BREAKINGVIEWS-Risk and resilience are the watchwords for 2025

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Peter Thal Larsen

LONDON, Jan 6 (Reuters Breakingviews) - As the world rings in 2025, try to imagine what it would have looked like in 2019 if a visitor from the future appeared with a warning about what was going to happen next.

First, the world would be struck by a deadly pandemic that shut down most developed economies. Governments would splash out to support people and businesses, adding to their already hefty debt loads. Global supply chains would strain and splinter.

Then, just as the planet was staggering back to its feet, Russian President Vladimir Putin would invade Ukraine, upending global supplies of energy and food. To control rampant inflation, the U.S. Federal Reserve would hike official interest rates from close to zero to over 5% in little more than a year. A new war in the Middle East would kill thousands and threaten to disrupt global shipping. And at the end of 2024, Donald Trump would win the U.S. presidential election following a campaign promising blanket tariffs and mass deportation.

Presented with such a prognosis in 2019, most observers would probably have expected a recession, and a dire performance by global stock markets. They would have been wrong. Western economies roared back from their brief Covid-induced slump and have so far avoided the often predicted “hard landing”. The S&P 500 Index of leading U.S. stocks has almost doubled in the past five years, fuelled by robust corporate profits and excitement about the potential of artificial intelligence. The U.S. stock market trades at a higher multiple of cyclically adjusted earnings than at any time outside the dotcom craze of the late 1990s.

That record reflects the surprising resilience of the global economy and financial system in the face of even severe shocks. It’s also a sobering reminder of how hard it is to make predictions about the future.

This is the humbling backdrop against which Breakingviews columnists have once again embarked on their annual attempt to help readers think about what lies ahead in 2025. As in previous years, the objective is not to make forecasts which cling to the established consensus, but to identify some of the shocks and surprises that may confront business leaders, money managers and policymakers in the next 12 months. The only thing that is certain is that the range of conceivable outcomes is wider than ever.

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Trump exemplifies that uncertainty. The returning president’s agenda for his second term in office is a jumble of slogans and often contradictory ideas. Watching his administration convert these into policies will be a source of deep anxiety around the world. Will the man who inspired “Trump: The Art of the Deal” impose blanket tariffs on U.S. imports, or use the threat of them as a negotiating tool? Will he actively abandon military alliances, or push U.S. allies to buy more American armaments? Will he undermine the rule of law, or will the U.S. Constitution restrain him?

Trying to anticipate the actions of such an unpredictable figure is a fool’s errand. However, the ambiguity about Trump’s direction will have tangible consequences. Start with the financing of U.S. government debt, which the International Monetary Fund puts at 121% of GDP. The bond market will constrain the president’s scope for running large budget deficits – especially if he seeks to undermine the Federal Reserve’s inflation-fighting credentials.

Most other governments in the developed world already face debt constraints. An exception could be Germany, where a new chancellor could release the “debt brake” which has hobbled Europe’s largest economy. The military threat from Russia may induce European countries to once again embrace joint borrowing, this time to fund defence spending. China looks set to respond to U.S. technology restrictions by wielding export controls of its own. And the prospect of American tariffs may prompt the world’s second-largest economy to take decisive action to halt its real estate slump.

Corporate chieftains will have to spend 2025 navigating around governments and regulators as well as more fundamental business shifts. Elon Musk’s role at the heart of Trump’s administration – at least for the time being – should propel his SpaceX unit to new heights. The Tesla TSLA.O CEO may also help to speed up the arrival of self-driving cars in the United States. Looser antitrust restrictions could clear the way for a wave of big mergers. Insurance companies, meanwhile, will pile into the private credit boom.

In the next 12 months, tech companies will find out whether the tens of billions of dollars they have poured into AI are beginning to pay off. If the technology’s applications expand then OpenAI, the inventor of the ChatGPT chatbot, could be the meme-stock initial public offering of the year. If not, Microsoft MSFT.O boss Satya Nadella may have to pen an apologetic letter to the software giant’s shareholders. Technology trends will also pull in different directions, as Silicon Valley pursues smart glasses while smartphone-wary parents spark a revival of the brick phone.

As ever, the coming year will throw up surprises that did not feature in even the most elaborate scenarios. The hope must be that, when they arrive, the global economy and financial system display the same surprising resilience they have shown in the past five years.

Follow @peter_tl on X

(Editing by Neil Unmack and Oliver Taslic)

((For previous columns by the author, Reuters customers can click on LARSEN/
peter.thal.larsen@thomsonreuters.com))