Macroeconomics: 2025 – Some Perspectives in Words and Pictures
- Marc Ostwald
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Written by Marc Ostwald, ADMISI’s Global Strategist & Chief Economist
– The array of political and economic uncertainties remains very large. As much as there appear to be moves to cease the hostilities in the Ukraine and Gaza, the lesson of the toppling of the Assad regime in Syria is that situations can change very rapidly and leave even greater uncertainty about the consequences. A move to engineer a ‘frozen’ conflict in the Ukraine, as per Trump’s intentions poses an enormous threat to EU unity, well beyond the gridlock that continuously besets it, with much of Central Europe, the Baltic states and Scandinavia totally opposed to any form of settlement that tacitly, let alone explicitly concedes Ukrainian territory to Russia, i.e. appeasing and enabling the Putin regime. Bear in mind that Poland under PM Donald Tusk takes over the EU presidency in January, before Denmark takes over in July. Elections in Germany (February 23), Canada (latest by October) and Australia are already scheduled, while the French quagmire suggests another round of Assembly elections in H2 2025, while Italy has local elections and a slew of regional elections in September.
– What is actually implemented and how quickly from the Trump 2.0 agenda, most notably on tariffs, immigration and deregulation (finance, energy and housing), and how this all progresses poses a lot of interconnectivity risk – above all it is the sequencing which may prove critical. Republican party divisions are likely to be all too clear to see in terms of extending his first term tax cuts, but also on rolling back parts of the Inflation Reduction Act, though ending or severely curtailing EV subsidies look likely. Bear in mind on tariffs, Trump has already declared his willingness to deploy tariffs for non-trade issues (as already stated in respect of Canada and Mexico in respect of curbing immigration and Fentanyl). Also keep in mind, 2017 was largely a dead rubber first year, largely due to the delays in appointing key positions. This time nominations are all in place, ready to hit the ground running, not just due to the 2017 experience, but also because after 2026, the US political machine will render him something of a lame duck, as it focuses on the post-Trump 2028 presidential election. As much as the world is better prepared for Trump 2.0, his erratic, unpredictable and outburst prone behaviour will be a constant liability, along with that of his companion of the road Elon Musk.
Europe
The EU remains rudderless above all due to the political vacuums in France and Germany, while the UK government continues to excel in snatching defeat at almost every opportunity, despite its huge general election victory. To be sure, a hostile media does not help it, but the government’s propensity for making one error or misjudgement after another makes it it’s own worst enemy. Both the EU and UK appear to be embracing systemic and structural decline in their importance to the world economy, falling way behind the US and China, and more broadly Asia and the GCC in terms of technological development, above all AI and the Energy transition, and hobbled by regulation, and bereft of enlightened incentives to modernize their structures and operational frameworks, most critically in terms of energy supply and distribution.
China
Consumer and business confidence remain very low; property sector woes are unresolved; but its lead in the energy transition, and above all noticeable in its auto sector, remains a very positive source of growth. But weak domestic demand and threat of increased US and other trade tensions continue to drive deflationary forces, above all race to bottom pricing (particularly in consumer sector) and output overcapacity leave it vulnerable. Both the PBOC and regime officials have promised that there will be further reductions in interest rates and bank Reserve Requirement Ratios (RRR), via way of additional stimulus, which will likely have limited impact, other than staving off a more protracted loss of momentum in the economy, but ultimately it is fiscal and regulatory policy which are needed to provide an acutely needed boost to confidence. As can be seen in the run of charts on the attached PowerPoint, this leaves CNY and JPY bond yields likely to converge further, and will lead to heightened speculation about CNY devaluation. The latter has already been mooted in official circles as one potential response to Trump trade tariffs. On the other hand, with China now using the CNY in just over 50% of its global trade transactions (above all non-EU and US), this would raise tensions with many trading partners.
Technology
Technology, above all AI and Energy related, remain the big bright spots for the global economy. But first and foremost, and in contrast to the initial phase of the post-cold war ‘fourth industrial revolution’, it has to be remembered that this phase is a) very capital intensive, and b) resource and energy intensive. It has also not ‘bedded down’, i.e. it remains in development, and is more costly than what it will displace or disrupt (for the time being), as well as being subject to potentially paradigm shifting regulation, not to mention the likelihood that much of the nascent technology may be superseded, it is therefore high risk, as well as potentially offering high returns. In many cases scalability has yet to be established, with distribution (above all power grids) and storage issues still a long way from being resolved in the energy arena. Furthermore, research into drastic (minimum 75% by my guess) reduction in resource usage, as well as recyclability (perhaps most significantly wind turbines) is still in its infancy. The opportunity is undeniably spectacular, but failure rates (as is typical with new technologies) will be very high (>80%). The fact that global political tensions will result in much research being at a minimum duplicated due to enormous resistance to deploying Chinese technology, or vice versa sharing Western technology with China for security reasons. Understandable as this is, it means that already intense demand for capital will also result in a lot of wasted capital. AI is as I have said before at best ‘learning to crawl’, with the lopsided asset and capital allocation in the financial and real economy clearly a substantial risk. Will this be the year that investors start to demand to see the results from AI projects, for proof of increased productivity, profits, efficiency and returns on capital? I have no idea, but the risk is there.
Interest rates
As 2024 more than amply demonstrated, market expectations have proven to be a very poor guide to what actually happened, as well as being incredibly fickle and fluid. No one anticipated Canada as being the front runner in terms of cumulative rate cuts, nor that Australia, the US and UK would be in the rearguard. 2025 rate expectations look likely to be equally fluid, with risks suggesting that UK and US rates end the year lower than currently expected; that the BoJ buckling under political pressure only initially raises rates one more time, only to find itself forced back into putting the JPY front and centre of its policy considerations. What should be borne in mind is that rates will not be returning to zero, barring a financial crisis, which would in any case up end all expectations. Given that those that have not yet had to refinance borrowing since central bank tightened rates sharply to combat inflation, the lagged effects of monetary policy will continue to have an impact. Some EM central banks are also being forced to reverse or halt rate cuts either to defend their currencies, or in the case of Brazil due to the BRL coming under pressure due to fiscal and broader political concerns, per se implying greater currency volatility.
Energy
Perhaps the most under-discussed topic of 2024 has been the colossal divergence in Oil and NatGas prices (see chart), above all from the aspect that NatGas prices rarely (excluding Covid/Ukraine invasion) posts a strong gain, when oil prices are in a protracted downtrend. To be sure, the energy transition is a factor in this, with demand for gas growing (above all consider how much of China’s road freight is migrating to LNG powered vehicles), even as oil demand is peaking. The UK may have achieved a landmark by closing the last of its coal fired power plants in 2025, and Europe may have reached recorded record level of renewables (wind and solar) output, but as noted above there remain many challenges. In immediate terms Europe’s Natural Gas reserves are being run down at a very rapid rate relative to seasonal trends, should January and February see this trend continue, Europe will be staring down the barrel of the gun of a renewed energy price crisis, which would be amplified if Asian demand accelerates further.
Some other things to bear in mind at all times
We live in an age where debate and dialogue are notable by their absence, above all in politics, but also socially. The world is impatient and anxious, rife with keyboard warrior critics, who like the growing army of populist egocentric politicians offer no constructive alternatives, but merely spout opprobrium and bile, and display their lack of curiosity and attention to detail as a thuggish badge of honour, often resorting to politicized religion to justify their belligerent intolerance of their fellow human beings, and to support their attacks on the institutions that are meant to protect the rule of law. Persistent long-term failure to enact reforms to adapt and evolve to a rapidly changing world, above all due to unwillingness to expend political capital on issues that are not popular (perhaps most obvious in the current French political crisis), as well as suffocating and ultimately hypocritical political correctness remain the root causes, and feed even greater inequality and social instability. It was Heraclitus who observed in the 5th century BC that stability is a permanent state of change, and it was Albert Hirschman who noted in his description of the concept of ‘possibilism’ that: ‘inverted sequences’ should not be seen as having primacy over ‘orderly sequences’, but rather as a means to ‘increase the number of ways in which the occurrence of change can be visualized’ – this can only be realized if we embrace ‘curiosity’ with open arms and self-critical eyes at all times, and resist dogma and regressive illusory nostalgia.
– The downloadable PowerPoint deck is an augmented version of a presentation given for the ADM ISI Grains Breakfast at the start of December, with a final section looking at the potential impact of the UK Budget, above all on the farming sector.
I hope that these comments and the attached charts offer some food for thought.
MARC OSTWALD
Chief Economist & Global Strategist
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