2024 in Review: Key Economic Trends and What 2025 Has in Store

The year 2024 was eventful and divided – starting with half the world hoping for a strong recovery and lowering interest rates, while the other half anticipated a hard recession. How did it go? Well… meh! Entering into 2025, it is essential to get a quick recap of the developments in 2024 and what to brace for this year.

The Inflation Puzzle

Inflation has been the focal point since the pandemic for various reasons, including shifting demand patterns, supply chain disruptions, geopolitical conflicts, and fiscal stimulus. Each economy has its unique reasons for monitoring inflation closely. For instance, rising energy prices due to the Russia-Ukraine war have significantly shaped the inflation narrative in the UK and the EU. These factors continue to drive critical policy decisions across economies, affecting sectors in many different ways.

In 2024, inflation remained a central concern for policymakers worldwide. In the United States, the Federal Reserve reduced its benchmark interest rate by a full percentage point over three meetings for economic uplifting but it got interest rate to 4.25% but that meant inflation showing little progress toward the 2% target since lowering interest rate led to slightly increasing inflation. This makes combating inflation while growing the economy i.e. avoiding hard recession a complex problem. In Europe, Germany’s inflation rate rose to 2.9% in December, surpassing expectations. This increase was attributed to higher food prices and a less significant drop in energy costs. Analysts expressed concerns about the persistence of inflationary pressures, suggesting that the ECB’s target of 2% by 2025 might be challenging to achieve.

The bond markets reflected these inflationary concerns. In the UK, the 10-year gilt yield held steady at 4.6%, indicating cautious investor sentiment amid economic uncertainties. In the last week, 30-year yields in the UK, US and even Japan reached historic highs, a testament to global economic and political uncertainties.

UK Yield Curve as on 6 January 2025

US Yield Curve as on 6 January 2025

One of the key concerns as we enter 2025 is the recent expiry of the oil supply contract via Ukraine. While many European economies claim to have secured alternatives from the Middle East and the US, the true test will come in the first quarter of 2025, as we assess the economic viability of these alternatives and their impact on inflation.

We entered 2024 in a high-interest-rate regime, driven by the hope that elevated rates would bring inflation under control and pave the way for economic recovery. However, managing inflation has proven far more complex, with multiple factors at play – wage inflation, tight labour markets, volatile energy prices, and evolving consumer behaviour among them. As we move into 2025, it will be critical to observe how central banks navigate these challenges and determine the ideal interest rate regime to address such complexities.

Geopolitics

2024 was eventful on the geopolitics front, with wars and changing governments (elections) running the narrative. The Russia-Ukraine war continued to impact the energy sector, compelling Europe to diversify its energy supply sources, with Germany, for instance, increasing its investment in renewable energy and other economies looking to buy oil from the Middle East and North America.

The chip war intensified between the US and China with increased restrictions, which impacted global supply chains, especially for manufacturing and electronics businesses relying on chips as their main raw material.

BRICS, on the other hand, welcomed new members – Egypt, Ethiopia, Iran and the UAE – stirring a debate about whether the move would prove useful or would leave BRICS in a weak spot globally.

Entering 2025, politics is playing a key role in driving global markets from bonds to equities. Government instability in France and Austria has jittered the European markets, while Biden’s last few moves before Trump’s entry are keeping the US and more or less the entire world on high alert. The Japanese Yen is acting up on potential rate increase sentiment, while the rest of the world is finally accepting and navigating wars and inflation.

M&A update

The M&A landscape in 2024 was characterised by resilience amid economic headwinds. Global deal value reached approximately $3.5 trillion, aligning with mid-2010s levels. This steadiness was maintained despite challenges such as high interest rates and geopolitical tensions.

Source: Bain & Co M&A report – “Looking Back at M&A in 2024: Dealmakers Adapt as the Market Idles”

In the Americas, M&A activity remained robust, accounting for more than half of global deals. The region’s strong economic growth and employment figures contributed to this trend. Notably, the value of deals in the Americas for 2023 closely trailed the pandemic-era total of $1.7 trillion.

Private equity firms faced a more pronounced downturn, with M&A activity involving financial sponsors down by 34% in the first half of 2024. In contrast, corporate dealmaking decreased by 18%, increasing their share of the M&A market from 60% in previous years to 63%. This shift is partly attributed to corporates’ lower dependence on debt financing. However, private equity firms still sit with high dry powder and over-mature investments. Looking ahead, bolt-on transactions seem to continue driving private equity deals.

Looking ahead, expected interest rate cuts and moderating inflation may set the stage for increased M&A activity in 2025. Industries such as technology, healthcare, and renewable energy are anticipated to remain focal points for dealmaking, driven by innovation and evolving market demands.

What people are looking forward to in 2025

As we step into 2025, several key themes are poised to shape the global economic and financial landscape:

Inflation and Monetary Policy

Inflation remains a central concern for policymakers and markets alike. Recent data indicates that the eurozone’s Harmonised Index of Consumer Prices (HICP) is expected to rise by 2.4% in December, up from 2.2% in November, driven in part by rising natural gas prices. This uptick may challenge expectations of significant interest rate cuts by the ECB in the near term. Similarly, in the United States, while inflation has moderated from its peak, it continues to influence Federal Reserve policy decisions. Market participants are closely monitoring central banks’ strategies to balance inflation control with economic growth, as these decisions will have profound implications for global financial markets.

Geopolitical Tensions and Economic Impacts

Geopolitical dynamics are set to play a pivotal role in 2025. The ongoing Russia-Ukraine conflict continues to disrupt energy supplies, prompting European nations to seek alternative energy sources and invest heavily in renewables. Additionally, the expansion of the BRICS bloc raises questions about potential shifts in global economic alliances and the future of Western-led institutions like the IMF and World Bank. These geopolitical developments are expected to influence trade policies, supply chains, and investment flows, necessitating vigilance from businesses and investors.

M&A Landscape

The M&A market in 2025 is anticipated to experience a rebound, contingent upon macroeconomic conditions. High interest rates and inflation have previously slowed deal activity; however, recent indications of stabilising inflation and potential interest rate cuts could rejuvenate the market. Sectors such as technology, healthcare, and renewable energy are expected to remain hotspots for deal-making, driven by the need for innovation and strategic growth. Private equity firms, with substantial capital reserves, are likely to pursue acquisitions actively, although valuation gaps and regulatory scrutiny may pose challenges.

AI and Semiconductor space

Technological innovation, particularly in artificial intelligence (AI), is set to drive significant economic transformation in 2025. The integration of AI across various industries is expected to enhance productivity, create new business models, and stimulate economic growth. At the same time, the semiconductor industry will remain critical as demand for advanced chips accelerates in areas like AI, electric vehicles, and next-generation telecommunications. Efforts to localise semiconductor production and reduce reliance on Asia-Pacific supply chains will likely receive further investment, with major economies including the US and EU ramping up subsidies and support for domestic manufacturing.

ESG and Sustainability

Environmental, Social, and Governance (ESG) considerations are increasingly influencing corporate strategies and investment decisions. With growing awareness of climate change and social responsibility, businesses are expected to adopt more sustainable practices and transparent reporting. Investors are likely to favour companies with strong ESG credentials, viewing them as better positioned for long-term success. This shift towards sustainability is anticipated to drive innovation, particularly in renewable energy and green technologies, contributing to broader economic and environmental benefits.

Parting thoughts

2024 taught us a lot in terms of the importance of geopolitics for businesses, challenged central banks to show their skills in combating inflation, and compelled investment bankers to execute deals in innovative ways, negotiating their way to completion. 2025 seems to be highly influenced by political changes alongside interest rates, and only time will tell how it unfolds. If things go as anticipated, which they always barely do, 2025 could be a narrow rebound start for the world. But resilience for all stakeholders will take them a long way.

General sources: Desktop research, Bloomberg, Financial Times, Reuters, M&A reports and 2025 outlook reports and more.

Disclaimer:
This article represents a curated synthesis of publicly available information from reliable sources such as Bloomberg, Financial Times, Reuters, and other industry reports. It includes my personal interpretations and perspectives, but it is not intended as financial, legal, or professional advice. Readers should conduct their own research or consult a qualified professional for specific advice.