Inflation, the US and cryptocurrency: Five predictions on how the global economy will develop in 2025
Europe is in crisis, while things are going well in the U.S. So far, this is what we know. But what could happen? A preview of economic scenarios for this year.
The U.S. economy continues to pull away
Europe is paralyzed and China is stuck in a real estate crisis. With growth of up to 3%, the U.S. economy was practically the only bright spot in 2024. America will remain the locomotive of the global economy in 2025, and may even accelerate its pace. Three factors support this trend:
First, the U.S. government has run up huge debts in order to provide its citizens and companies with financial support. Americans are investing and consuming as if there were no tomorrow. President-elect Donald Trump has also promised to usher in a new «golden age.» Thanks to the Republican majority in parliament, he will likely cut corporate taxes and reduce bureaucratic hurdles, which will encourage companies to make additional investments.
Second, the Federal Reserve will loosen monetary policy. As inflation is only slightly above the Fed’s target, it will decide to cut interest rates further in 2025, which will provide an additional boost to the economy.
Third, companies in the U.S. will continue to invest heavily in innovation. It may well be that too many AI data centers are currently being built, but some investments will make America more productive. The internet boom at the turn of the millennium offers a good comparison – that investment surge was also accompanied by hubris and bad investments, but it produced new technologies and efficient companies such as Amazon and Google, which still shape America’s economy today.
With forced debt management, America under Trump might overexploit its own resources in 2025. Its confrontational trade policy is also likely to cause economic damage in the medium term, for example in the form of higher inflation. However, these negative effects will only really come to bear starting in 2026. Until then, the U.S. will remain the locomotive of the global economy.
André Müller
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The European single market continues to cause problems
It was a bad year for the EU economy, and there is a high risk that 2025 will not be any better. Europe is suffering from high energy prices, a shortage of labor, too little investment and the war in Ukraine. In addition, the two most important member states are paralyzed. In France and Germany, the governments collapsed because they could not agree on a budget.
The situation is tricky: EU countries need to invest more, while at the same time the deficits of eight member states are so high that the European Commission has initiated proceedings against them. This means that there is no money available for nonessential projects. On the demand side, the EU can hardly stimulate the economy.
But it has another option: a supply-side economic policy. In other words, create incentives for companies to invest more. To achieve this, the EU would finally have to enforce the four freedoms in the single market: the free movement of people, capital, services and goods.
The single market has existed since 1993, but there are still many gaps. There are no pan-European telecom providers, for example, and the traditional banks only concentrate on a few countries.
There are two schools of thought in the EU: One wants to uphold competition and is therefore in favor of strict merger control – the European Commission supports this approach. The other is concerned about Europe’s competitiveness. It wants less stringent merger rules so that more large European companies can be created. France takes this view.
What is forgotten is that it is precisely those companies that hold their own in the face of competition that are particularly competitive. But this insight will not prevail in 2025 either. EU countries are only prepared to promote competition in those sectors in which they are strong. However, they prevent this where they think they are weak. There is almost no escape from this stalemate.
Daniel Imwinkelried
The European Central Bank causes a debt crisis in France
This year’s deficit in the French national budget amounts to more than 6%. Such high government deficits have only ever been seen in France during a severe recession or in times of war. France’s debt is growing dramatically. While the ratio was still below 100% of economic output before the pandemic, it will climb to 124% in 2029, according to the International Monetary Fund.
Two aspects exacerbate France’s situation, especially in comparison to the U.S., which is also heavily indebted. The economy is much less dynamic and is growing more slowly than in America. In addition, France already has one of the highest ratio of public spending to its gross domestic product (GDP). In France, government spending accounts for over 50% of economic output compared to 30% in the U.S. The scope for higher taxes in France is therefore extremely small.
So far, the bond markets have reacted calmly to the precarious situation in France. This is because creditors know that in an emergency the European Central Bank will step in. Thanks to the Transmission Protection Instrument, or TPI, it can buy unlimited amounts of French government bonds as soon as the country suffers from an «unjustified» tightening of its financing conditions.
The instrument suppresses market price signals. Accordingly, yields on government bonds have barely risen – which is why French politicians do not see any need to restructure the country’s out-of-control public finances. But in the long term, such artificially created calm is extremely dangerous. The American economist Hyman Minsky coined the phrase «stability creates instability.»
In relation to France, this means that the protective hand of the ECB may be able to prevent short-term turbulence in the markets. But it is sowing the seeds for a potentially much more dangerous and bigger crisis. The fact that the once feared guardians of the bond markets, the «bond vigilantes,» hardly play a role in France anymore is a bad sign for the country’s future.
Albert Steck
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Inflation remains tougher than hoped
On the positive side, the major central banks have made significant progress in the fight against inflation. The 2% target set by most monetary authorities is getting closer. And fears that price stability would have to be bought with a recession have so far remained unfounded in most regions.
But the last mile is usually the most difficult, even on the road to price stability. Although overall inflation in the U.S. and the eurozone has approached target levels, this is not yet the case for core inflation – inflation that excludes volatile components such as energy and fresh food.
One reason is services. Inflation in this sector falls less sharply than that of goods. This is due to the sharp rise in wages, which in turn can be explained by the shortage of labor. Because wages are rigid, but account for a large proportion of service prices, inflation is falling only very slowly.
The problem is particularly evident in the U.S., where inflation has fallen less than expected despite lower oil prices and where core inflation is actually rising again. The situation in the eurozone looks somewhat better, although here too it is not yet possible to declare victory over inflation. Switzerland, on the other hand, is clearly on target.
It remains unclear whether new inflation risks will soon arise. The election of Donald Trump has increased the risk that prices in the U.S. could rise again. The tariffs and tax cuts promised by Trump will increase debt and prices. The same applies to the planned deportation of millions of immigrants.
It remains to be seen whether the measures will be implemented. However, there is great uncertainty about the U.S. course and its global impact. There is also a risk that the fight against inflation will weaken and that authorities will be satisfied with an inflation rate slightly above 2%. Indications of such fatigue must be closely monitored in 2025.
Thomas Fuster
Bitcoin first reaches record highs – and then crashes because of Trump
The enthusiasm for Bitcoin was almost unstoppable in 2024. First the approval of Bitcoin index funds, or ETFs, and then the election of Donald Trump provided a price boost. Thanks to his call for deregulation and the announcement of a strategic Bitcoin reserve as a digital reserve currency, the value of Bitcoin broke through the $100,000 mark at the end of the year.
After Trump’s inauguration in January, the upward trend is likely to lose some momentum, but the $120,000 mark will likely be broken in the spring. Then it will be Trump, of all people, who could change the trend. When asked why his Bitcoin reserve project is not moving forward, Trump could say that he does not want to spend hundreds of billions of dollars of taxpayers’ money on one million Bitcoin. He may love Bitcoin, but he loves the dollar even more.
One ill-considered statement by Trump would be enough to tip the mood in the cryptomarkets. If the Bitcoin reserve remains an empty promise, there will be no need for the U.S. or other central banks to stock up on Bitcoins. The hope of government-driven Bitcoin inflation in price would fizzle out – and with it a crash could begin. The value could drop back to $100,000 in a few days and then below $80,000 after a month. Bitcoin could end the year at around $45,000, which would be a drop of 57% – according to market strategists at BCA Research.
But it is not only Trump’s statements that could usher in a new crypto winter. An overdue correction on the highly valued U.S. stock markets would also take Bitcoin with it – cryptocurrencies move in line with risky stocks, but they fluctuate much more. A market event such as the collapse of Microstrategy could also spur a crash. The technology company with a market capitalization of $90 billion has made Bitcoin investments its business model. And it is doing so financed by debt – such excesses are an alarm signal.
Eflamm Mordrelle
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