Year 2025: Wonderful and Terrifying

Trump will destroy the dollar, China will send $7 trillion dollars to stimulate its economy, and electrification will kill OPEC. These are just some of the “scandalous” predictions that SAXO Bank, as it does every December, publishes for the coming year. However, events in the recent past have shown us that making predictions can be a real gamble, as geopolitical, economic, and financial uncertainty leaves open scenarios that today may seem only a figment of the fevered imagination. Many cling to the hope or simply the illusion that after the inauguration of the US president on January 20, 2025, many of the clouds that now hang over the future will dissipate, but this will depend on how many and, most importantly, which of the promises made during the heated election campaign will actually be adhered to by the new US administration.

To drum up even more fear, as if the geopolitical crises already taking place were not enough, several political crises unexpectedly occurred at the end of 2024. In Syria, after a sudden and unimpeded march on the capital by rebel forces, the president fled Damascus, leaving a divided country with many unknowns about its future territorial integrity and, more generally, about the stability of the Middle East, given Israeli and Turkish claims in the region. In South Korea, the incumbent president overnight first declared martial law and had the Parliament attacked by special forces, then suddenly backtracked because of the unanimous vote of the Parliament itself, withdrew his decision, and is now himself embroiled in an impeachment trial that could bring South Korean political life to a standstill, which risks very serious consequences also for the economic situation in this Asian country. In Europe, the political situation also seems to be seriously deteriorating due to the growing domestic economic problems each country is facing. In France, just three months after the election, the president was forced to replace the prime minister, the fourth in a year, a negative record for the country, following a vote of no confidence in parliament, motivated by disagreements over the national budget. Germany will hold its first early elections in two decades due to disagreements on economic issues within the ruling coalition that led to a vote of no confidence in Chancellor Olaf Scholz by the Bundestag. On the other side of the Channel, British citizens have also suffered in recent years from political uncertainty that was not there before, given the change of four prime ministers in five years, none of whom were able to offer effective solutions to the country’s economic problems. Even on the other side of the Atlantic, the political situation presents a number of unknowns. In Canada, following the resignation of the finance minister, increasingly persistent but still unconfirmed rumors have begun to spread that the Canadian prime minister intends to leave office and lead the country into early elections, raising questions about the country’s political and economic future. In the United States, on the one hand, the world’s attention is focused on the future political and economic line of the newly elected president, and on the other hand, we see an attempt by the outgoing administration to leave Trump a legacy of more problems than those already accumulated before the November 2024 elections in order to complicate the work of the 47th president of the United States.

Thus, political instability is based primarily on unresolved economic problems, which may become even worse in the future. Despite the uncertain political climate in various countries and the continuation of geopolitical conflicts, many analysts predict that the world in 2025 will not face a recession after all, thanks to the improvement in the financial climate, which is facilitated by the cycle of lowering the cost of money implemented by many of the world’s central banks, especially the US Federal Reserve (Fed). Lower benchmark interest rates, especially on the dollar, could actually not only support but also push financial markets higher, slowing the economic decline in many countries. The reversal of monetary policy and subsequent rate cuts were justified by central banks to slow inflation, which, however, seems to be rising again after interventions by the central bank. In the USA, inflation rose from 2.4% in September 2024 to 2.7% in November, while in Europe it rose from 1.7% in September 2024 to 2.3% in November. Therefore, a return of inflation to growth could force central banks to reconsider their monetary policy choices as early as 2025, increasing uncertainty about possible future interest rate cuts.

However, the desire to renew the fight against inflation may not be followed by a decision to return to restrictive monetary policy, as financial markets, especially in the USA, have become dependent on cheap liquidity. Throughout 2024, there were rumors of a new possible wave of regional US bank failures, which the Fed appears to have partially avoided or at least postponed by introducing tools such as the Bank Term Funding Program (BTFP), through which banks can increase liquidity by pledging the US Treasury bonds they held at their face value rather than at a lower market price. However, the state of the US banking system remains under scrutiny: as of October 2024, US banks have recorded outflows from their deposits of $133 billion, excluding seasonal fluctuations on an annualized basis.

Liquidity risk remains so high that the volume of reverse repurchase transactions collapsed, shrinking to the level of May 2021. (Ed. note: repurchase agreements under which an operator buys securities on the spot, transferring liquidity, and simultaneously undertakes to resell them in the future at a predetermined price, which includes the interest rate set at the time of signing the contract.)

Despite the injection of liquidity and lowering interest rates, the Fed’s actions don’t seem to be enough to help the banking system, much less ease the US Treasury Department’s budget problems. The decline in the benchmark dollar rate has not translated into lower US Treasury bond rates, which are higher than they were in September 2024 and even higher than early this year. In this context, the US Treasury Department will have to pay approximately $900 billion in interest accrued on its debt in 2024 alone, which is three times the amount paid in 2020. The continued expansion of the mass of US public debt, which has increased by another $2 trillion in 2024 alone, thus has reached a total of 36 trillion dollars. The main problem is the lack of control over the growth of the debt mass itself, which, unless decisive measures are taken to reduce public spending, could grow uncontrollably even in 2025. However, the huge amounts of accumulated debt are a problem not only for the USA: they indeed are and will remain a global problem. In fact, by the end of 2024, global public and private debt will reach 323 trillion dollars, and projections – not just for 2025 – show a further expansion due to all these countries issuing new public debt to cover their national budget deficits. By 2028, sovereign debt could reach 130 trillion dollars, which is 34% above the $97 trillion in 2024, increasing the risk of new turbulence in the bond market, which will be forced to absorb new amounts of issued sovereign debt.

Thus, if increased volatility in financial markets can be expected, the continued expansion of public debt could put a brake on the global economy, which has already begun to send signs of weakness and instability starting in the second half of 2024. Many companies have already announced layoffs and downsizing: Boeing laid off 10% of its employees, Tesla 10%, Citigroup 8%, Microsoft 8%, Deutsche Bank 4%, BlackRock 3%, Nike 2%, Morgan Stanley 1%. In the USA, the technology sector was the hardest hit, with about 150,000 jobs cut. And in Europe, 2024 was no better, as several companies such as Banco Santander, Unicredit, Equinor, ThyssenKrupp, Auchan, Airbus, Unilever, and many others faced further demand cuts and increased already high production costs, stating they wanted to cut thousands of jobs, wages, and working hours, so to contain costs. Hit the hardest was the auto sector, which today, along with its related industries, seems to be heading for a real crisis. In the second half of 2024, car manufacturer Volkswagen (VW), which never decided on cutting production, announced the closure of two production sites in Germany, later to be increased to six, putting tens of thousands of jobs in jeopardy. VW is not the only company in the industry that has made staff cuts: Stellantis, Bosch, Ford, Michelin, Schaeffler, Daimler, Audi, BMW have already announced their intentions to reduce staff in Europe. European automakers are succumbing to competition from Chinese rivals, who have become the world’s largest car exporters over the past 5 years, overtaking the Germans. The difficulties of the automotive sector demonstrate that the European economy is indeed in trouble, as Germany, this former “locomotive” of the continent’s economy, is no longer able to economically lead, or rather drag, the rest of Europe. German industrial production is still 10% below 2019 levels and seems unable to recover as, according to a study by the Institute for German Economics, 40% of German companies said they plan layoffs and staff reductions in 2025.

Germany, in the current political and economic context, has become a symbol of European “deindustrialization” – the process by which industry moves to countries where lower production costs and particularly energy costs allow it to maintain its competitiveness. The strongest impetus to deindustrialization comes from short-sighted choices about national energy security. The German government is essentially unwilling to revise its energy policy despite the changes that follow one after another. For example, the blunt refusal to reconsider its position on nuclear power stands in stark contrast to the renewed global interest in this source of energy supply. The intransigent desire to buy more expensive liquefied natural gas (LNG) from the United States instead of cheaper Russian gas contrasts with Germany’s firm austerity policy to support the state budget. The consequences of these poor energy choices have already begun to show: in mid-December 2024, the price of electricity on Germany’s spot market soared to €936 per MWh, a new maximum compared to the peak in 2022, which has strongly encouraged Sweden to demand that the German electricity market be divided into territorial zones to avoid future price spikes and prompted Norway to consider restrictions on electricity exports.

Among the European countries, not only Germany faces new and old energy security challenges. The desire of European bureaucrats to promote the continent’s energy transition and electrification at all costs is causing more problems than it should solve. Electricity prices in European markets are rising rapidly because not only is renewable electricity generation proving to be insecure and intermittent, but also the decline in natural gas electricity generation is not being offset by an increase in renewable electricity generation. To meet the targets set by the European Commission for 2030 and 2050, Europe must invest approximately 1.6 trillion dollars per year, while investments made and planned do not exceed 400 billion dollars per year, thus confirming the impossibility of achieving the energy transition within the set timeframe.

European energy security will continue to be a topic of discussion, given the risk of volatility and possible further increases in gas prices. The agreement on the transit of Russian gas through Ukraine actually expires on December 31, 2024, and the latter’s desire not to renew the contract with Russia will force European countries to replace the remaining volumes of Russian gas, about 15 million cubic meters in 2023, with new supplies of LNG, for which a higher premium could be charged. Further increases in the cost of energy supply could also be accompanied by new tariffs and duties imposed by the new US administration. According to Goldman Sachs analysis, it is the uncertainty in relations and trade that will cause more damage to Europe than the tariffs themselves, reducing GDP by at least 0.5%. Despite this, the US bank expects Europe to avoid recession, although the same GDP forecasts for Germany and France point to contractions of 0.3% and 0.7% respectively. Much more eloquent than the GDP data, however, are the figures for labor productivity in Europe, which, after falling 1.1% in 2023, has not returned to growth in 2024, thereby widening the gap with the USA, which, however, recorded growth of 2.6% at the end of 2023 and 2.2% in the third quarter of 2024, so much so that the question arises as to whether Europe, at this point, is not really in a deep crisis of competitiveness.

Therefore, the year 2025 and, more generally, the medium-term future will highlight what Europe’s role on the world chessboard will be, as European countries may see their influence diminished, running the risk of becoming an irrelevant player both financially and industrially, because they will be overwhelmed by the United States and China, and geopolitically, because conflicts, present and future, will be settled without any consultation either with European heads of state or even less with the political leaders of the European Union.