Thought Leaders

How global politics could shape the year

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By Gabriella MacariSenior Investment Manager at Arbuthnot Latham

The biggest news so far for 2025 is, of course, Donald Trump’s second term. Policy promises in his campaign including tariffs, protectionism, and even mass deportations, are likely to have implications for most other global economies, either directly or indirectly. We will also see the first full calendar year under Kier Starmer’s administration here in the UK.  

United States 

Trump has a narrow majority in both chambers of congress and took office on Monday for a historic second term. While it is true that President Trump is a known entity, there are a few distinctions between his first and second term. 

In 2016, his victory caught many by surprise. Trump policies struck a balance between his sweeping campaign promises and his desire for re-election in 2020. 

This time around, Trump has no such re-election concern, and he comes to office significantly more prepared, both for what being president entails but also for how to get things done. He will want to leave an indelible mark on history for his second term, ensuring that nobody forgets he was there. 

What are we watching? 

Tariffs: One of President Trump’s key campaign promises was to implement a flat tariff on all imports to the USA. If enacted, there are two things to consider: inflation and global growth. 

Implementing an ‘overnight’ increase on import prices to the US will immediately increase the cost of those goods for the US market. While over time this may diminish as US firms and households find domestic suppliers (which is Trump’s objective), in the short-term, it could keep US prices higher and may push out the expectation for Federal Reserve rate cuts even further. 

The US remains one of the largest trade partners for most global economies. If the tariffs that Trump has promised come into play and have the desired effect of moving supply chains to the US, economies with high levels of exports to the US may suffer. 

Fiscal spend: Trump’s campaign promises are firmly on the side of spending, rather than fiscal prudence. The US fiscal deficit is already at a historically high level, with the debt ceiling needing to be debated and a raise agreed by congress each year. Trump’s spending plans mean that we’re anticipating high levels of US government debt issuance throughout the next four years, which will impact global bond markets. 

United Kingdom 

Following Labour’s landslide victory in 2024, Kier Starmer’s majority is such that he can remain comfortably in power until 2029, notwithstanding any political scandal. 2024 saw the first Labour Budget, bringing in tax rises and spending cuts. Importantly, Chancellor Rachel Reeves also announced Labour’s new fiscal rule, which is that the forecast for public debt should be falling, relative to the size of the UK economy. 

Since the start of the year, we’ve seen gilt yields rise globally, which has put this new rule under pressure; gilt yields rising increase the cost of borrowing for the government. For context, a 0.50% increase in yields costs the UK approximately £6 billion in additional borrowing costs – since the start of the year, the UK government 10-year yield has risen from c.3.6% to c.4.9%. 

What are we watching? 

Politics: Kier Starmer’s honeymoon period in Number 10 has well and truly ended and he and his cabinet are coming under increasing scrutiny. However, he has a comfortable majority and we don’t anticipate any political turmoil with regards to changes in leadership during 2025. 

Budgets: Eyes remain firmly on Chancellor Reeves and her upcoming spring statement; it’s possible that to keep to her self-enforced rules, we will see further fiscal tightening. This means more spending cuts or tax rises. The nature of these is yet to be seen but any dramatic changes could cause a fall-out in markets. For example, increasing corporate taxes, may hit business confidence. 

Currency: Sterling was one of the strongest performing currencies throughout 2024 and, while we have seen some weakness since the start of 2025, there is potential for more steps backwards yet. Sterling weakness or strength is a reflection of global confidence in the UK economy, so if the economic picture weakens or we see a tightening in market conditions, we may see the currency fall. This isn’t necessarily bad for markets, given that sterling weakness can be a positive when translating overseas earnings for UK-based multinationals. 

Rate cuts: With UK inflation coming in marginally below expectations in January, it is becoming increasingly likely that we’ll see another Bank of England rate cut in February. Whether this comes to pass or not, we anticipate rates coming down over 2025, which will ease conditions and may help to boost businesses that have been hit by budget changes coming into effect in April (higher National Insurance, higher rates, higher minimum wage). 

Europe 

2024 was a year of turmoil for European politics, with the two biggest players in the bloc, Germany and France, experiencing a breakdown in their respective governments. European economic growth has also been faltering, with many sectors being hit by low and slowing demand from China in recent years. 

What are we watching? 

International trade: As an open economy, with high exports of goods and services, Europe could be hurt by the tariffs that Trump is promising. Some of this, we think, has already been priced in with European markets remaining relatively weak through the end of 2024. 

Rates: It is expected that the European Central Bank (ECB) will continue to ease monetary policy in 2025 with further rate cuts. The perennial problem remains that the ECB needs to balance the economic needs of all its constituents, which all face different economic conditions.

China 

The last few months of 2024 saw the Chinese government announce significant stimulus measures to try to boost the economy’s lagging growth. The measures focused on equity and property markets in the first instance, with policymakers also committing to improving domestic demand. 

What are we watching? 

The response to 2024’s stimulus measures has, so far, been somewhat subdued. Chinese policymakers have historically done whatever it takes to support the domestic economy and we may see further stimulus measures announced in the coming 12 months. 

If we do see Chinese demand pick up again, it’s likely that China’s trade partners (including Europe) will benefit. The other side of this coin is that Trump’s promised tariffs could dampen the globally significant supply side of the economy. The prospect of a renewed trade war is a major headwind for Chinese growth in 2025. 

Global politics 

The ‘Election Year’ may be over but there’s still plenty of political uncertainty around the world in 2025. In the last few months, we’ve seen a number of contested elections, political protests and unrest, particularly in emerging markets (Venezuela’s re-election of Maduro and the ‘Georgian Dream’ victory in Georgia are notable examples). 

While these economies are relatively small players on the global stage, upheaval and political uncertainty in any region has the potential to disrupt the balance. 

What are we watching? 

President Trump vowed on the campaign trail to bring an end to the war in Ukraine, claiming that he could do so ‘within a day’. The reality of this is yet to be seen but with such a headline commitment in his campaign, we expect Trump’s administration to put a great deal of focus on this particular ‘deal’ to reach a resolution between Russia and Ukraine. Again, reaching a resolution here would be settling, particularly for European markets, which were more impacted by the conflict. 

There is still a lot of truth in the adage of ‘when the US sneezes, the rest of the world catches a cold’. With Trump taking office with guns blazing, we expect the next few weeks to be telling; Trump will use his power to start signing executive orders that will give us an indication of the direction he plans to take for the next four years. Time will tell whether Trump will double-down on his promises or if his bark will be worse than his bite. 

At Arbuthnot Latham, one of the key pillars to our investment philosophy is Active Management. We are continuously reviewing the global landscape to identify areas that may either provide opportunities for client portfolios, or which we may need to protect against. 

Many of our clients are reassured that we are analysing the news flow and what it means for markets, so that they don’t have to. 

You can view the full exploration at: https://www.arbuthnotlatham.co.uk/insights/perspectives-2025-how-global-politics-could-shape-year