Chief Economist's Corner: Welcome to 2025

As the champagne corks have popped and the new year has been rung in, we find ourselves at the threshold of what could be a pivotal year where, in my opinion, three key factors stand out.

First, developments in the US where Donald Trump's “America First” philosophy will have a major impact on largely all fronts. This goes for external relations, the climate and, of course, economic policy, which will be based on the well-known themes from Trump's first presidential term from 2017 to 2021: tax cuts, deregulation and protectionism.

Overall, there is good reason to expect relatively strong growth in the US economy in the coming years. The stock market has responded well to Trump’s convincing election victory, and confidence indicators suggest growing optimism among business leaders and households. But it should be pointed out that there is also a risk of economic headwinds. Especially if the announced trade restrictions lead to higher inflation and there is a hard clampdown on immigration. Foreign labour has accounted for a large part of recent years’ job growth, not least in the construction sector, agriculture and the hotel and restaurant industry.

At the same time, US exports could be affected if a new trade war erupts between for example China and Europe, and the substantial public debt could also put a brake on economic growth. The debt is expected to increase drastically in the coming years, unless the new DOGE Commission, led by Vivek Ramaswamy and Elon Musk, succeeds in implementing the massive public savings they have promised.

Second, Germany where political changes and economic transformation will be key words in the new year. The political scene will likely undergo a significant change after the elections on 23 February where there even is a risk that a fragmented political situation will make it difficult to form a stable coalition government. And these political challenges come on the heels of the massive problems already facing Europe's largest economy.

Unlike most other countries, Germany has experienced practically no economic growth since the pandemic. Worse still, the majority of the problems are of a structural nature. The digitalisation of society is slow, to say the least, and the green transition has exposed the weaknesses of the important automotive industry. The workforce is only sustained by immigration; energy policy has proved naïve and the focus on China as a future export market is risky at best. So there is a reason why Germany is once again called “the sick man of Europe.” This term was first used around the turn of the century, but then led to major labour market reforms, resulting in a true job miracle. The hope for 2025 is that the country's problems can again spark a wave of economic reforms once a new, sustainable government hopefully takes office in the spring.

Third, we need to keep an eye on labour market developments and inflation, which will be crucial for monetary policy in 2025. All signs point to further rate cuts, especially in Europe, where inflation has come under control, but growth prospects remain clouded. The rhetoric from central bank governors in both the US and the Euro area during the first months of the year may prove crucial for financial market sentiment for the rest of 2025.

This is the environment that also the Danish business community will have to navigate in a year when geopolitics will continue to pose a major risk to growth prospects. And even if some of the conflicts and wars that have caused so much destruction and uncertainty in recent years are resolved, the fact is that defence readiness will remain a top priority on the political agenda for the foreseeable future.

This was also clearly evident in Prime Minister Mette Frederiksen's New Year's address, which concluded with: "Rearmament to avoid war is, in my view, inevitable. But let's do it the Danish way. Socially just and with our values intact. Then it won't all go to hell."

And that things will work out is also precisely my own view, especially on the economic front, even though 2025 looks to be a challenging and pivotal year.