Rising tariffs, economic slowdown, public debt volume, inflation and rate cuts, stock market valuations... The financial challenges of the coming year are many and varied, as are opportunities for investors. Geopolitical conflicts are also a concern.
The economy, or rather its state, is something that affects everyone. For better or worse. Which is why future prospects are closely scrutinized by investors and savers alike. Both seek to find investment opportunities there or, perhaps, anticipate risks to reduce their exposure to them. In any case, although the volatility of the world and its circumstances makes it impossible to know for certain what will happen in the future, we can analyze the present to create a guide to the financial challenges of 2025.
“One thing is certain: investment conditions in 2025 will be very different from those of 2024," begins Morningstar in its study on the outlook for the coming year. Since it would be presumptuous to detail all the risks and opportunities that are likely to arise in this new year, the most sensible approach is to focus on the financial challenges.
Tariffs
Recently, the president-elect of the North American country announced a 25% tariff increase on Mexico and Canada. Meanwhile, for Europe, he suggested a possible 10% increase. For its part, China could face an additional tariff hike of up to 60%.
This policy could potentially trigger certain trade tensions that would impact companies with greater exposure to U.S. exports, as well as the economic growth of the affected regions.
Economic slowdown
This is another major challenge for 2025, which could be exacerbated by rising tariffs. While the risk of a recession is not the baseline scenario observed by institutional investors—only 25% believe this scenario could materialize next year—an economic slowdown could be.
The OECD forecasts a growth rate of 1.9% for the Eurozone in 2025 and 2026. However, for the US, it expects a decrease from 2.8% in 2024 to 2.4% in 2025. As for China, it is expected to grow at a rate of 4.3%, versus the 4.8% estimated for 2024, according to the World Bank. Globally, the IMF expects an increase of 3.2% in 2024 and 2025.
Public debt
In fact, the International Monetary Fund (IMF) titled its analysis: “Global public debt is probably worse than it looks”. According to this agency, global public debt is expected to exceed $100 trillion by the end of this year, representing 93% of global GDP, and is projected to approach 100% of GDP by 2030. This is 10 percentage points of GDP higher than in 2019.
Such high volumes can pose a market risk due to the significant spending on interest payments and debt repayment that countries face, the obligation to raise taxes to pay off the debt, and the reduced spending in other areas to meet these obligations.
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Inflation and rate cuts
In 2025, inflation will return to levels close to 2%. At last that's the expectation, with interest rates anticipated to settle at neutral ranges. That is, below 3%. In fact, asset managers like PIMCO have stated that in Europe, interest rates will stabilize at 1.75% by the second half of the year. While in the US, they could level out at around 2.5%.
At first glance, these figures are positive, since they indicate some normalization after several years of significant imbalance. However, they also pose new challenges for savers investing in fixed-term deposits or money market funds, for financing conditions, or due to a possible inflationary rebound that could disrupt the plans of central bankers.
Bullish stock markets
Stock markets, despite high valuations, remain bullish. In fact, Bloomberg's panel of experts expects a 12% increase in the U.S. stock market for 2025 and an 8% rise in the European market. Donald Trump's arrival at the White House, which is likely to encourage more relaxed fiscal policies, could be one of the catalysts, along with the strength of the country’s economy.
Some international entities, such as Deutsche Bank, Morgan Stanley and Goldman Sachs, are also optimistic about the world’s main index, the S&P 500, which they expect to end the year between 6,500 and 7,000 points, compared to the 6,000 points it traded at at the beginning of this year.
That said, despite these expected widespread increases, 75% of institutional investors surveyed by Natixis believe that 2025 will be the year the market realizes the importance of stock valuations. This could mean a rotation in portfolios toward companies with lower P/E ratios, which could be positive for Europe as well as for small- and mid-cap companies.