Weekly Forecasts Year-End Special
Optimistic and Pessimistic scenarios for 2025 (Free)
Forecasts
The Optimistic scenario for 2025.
The Pessimistic scenario for 2025.
See our most likely scenario from the December Outlook.
We have had a New Year’s tradition of publishing three scenarios for the following year(s) since 2018. At the end of December 2018, we envisaged three scenarios for the path ahead, which were entitled as: Global Depression, Systemic Meltdown and the Fairy Tale. They were based on our warning of an approaching collapse of the global economy issued a year earlier. We wrote:
In the December 2017 issue of our Q-review we outlined the path that the crisis would follow and determined the three most likely markets that would set the global economy ablaze.1 We called the coming crisis a ‘perfect storm’ and we envisaged it consisting of five factors:
The ‘everything bubble’.
The zombification of the global economy.
The over-indebtedness of China.
The teetering banking sector of Europe.
The end of QE and the beginning Quantitative Tightening (QT)
The main culprit behind all of this is the flow of artificial liquidity from the central banks through their QE-programs. They have led to:
1) Yield-hunting and the
2) mispricing of risk of a vast magnitude,
which will lead the global economy into the forthcoming depression.
Our main point was that the world economy had simply become too levered and “zombified”, and was heading for a serious correction without ever-deepening involvement of the central banks. We forecasted that 2019 would be the year, when the crisis would become visible, and it was.
In the 2018-scenario Fairy Tale, we envisaged a path, where the bailouts of central banks would keep the world economy limping along without a crash.
There’s also the alternative that CBs would make a complete U-turn and continue to backstop market losses. This would be the “way of Japan”, where the BoJ already owns over 40% of the sovereign bond universe. It would eventually mean the effective nationalization of capital markets which would continue to function in name only.
This came to be in early January 2019 (the pivot of the Federal Reserve), in September/October 2019 (the bailout of the repo markets) and most notably during the Spring of 2020 with the de facto nationalization of the financial markets by the Fed.
Now we are likely heading to another tumultuous year. Like every year since 2018, we want to shield our customers by mapping the ‘far-ends’ of the distribution of what may come, while providing our estimate on the most likely road. We start with “White” and “Black” Swan scenarios.
That is, in this special issue, we will establish two scenarios: the optimistic and the pessimistic (effectively the worst-case scenario). We will present the (consensus) scenario we consider as most likely in this month’s Black Swan Outlook, where we also establish likelihoods for each scenario. The forecasts, unsurprisingly, hover around the approaching global recession and the wars in Ukraine and in the Middle East. Let’s dive in.
The Optimistic Scenario
In the optimistic scenario, the detrimental developments of past few years will be turned to their opposites in a series of drastic policy moves. Essentially, we would see the following developments:
Peace in Ukraine and a (lasting) ceasefire in the Middle East.2
President Trump cuts federal deficit in a moderate fashion.
Beijing continues its cautious balancing act between stimulus and de-leveraging.
Central banks keep interest rates relatively high to counter the sustained inflation pressures.
European and U.S. authorities enact pre-emptive re-capitalization of banks.
Banks are forced to come clean on their losses.
Funds are offered to cover the losses.
Emerging economies enable a fiscal discipline campaign in the wake of the success of Argentina.
Rich nations gradually follow.
The European Union acknowledges that the centralization of power does work and they halt further ‘power grabs’ from member states.
The European Commission scales back all of its plans to increase debt issuance under EU, subjecting herself to a full financial audit.
Commission and Parliament concentrate their powers to ensuring the security of European borders and re-establishing relations with Russia.
The flow of illegal immigrants to Europe halted and refugee application process is transmitted to countries of origin allowing also women and children of troubled countries to reach the safety of Europe.
The European Central Bank freezes its plans to establish a digital-euro (central bank digital currency). Other central banks follow.
Because of the fragilities of the world economy (see the intro), a mild global recession ensues, but peace, fiscal discipline, moderating inflation and cutting of the ‘red tape’ (government regulation) in western economies reinvigorates global growth during the latter part of the year.
The price of gold falls and then moderates to the range of $2200-2400.
The price of Bitcoin sees a smallish collapse to a range of $60-70k.
The ‘optimism’ in this scenario springs from the moderation of policies of world leaders. They seek a stable path ahead from the current turmoil, both geopolitically and economically, yielding the best possible outcome. We naturally can envisage a scenario, which would be better, growth-wise, for 2025. This would involve continuation of massive central bank induced bailouts, including deep rates cuts and re-starting QEs, and gargantuan fiscal stimulus. However, this would just increase global imbalances, leading even to a bigger crisis down the line. This is why, it’s not “optimistic” nor the best we can imagine.
Needles to say that we are currently pretty far of this optimistic scenario coming to fruition. In practice, everything depends on what happens in Ukraine and in the Middle East. While the conflict in Ukraine has the ability to engulf Europe, a war in the Middle East would engulf the world. Moreover, pushing through such massive chances in just one year, is unlikely (yet not utterly impossible). It’s likely that the Deep State and the military-industrial complex will do their utmost to block aspirations of President Trump to halt the conflicts or at least to stop him of finding a long-lasting solution to them.
Another crucial piece of the optimistic scenario would be re-capitalization of European and U.S. banks. This also far from occurring, because authorities on both sides of the ‘pond’ are engaged in extend-and-pretend that their banks are in good shape. We of course know this not to be true from the collapse of Swiss banking giant Credit Suisse and devastating runs to U.S. banks in March and April 2023. The third wave of the global banking crisis awaits to emerge. This leads us to the pessimistic scenario.
The Pessimistic Scenario
Most unfortunately, the war in Ukraine has been following the pessimistic (escalation) scenario we envisaged in March 2022. In it, we warned that deepening escalation would lead to ravaging inflation (both in the ‘West’ and Russia), an energy shock and to a banking crisis. These all came to be. Only parts that have not come to be, at least not yet, are the Russian default and breaking up of the euro.
In the 2025-update of our pessimistic scenario, the war in Ukraine turns into a war between Russia and NATO. This, combined with a war breaking out between Israel and Iran, pushes the world economy into a complete tailspin. In this scenario, we would see the following developments:
War in Ukraine escalates into a (frozen) conflict between Russia and NATO following, for example, these ladders of escalation:
NATO/Ukraine continue with their missile strikes deep into Russia.
Russia retaliates with missile strikes and air raids.
Before or right after the inauguration of President Trump (January 20), NATO/Ukraine launches a devastating attack to Moscow.
Russia retaliates with Oreshnik strikes to Kiev.
The peace proposal of President Trump is ‘dead-in-the-water’ as he tries to bully President Putin into peace, e.g., by threatening to double the military aid to Ukraine unless Russian troops are withdrawn from many of the regions they have taken.
President Putin declines the offer, and Russia launches a major offensive with Russian troops pushing through the lines of the AFU (Armed Forces of Ukraine) reaching the river Dniepr.
NATO sends in a “peace-keeping” force to protect Kiev and key parts of western Ukraine along the Dniepr.
By the end of 2025, the conflict freezes along the Dnieper.
Escalation of the war in Ukraine leads to a re-armament race in Europe.
The EU (Commission) hijacks even more power from national states, while enacting a major program aimed at issuing €2-3 trillion of debt to re-build European military capacity.
The EU begins turning into a federal Defense Union.
Strict censorship laws are enacted silencing dissident, i.e., critics of the war and war-efforts.
Regional war in the Middle East erupts. The ladders of escalation could be as follows:
Iran launches True Promise 3 hitting critical Israeli infrastructure.
Israel and the U.S. retaliate striking Iranian oil facilities.
Iran closes the Strait of Hormuz.
See the economic worst-case scenario.
Iran strikes Israel with devastating force.
Houthis and other regional players join the strikes and launch a ground-campaing against Israel.
Israel retaliates to Iran with tactical nuclear strikes.
The U.S. and Russia step in to stop the escalation, and the conflict freezes.
See also the worst-case scenario for the Israel-Iran conflict.
War in the Middle East leads to another, and worse, energy shock, especially in Europe.
Central banks are forced to start another round of tightening.
Gold price skyrockets.
Stock markets collapse, alongside bonds and cryptocurrencies (including Bitcoin) .
Global recession emerges.
Emerging economies face an avalanche of sovereign defaults.
At first, this pushes investors into USD and Treasuries, but the failure of President Trump to cut the federal deficit, while simultaneously enacting tax-cuts, leads to an acute stress in the U.S. bond markets with failed auctions of Treasuries.
Global capital markers fall into disarray.
The third wave of the Global Financial Crisis erupts with devastating bank runs in the U.S. and bank failures in Europe.
Bank runs start from the eastern states of the U.S. but quickly spread causing a nationwide run.
Federal authorities restart the BTFP, but are eventually forced to enact a financial lockdown of the U.S. economy.
European banking crisis re-emerges with the failures of major German and Italian lenders.
The panic quickly spreads continent-wide with authorities enacting deposit withdrawal limitations, forced bank mergers and bailouts.
China faces her first nation-wide bank run.
By the end of 2025, the world economy has fallen into a depression.
This scenario is rather self-explanatory. The global security structure and the world economy simply fall apart. World leaders are not able nor willing to seek for the path leading to peace and prosperity for their constituencies, while the economy collapses beneath their feet.
Note that the ladders of escalation are, naturally, hypothetical and also a worse paths of escalation can be imagined for the Russo-Ukraine and Israel-Iran conflicts, which is something we do not speculate with here. This is simply, because this is a pessimistic, not an ‘apocalyptic’ scenario. We continue to assume, for the time being, that any nuclear confrontation would be stopped getting out of hand. This is especially due to the presidency of Donald Trump. Our in-house analysis conducted after his victory in 2016 indicated that he will not risk an actual nuclear confrontation despise of heavy rhetoric, which has been his negotiation strategy also in the business world. He’s mostly interested on his promises (like’s to keep them), his legacy and the survival of his business, his children and his country. Businessmen simply do not start nuclear wars. We are also confident that the Russian President Vladimir Putin will go to great lengths of stopping any nuclear confrontation. We do not think he’s seeking the destruction of the world, despite of the heavy rhetoric, which we consider to be a warning of risks involved to further escalation. These are the reasons, why there’s a clear hint of optimism in our pessimistic scenario.
What needs also be noted is that scenario can go even more pessimistic, economy-wise, if central banks enact a massive bailout operation of the financial markets. That is, they would restart their QEs programs, despite of ravaging inflation. The programs would need to run in the scale of tens of trillions USD. This would be an effective nationalization of the capital markets, with dire consequences. In December 2018, we noted:
If central banks take a permanent active role in the capital markets, it would lead to “financial market socialism”. It would be likely to bring similar horrors as regular socialism in the form of lost incentives (breaking down of the risk-reward relationship) and inflated asset values.
Central banks would also launch their digital currencies essentially taking over the banking sector. They would effectively turn into Gosbanks (the former central bank and the only bank in the defunct Soviet Union). We did not include this into the actual scenario, because we do not think this would happen in 2025, but only possibly later. For example, President Trump has announced that he would block the creation of digital-dollar.
Erratas corrected on 1/10/2025.
Disclaimer:
The information contained herein is current as at the date of this entry. The information presented here is considered reliable, but its accuracy is not guaranteed. Changes may occur in the circumstances after the date of this entry and the information contained in this post may not hold true in the future.
No information contained in this entry should be construed as investment advice. Readers should always consult their own personal financial or investment advisor before making any investment decision, and readers using this post do so solely at their own risk.
Readers must make an independent assessment of the risks involved and of the legal, tax, business, financial or other consequences of their actions. GnS Economics nor Tuomas Malinen cannot be held i) responsible for any decision taken, act or omission; or ii) liable for damages caused by such measures.
These were the stock markets of the US, the high-yield bond markets in the US and Europe, and the FX-market of China.
We do not go into the speculation of how peace in Ukraine could be achieved, but Tuomas has published a roadmap to peace in his newsletter.