David Skilling says there is high potential for economic and geopolitical disruption in 2025. These ten developments in December provide a sense of what to expect

By David Skilling*

As is normal at this time of the year, I have been wading through a small mountain of 2025 outlook documents. As is also normal, there is a high degree of clustering – and path dependence – in these forecasts: common themes include ongoing US exceptionalism; a muted outlook for Europe/UK; and some caution on China.

Much of this consensus is sensible, but it discounts the potential for economic, political, and geopolitical dislocation: at-scale disruptions that affect economies and markets in material ways. My assessment is that there is a high likelihood of significant economic and geo/political turbulence in 2025, as global regime change strengthens – reinforced by a second Trump term, which I think will be more consequential than the first term.

Structural geopolitical pressures will continue to build, with important implications for the functioning of the global economy; and domestic politics across many countries will be turbulent – with material economic and commercial consequences. At the same time, there are powerful economic and technology dynamics that are positive for the economic outlook. Taken together, there is a very wide range of possible outcomes across economies and sectors over the next year and beyond

I am finalising preparations for client briefings on the 2025 outlook (get in touch if you would like to schedule a discussion). But to give an indicative sense of what we can expect in 2025, ten developments during December struck me as instructive (listed below in no particular order of importance).

1. The return of inflation

The hawkish cut by the Fed in December – cutting by 25bps, but marking up its inflation and rates forecasts – caused a significant repricing in markets. The S&P500 was down by >3% on the day, and the forward rates path was marked up. This should not have been a surprise: inflation pressures remain persistent across many advanced economies; Trump Administration policies are likely to contribute to higher inflation readings in the US; and there are good reasons to think that we are moving into a structurally higher global inflation regime. Sustained inflation below 2% will be unlikely given the emerging global economic and geopolitical context.

2. China’s Japanification

On the other side of the Pacific, Chinese bond yields continue to plumb new lows – the 2-year government bond yield is approaching 1%. This reflects Chinese monetary stimulus amid broad-based deflationary pressure, and a weak Chinese economy. Balance sheet recession dynamics are increasingly evident in China, even as China’s global competitive strength continues to manifest (discussed below). Economic and fiscal risks are building in China. Watch the CNY, which has continued to weaken in December and which may come under further pressure if meaningful US tariffs are imposed - with regional and global spillovers.

3. Wartime economy

Newly-appointed NATO Secretary General Mark Rutte delivered his first set-piece speech in mid-December, containing a series of blunt remarks. He said that ‘It’s time to shift to a wartime mindset’ in response to the growing threat from Russia as well as a more challenging security landscape more broadly. The direct implication is a need to ramp up defence spending and capability across Europe significantly, a process that has only just started and that will place significant pressure on already-strained government balance sheets. Firms and investors as well as governments need to position for elevate geopolitical risk in Europe and beyond.

4. Syria

In breathtakingly rapid developments in mid-December, HTS-led rebels overthrew the Assad regime and have begun to establish a new government. This is bad news for Iran and Russia; and offers a glimpse of a positively reordered Middle East – early signs are encouraging, although there is deep uncertainty and recent political history in the region counsels caution. This success was unexpected by most (except perhaps Turkey), and is a reminder of the elevated potential for fat-tail geopolitical shocks in 2025 as big and middle powers reprioritise. From Asia, to the Middle East and Europe, there is deep geopolitical fluidity.

5. Technology goes exponential

For all of the talk about a plateau in AI models, impressive new releases in December from Google and OpenAI suggest no let-up in progress. And last week Google announced significant developments in quantum computing, with the technology coming closer to commercial use. In these technology domains, as elsewhere, exponential progress is being made. In not entirely unrelated news, the December release of US labour productivity data confirmed 2.0% growth in the year to Q3; the US, which leads in many of these technologies, has the stand-out labour productivity performance across advanced economies over the past few years. This provides some early, but encouraging, confirmation of my productivity renaissance thesis.

6. Populism

2024 was a year of elections. Although the centre broadly held (just), populist parties made meaningful advances (Germany, France, Netherlands, UK). Many incumbent parties are facing significant difficulties in governing effectively (note also South Korea). And expect more pressure. As one disruptive force, Elon Musk has recently encouraged support for the AfD to ‘save Germany’; and there are rumours of significant financing support from Mr Musk for the Reform Party in the UK. This type of support could have a major impact on the German and French elections in Q1 and Q2 2025, as well as on UK politics, with major implications for economic policy and outcomes. Significant domestic political disruption is also likely in the US, as Mr Trump begins his second term in January.

7. Tariffs & rumours of tariffs

President-elect Trump has threatened tariffs on a range of countries over the past month: 25% on Canada and Mexico (contributing to the imminent collapse of the Trudeau Government); and more recently suggesting tariffs on NATO members that don’t spend 5% of GDP on military spending (3.5% of GDP is apparently the real aim). And Panama is now in the firing line (and perhaps Denmark/Greenland). Tariff threats are partly about negotiating leverage to extract concessions, but I think it plausible/likely that we will see meaningful US tariffs imposed selectively through 2025. Equity markets are beginning to price for the possibility of actual tariffs.

8. Markets v politics

One of the themes in my notes has been the increasing tensions around fiscal policy, with public debt levels across many advanced economies and beyond moving sharply higher. This has not yet caused significant market ructions, aside from isolated examples (such as the Truss shock in 2022). But December saw investor noise in response to Brazil’s deteriorating fiscal situation as well as ongoing concern about the French fiscal outlook as a consequence of its political stasis. And bond investors look increasingly cautious about the US fiscal outlook. A clash is looming between markets and politics with respect to fiscal policy.

9. Supply chain weaponisation

China has just imposed a ban on exports of gallium and germanium to the US after the latest round of US export restrictions on advanced technologies. China has developed dominant global supply chain positions across a range of critical raw materials, including rare earths. This gives it leverage in pushing back against tariffs and other restrictions by the US, the EU, and others – as well as the competitive advantage that arises from owning closed, vertically integrated supply chains. It will take time for the US and Europe to build out its own capacity; in the meantime, these supply chains will be increasingly weaponised.

10. Chinese mercantilism

From ongoing industrial disputes at Volkswagen plants in Germany to this week’s proposed tie-up between Honda, Nissan, and Mitsubishi, the global spillovers from China’s aggressive mercantilism (notably in EVs, and associated supply chains) are becoming increasingly evident. China accounts for ~30% of global manufacturing value add, and continues to invest in ‘new quality productive forces’. This is not new, as regular readers of these notes will know, but these dynamics – and the reaction from other countries (including the US and EU) – are strengthening, and will shape globalisation through 2025.

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*David Skilling ((@dskilling) is director at economic advisory firm Landfall Strategy Group. The original is here. You can subscribe to receive David Skilling’s notes by email here.