back President Biden’s Executive Order on the Safe, Secure and Trustworthy Development and Use of Artificial Intelligence.

For the time being, the Trump effect is unlikely to give the tech sector any real impetus, especially as current equity valuations are much higher than in 2016, and a post-election change in interest rate outlook is not conducive to a further valuation boost. The Nasdaq performed slightly at +2.2% since the election.

Tech investors will focus on fundamental questions, including capex: Are the industry's massive CAPEX programmes generating the expected returns on investment? Can the alleged productivity gains from AI be measured at last and do they justify broad and rapid adoption of the technology? Is generative AI now reaching a plateau in terms of performance and if so, where should the next wave of investment be directed?

Trump's election brings uncertainties regarding inflation and interest rate volatility. In terms of asset allocations, economists propose three strategies: reduce bond duration and move towards shorter-term government bonds. Stay long on US stocks even if valuations are high: there is still potential for growth in the S&P 500 and potential outperformance for the S&P500 Equally Weighted. Hedge risks: commodities and alternative strategies can serve as a hedge against geopolitical and inflation/stagflation risks.

Will real estate, whose performance is strongly correlated with interest rate movements, benefit from the context of rate cuts? Our economists expect a continuation of the flattening of the yield curve and a dynamic search for term premium.

As rents continue to rise, and the market remains generally under-capacitated with a mixed construction pace, most segments are expected to recover in 2025. Particularly logistics and residential, which benefit from solid fundamentals.

The best-located and designed offices should see renewed interest, as well as healthcare real estate. Data centers, at the intersection of real estate and infrastructure, present an attractive risk profile driven by the digital transition.

Finally, our economists addressed one last point about the energy transition. Will a climate-skeptical, pro-hydrocarbon president who repeatedly stated that he would seek to repeal the Inflation Reduction Act sound the death knell for efforts to combat climate change?

The rise of populist governments in various countries further clouds a picture that our economists do not view as so bleak. The energy transition remains a very impressive underlying dynamic: for every dollar invested in oil, gas, and coal, 2 dollars are invested in renewable energy.

The world is electrifying. In China, 50% of new registrations in 2025 will be electric. In Europe, stricter CO2 regulations and more affordable electric vehicles are expected to boost EV sales. In the US, the Trump-Musk duo is poised to initiate a clear slowdown, potentially exacerbated by the elimination of cash incentives for purchasing electric cars. The topic of autonomous vehicles could resurface as a strategy for Musk's Tesla to position itself for future growth.

The session concluded with a point on oil and gas markets. Trump's impact is likely overstated, with prices more influenced by OPEC's management of weakening fundamentals. Brent crude is expected to average $73.3 per barrel in 2025, with a floor at $70, as global oil demand grows modestly. In contrast, non-OPEC supply is projected to rise by 1.3 million b/d, mainly from Brazil. Trump's ability to boost U.S. production is limited, and his approach to Iran will focus on military deterrence and sanctions, although Iran's exports may remain resilient due to its shift towards Chinese customers. Escalating tensions with Israel could also pose risks to Iranian exports and affect global energy markets. For gas, 2025 will be a transition year, awaiting new gas projects in 2026.

Finally, regarding transition metals, in its tit for tat economic war with the US, China could use a weaponization of minor metals and rare earth elements, 95% of which it extracts and refines. This would cause a major supply issue to US value added products.