Economic Outlook for 2025: Navigating uncertainty and opportunity

The global economic environment remains steeped in uncertainty, and this will undoubtedly influence investment decisions, international trade, and M&A activity in 2025. Many firms are adopting a cautious “wait and see” approach, delaying significant decisions in light of unpredictable geopolitical and economic factors. While some businesses will seize opportunities to expand or acquire strategically, the broader climate suggests a challenging year ahead.

Global growth prospects

Global economic recovery is expected to slow further, with global GDP growth predicted to hover around 3.2% this year and possibly reach as low as 3% in 2026. This expected decline in the pace of recovery reflects a mix of geopolitical risks and economic headwinds, including rising trade tensions and persistent inflationary pressures. The uncertainty surrounding trade relationships, particularly involving the United States, remains a critical factor. The potential for a global trade war – with tariffs targeting key nations such as China, Mexico, and Canada – poses a significant threat to supply chains and investment activity.

Inflation, interest rates, and bond yields

While inflation has eased from the peaks of 2022, driven by the Ukraine crisis and soaring energy prices, it may persist at slightly higher-than-expected levels due to potential trade protectionism. Import costs could rise significantly if tariffs are widely implemented, feeding into domestic prices globally. This environment will likely result in interest rates remaining elevated for longer, further compounded by rising long-term bond yields. In the UK, for instance, 10-year bond yields have reached their highest levels since the Global Financial Crisis of 2008, adding pressure to Government borrowing costs – with potential knock-on implications for corporate borrowing rates.

Investment and M&A activity

Investment remains the engine of economic growth, yet uncertainty acts as a significant dampener. With the cost of borrowing long-term funds rising and geopolitical risks persisting, M&A activity is subdued. Many companies are reassessing their strategies, particularly in light of potential supply chain realignments caused by shifting trade policies. For businesses considering M&A’s, the key question is whether the deal focuses on strategic expansion or simply cutting costs. Cost-cutting alone is not a sustainable competitive advantage, and firms must prioritise long-term value creation.

Supply chains and trade realignment

Global protectionism could lead to a significant reshuffling of supply chains. Tariffs and trade barriers will force companies to source materials and goods from alternative markets, a process that takes time and adds complexity. While this creates challenges, it also opens up opportunities for businesses agile enough to adapt to the changing landscape.