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The State of the World - Geopolitical Risk Outlook 2025
Following “the year of elections” in which more voters ever in history went to the polls in over 60 countries, 2024 ended up as the “bonfire of the incumbents.” A full slate of complex geopolitical, environmental and economic factors flows from the global upheaval largely explained by economic discontent. With hindsight, it seems that many changes were long underway. But accelerants, such as the second Trump administration, will likely force more interaction between the risks and lead to higher volatility and less predictable outcomes in most regions. With the conflicts in Ukraine, Africa and the Middle East likely to continue this year, and US-China trade relations worsening, companies will have to cope with heightened geopolitical tensions, as well as the increasing impact of climate change.
The international rules-based order has been fragmenting for many years. Hand wringing at Davos aside, the business community in developed countries has generally chosen to hope that business-as-usual would return in due course, perhaps encouraged by the observation that working and travel patterns are normalising for many. But overall, these hopes for business-as-usual have been continually dashed since the end of the Cold War and in the aftermath of the COVID-19 pandemic. There is no clear consensus or organising principle on how to replace the global institutions or rules that are being bulldozed by rising nationalist and populist sentiment.
Within this fracturing geopolitical landscape, the most important variables at play are (i) the first months of a second Trump presidency in the US, with a deeply transactional and protectionist “America first” foreign policy, aggressive towards enemies and allies alike, which could deal a potentially irreparable blow to the already damaged rules-based multilateral trading system; (ii) the relative influence and leadership of the United States and China, and the bilateral relationship between these countries.
The risks of escalation in the Taiwan Strait and South China Sea, and now the left-field possibility of US action in Panama, are the most likely to impact global markets in the next few years, given their ties to asset prices and the key semiconductor industry in the case of the former, and supply chains in the latter; (iii) as the US questions its ‘nuclear umbrella’ protection for client states, expansionist countries may test the limits of established borders, and the threat of nuclear proliferation by anxious mid-sized states will grow. The risk of nuclear escalation by Russia and North Korea is undiminished.
On the economic side, the cost-of-living crisis endures, due to slow growth and high but falling inflation. This will continue to exert a powerful economic and political drag in 2025. The gradual reduction of central bank interest rates amid improving inflation indicators will weigh on bank profit margins leading to lower dividend payouts, but the Basel III endgame will likely be eased or delayed further. The EU has been vocal about its commitment to not delay the implementation more, but this position might be forced to change depending on the Trump administration's approach to the framework. The overall de-dollarisation of global trade and financial transactions is increasingly polarising the world’s economy. International firms will need to navigate a rapidly diverging policy landscape, with the US deregulating in key areas and clashing with the extraterritorial ambitions of EU legislation.
Ongoing conflicts, particularly in Ukraine and the Middle East, will continue to cast a shadow over global energy polices. Fossil-fuel markets will continue to face geopolitical risks as the US opts for “drill baby drill” and penalises renewables, but investment into renewables will remain strong, particularly in China. The wars in Gaza and Lebanon may de-escalate in 2025, leading to a softening in oil prices, while a ceasefire between Ukraine and Russia seems possible this year, which could lead to lower gas prices. However, some forecasters warn that a re-ignition of a wider conflict could drive oil prices much higher, while also leading to steep rises in shipping and insurance costs for global trade.
On the environmental side, climate patterns, El Nino, will bring extreme weather events that cause food insecurity, increase water stress, disrupt logistics, spread disease, and fuel migration and political instability. We can already observe a gridlock in climate policy, as developed economies fail to increase public investment or take action to achieve net-zero emission targets.
One of the key risks in the technological sector is the increase in misinformation and disinformation linked to the lack of governance frameworks around the use of artificial intelligence (AI). This, coupled with growing investments in technology—especially AI—will lead to more regulatory pressure in the EU for technology companies, as well as strengthened scrutiny over data usage and overall investor impatience for information and results. This could open a big strategic divide with the US which may seek to deregulate in these areas. We expect more countries to use satellite internet, limiting it to military and maritime purposes for now. On the regulatory side, we foresee the technology and automotive sectors splintering as regulation diverges too. Technology decoupling between the U.S. and China will significantly accelerate in scale and scope, which will lead to more uncertainty on global markets. Cyber-attacks which cause sustained disruption to critical physical and digital infrastructure, will likely increase. Mounting geopolitical competition will likely encourage non-state and state-backed cyber-attacks to increase in scope, scale, and sophistication.
Additionally, the intensifying societal polarisation is contributing to the rise of extreme nationalists and the breakdown of political consensus. All these geopolitical, economic, environmental and technology risks will have profound impacts for companies’ business models across multiple sectors.
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