The Wealth Report 2025: The Risk Landscape of the World Economy

The world economy has had a good run. Global GDP surpassed its pre-pandemic peak in mid-2021 and has continued to expand at around 3% every year since. Will 2025 be the year that run ends?

It’s possible, perhaps even likely. The US has a new, volatile president, a man inviting trade wars on multiple fronts. Inflation isn’t quite tamed. Government deficits appear out of control. Stock market valuations are inflated. War is ongoing in various theatres, and could spread to others.

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“What might be deemed to be a plausible risk has expanded massively over the past five years because of the pandemic, because of the war in Ukraine, because of Trump and because of the shifts in politics,” says Neil Shearing, Group Chief Economist at Capital Economics. “If we’d said 10 years ago, there’ll be a global trade war, war in Europe, escalating US–China tensions and seemingly genuine threats to Taiwan, all these things would have seemed implausible. That’s no longer the case.”

Understanding whether these risks will matter from an economic perspective presents another challenge. Last year, despite regional conflict and major disruptions to Red Sea shipping lanes,
oil price rises were relatively muted. Similarly, the US S&P 500 has gained
more than 20% for two consecutive years despite the steepest rise in interest rates since the 1980s. Given these competing uncertainties, what are the most likely threats to growth?

A TRADE WAR

Almost two-thirds of business leaders recently surveyed by Oxford Economics believe that a trade war poses a very significant risk to the global economy over the next two years.

During his first month in office, US President Trump announced 25% tariffs on Canada and Mexico, before granting both a month’s reprieve. The President levied another 10% on Chinese goods, to which China responded with its own tariffs. The situation will remain unpredictable, hinging on factors spanning the performance of financial markets, the trajectory of the US economy, the flow of illegal drugs into the US and Trump’s unique approach to diplomacy.

Still, US GDP will be 0.7% weaker this year, even if Trump reaches key exemptions with his North American counterparts, says Oxford Economics. The outlook for Canada and Mexico will remain weak and, at the time of writing, the threat of tariffs hangs over Europe.

The crucial question for the global economy will be how other nations retaliate. “If they respond in a much more aggressive way the whole thing escalates,” Shearing says.

STUBBORN INFLATION

Economists tend to agree that inflation is almost tamed, but a couple of percentage points can make a big difference in key sectors, particularly real estate.

“Extend and pretend” strategies – where lenders extend loan periods in the hope of avoiding having to recognize losses – hinge on rate cuts, but potential inflationary shocks lie around many corners. Trump’s plan to cut taxes while deporting large numbers of workers could be inflationary, as could conflict in the Middle East. Meanwhile, many governments have expansionary fiscal policies and wages continue to grow, despite slowing growth.

“None of this is going to get us back to 7%, 8% or 9% inflation, but it could get stuck at 3% or 4%,” Shearing says. “That’s important because I think at 2% or 3%, you can still get rate cuts next year, but if you’re at 3% or 4%, you can’t.”

FISCAL ILL-DISCIPLINE

The private sector was historically perceived as the bigger risk to financial stability, but across G7 economies government debt servicing costs are increasing – debt loads in many advanced economies stand at 100% of GDP or more.

The brief premiership of Liz Truss
in the UK, and its aftermath, illustrated how markets can punish governments guilty of fiscal ill-discipline – and the risks are rising. No candidate is more vulnerable than the US, where national debt exceeded US$36 trillion in January, surpassing its GDP and marking an historic high. More than half of those responding to a survey in October by the US Federal Reserve survey flagged fiscal debt sustainability as a salient risk, up from 40% just six months ago.

“It’s entirely conceivable that we could get to the next presidential election with both sides talking about continuing to
run big deficits,” says Ben May, Director of Global Macroeconomic Research at Oxford Economics. “Whether that happens or not, in the end, comes down to whether markets let them.”

THE BUBBLE BURSTS

The January release of DeepSeek, a Chinese-made AI model similar to Open AI’s ChatGPT, knocked US$1 trillion off the value of AI-linked companies. Shares in chip-maker Nvidia fell 17% in a day, wiping US$589 billion off its market value.

The Chinese model, apparently developed at a fraction of the cost of its American-made rivals, undermined two prevailing narratives that have underpinned the sector’s sky-high valuations – that a single winner is likely to take most of the spoils, and that hugely expensive hardware and infrastructure will be required to power its growth.

Nvidia and its peers quickly recovered some of their losses as bargain hunters returned, but the saga highlighted how exposed the American stock market has become to a single sector. The largest 10 stocks in the S&P 500, many of which are AI-related, trade at a 12-month forward price-to-earnings ratio of 29x. Investors in these stocks are paying for companies’ profits for many decades into the future. The market is in bubble territory.

Whether 2025 will be the year that bubble bursts remains uncertain. Investors are often right about the potential of transformative technologies, but wrong about the time it can take to reach commercial success. The dotcom boom and bust in the 1990s is a good example. Meanwhile, a loss of faith in one industry bubble can shatter confidence in entire markets. The S&P 500 is vulnerable to a correction.

THE GREAT UNKNOWNS

There are other risks, particularly the escalation of armed conflicts, though economists perceive the chances to be too remote, or hard to predict, to produce forecasts. The same goes for pandemics and natural disasters.

A Chinese invasion of Taiwan, for example, where as much as 65% of the world’s chip industry resides, would present a larger risk than almost all those listed above, but the likelihood is too difficult to gauge. Investors can only hope that remains the case.