Rethink Perspectives: a look at 2025, between geopolitical risks and economic normalisation

Frédéric Rochat, Managing Partner at Lombard Odier

“The world around us is one of paradoxes, voices in harmony and dissonance, a world of opportunities but also one of risks.” That was the opening from Frédéric Rochat, Lombard Odier Managing Partner, as he introduced our recent Rethink Perspectives event in Geneva in early October. Explaining how these paradoxes have come into being, he noted that the last five years have witnessed a volatile economic environment, with uncertainty driven by external shocks such as the COVID-19 pandemic, the war in Ukraine, inflation, and interest rate surprises. For investors, it can feel as if there is a growing cacophony of conflicting opinions, forecasts, and breaking news, making it harder than ever to take informed investment decisions.

Nevertheless, he noted, the engine of the economy appears to be putting us on a more stable trajectory. The first encouraging sign of a return to normality is recent central bank interest rate cuts. Another powerful indicator is the long-term growth outlook in the three major economic blocs: the USA, Europe and China.

However, there remain a host of risks that could put a spanner in the economic works, including geopolitical uncertainty, the possibility of recession, China’s structural challenges, and the US elections in November. How should we navigate this uncertain environment? And what are the convictions on which we should base our investment decisions?

Frédéric Rochat was joined at Rethink Perspectives by Samy Chaar, Chief Economist and CIO Switzerland at Lombard Odier, who shared his outlook on the current state of the economy and the market, with a view to finding the optimal portfolio positioning as we look ahead to 2025.

There are risks to this outlook, but are they sufficient to push the economy off course?

Growth rates: gradually returning to normal

“The major blocs seem to be gradually returning to normal,” Samy Chaar told the audience of invited guests, meaning a US economy capable of growing around 2%, and a European economy at between 0.5% and 1%. “We have to accept that the European economy is much less nimble that the US,” he said, also noting that China should be posting growth of 4-5%¹ in the current environment. 

At Lombard Odier, we anticipate that today’s long-term growth rates will be maintained over the coming quarters, and in fact for most of 2025. There are risks to this outlook, but are they sufficient to push the economy off course?

Samy Chaar, Chief economist and CIO Switzerland at Lombard Odier

Dismissing the risk of a recession

To answer this question, Samy explained, “We have to review each [risk] systematically and understand what drives them.” Taking the risk of recession as his first example, he said, “The way a recession works is perfectly familiar: companies, balance sheets and profits come under pressure” – resulting in reductions in spending on labour or even, in the most severe cases, layoffs.

The key indicator for spotting a risk of recession is the change in the rate of jobless claims. In the US, the figures are stable, with unemployment at 4.1%² and new claims heading downwards.³ With a similar picture in the euro zone⁴, he noted, we can discard any risk of a recession in the medium term.

There are no signs suggesting that economic growth will be driven off course by inflationary trends

Does inflation mean we are heading back towards “overheating”?

Samy noted the signs are positive. “The fact that inflation remains persistent in the economic system does not come about of its own accord: there is a mechanism that triggers it,” he explained, adding that “the trend is directly linked to wage growth” in a cycle where employees resign to take better paid jobs, which pushes up inflation and adds to the pressure on goods and services.

Where are we at the moment? “We are watching wage trends in Europe and the US very closely. The level of wage growth is very close to normal right now.” In the US, he said, “staff turnover rates [are] steadily moving back down to the levels seen in 2017 and 2018”.⁵ Crucially, Samy highlighted, There are no signs suggesting that economic growth will be driven off course by inflationary trends. What, though, of other risks?

Read also: Rethinking through the noise

The factory of the world facing major structural challenges

“China is slowing down just now and faces a large number of structural challenges, related to demographics, globalisation and debt,” Samy said. Combined private and public debt exceeded 300% of GDP in September 2024.⁶ In view of these persistent dangers and despite the huge recovery plan launched by Beijing in late September, could the country drag the global economy off course? While it’s important to consider the possibility, Samy explained, it appears unlikely.

Domestic Chinese consumption is “running on fumes,” largely because of the losses savers have suffered from the collapse in the real estate market, caused by the bankruptcy of the property developer giant Evergrande.⁷ This backdrop is “causing Chinese consumers to over-save,” resulting in nervousness about consumption and acting as a drag on the country’s growth. But the key indicator that has to be analysed to measure the impact of China on the trajectory of the world economy is not so much domestic consumption as industrial production. As far as this is concerned, the “factory of the world” can boast an iron constitution.⁸

“Chinese output is subsidised in the most strategic sectors and the country continues to export affordable goods. So China is helping the world economy at the moment, rather than hindering it,” Samy said. Hence, he concluded, the Chinese bloc does not look set to trouble current economic conditions, which are likely to remain relatively healthy over the coming months.

The conflicts in Ukraine and the Middle East are affecting some sectors, especially energy and agriculture, but companies and countries have adapted

Geopolitics: escalating conflicts triggering concerns

Today’s geopolitical risk is focussed on two main centres of attention: the war in Ukraine and the Middle East. But how do you measure the impact these conflicts could have from a purely economic and financial perspective? “We see two channels for geopolitics to feed into the real economy and the markets,” Samy explained.

Read also: New order

The first relates to value chains in producing and exporting goods and services: are these stressed, or inoperative? The conflicts in Ukraine and the Middle East are affecting some sectors, especially energy and agriculture, but companies and countries have adapted. This is apparent from the Global Supply Chain Pressure Index (GSCPI),⁹ which has now reverted to the normal levels close to those seen before the pandemic. “Value chains are operating very well currently: you can produce goods in large quantities and export them from producers to consumers,” Samy noted.

That’s a very important lesson that has been learned from these conflicts: huge investments have been made in Europe and the US to protect against disruptions

The second channel to look at is the energy market, especially movements in the price of Brent oil, which fluctuates directly in line with geopolitical tensions. What, Samy asked, is the oil price telling us today? “The price is rising slightly, but still between USD 75 and USD 80 per barrel,” in other words, “well down from the peak of USD 124 we saw when Russia attacked Ukraine.”

The major economic blocs have reorganised themselves “with an eye to securing their energy supplies and value chains.” “That’s a very important lesson that has been learned from these conflicts: huge investments have been made in Europe and the US to protect against disruptions,” he said.

At present, geopolitical risk does not seem “likely to drive our economic engine off track

In recent years the US government has been rolling out ambitious subsidy packages to boost the domestic economy – first and foremost among these are the Inflation Reduction Act (IRA), which is providing USD 369 billion of subsidies for clean technologies (provided they are made on US soil), and the CHIPS Act.¹⁰ Europe has likewise put in place the Green Deal¹¹ to finance the ecological transition and build energy sovereignty. Hence, Samy concluded, at present, geopolitical risk does not seem “likely to drive our economic engine off track,” and is acting as less of a drag on the real economy and financial markets than might be feared.

US elections: impact uncertain

Of the many other potential risks, the US elections in November are perhaps the most significant. In the contest between Kamala Harris for the Democrats and Donald Trump for the Republicans, a Trump win could change the trajectory of the world economy.

Read also: US election scenarios - investment implications

If Trump is re-elected he is expected to impose major tariffs on imports, targeting China in particular – a policy that would push up inflation. However, Samy noted, this is not the core scenario for our portfolio positioning, since “there are a whole host of conditions that have to come together to cause the economy to overheat.” To put his campaign programme into action, Samy explained, not only would Donald Trump have to win the election, but he would also require the support of both chambers of Congress – the Senate and the House of Representatives – which appears unlikely at present.¹²

An uptick in activity, higher productivity, inflation at normal levels and central bank rate cuts” will combine to create an economic environment that is relatively healthy

A favourable economic environment for investing

So, what conclusions should we draw for portfolio positioning? “An uptick in activity, higher productivity, inflation at normal levels and central bank rate cuts” will combine to create an economic environment that is relatively healthy, regardless of the potential risks, which “are not sufficiently concrete right now to disturb the economic environment,” Samy said.

At Lombard Odier, he continued, we see this as a favourable environment for investing, but cater for today’s risks by striking a balanced position between equities and bonds, “allowing us to build a robust portfolio with gold and Swiss franc in case volatility increases.” “This allocation will give a resilient portfolio,” he concluded.