Investing.com -- BCA Research has outlined three geopolitical trends it expects to emerge in 2025, driven by several major factors such as expected policies under Donald Trump’s second term, economic moves by China, and escalating tensions in the Middle East strategic recalibration on the global stage.
View #1: 'Trump Cuts Taxes, Hikes Tariffs'
BCA expects the U.S. Congress to pass tax cuts by the end of 2025, contributing a fiscal thrust of approximately 0.9% of GDP in 2026. This move aims to stimulate the domestic economy but will coincide with President Trump initiating a global trade war. Central to this conflict will be tariffs targeting major trade partners, with China bearing the brunt of these measures.
"Trump claims that higher taxes on imports will cover the difference," BCA notes, but it highlights that such tariffs could have unintended consequences.
Higher import taxes may lead to a 2.9%-6.3% decline in household incomes, offsetting the benefits of tax cuts. Furthermore, the uncertainty created by these trade policies could weigh heavily on business investment, particularly in sectors reliant on global supply chains.
The report underscores that tariffs are unlikely to fully fund the ambitious tax overhaul. Instead, BCA anticipates increased fiscal deficits and heightened pressure on domestic consumers and businesses.
View #2: China Will Boost Spending
In response to U.S. tariffs, China is expected to counter with significant domestic stimulus measures while strengthening its trade ties outside the U.S. According to BCA, "Xi Jinping will be able to blame Trump for the painful consequences of restructuring at home," using external pressures to justify economic reforms and solidify domestic support.
Beijing’s strategy will likely include targeted fiscal easing and efforts to reduce reliance on American demand. While these measures are expected to provide short-term relief, BCA suggests that China will hold back on deploying its "fiscal bazooka," reserving significant stimulus for a potential global recession. Instead, China will focus on long-term strategies, such as expanding trade with non-U.S. partners and bolstering its manufacturing sector.
Simultaneously, the report highlights an uptick in China's military and strategic activities, including potential conflicts in East Asia and increased pressure on Taiwan. These moves are part of a broader strategy to assert geopolitical influence amid heightened global tensions.
“Investors cannot predict random military incidents or base their portfolios on them – but they can set up early warning systems to detect if a negative trend starts to develop,” BCA notes.
View #3: Geopolitical Risk Shifts From Russia To Iran
Lastly, while the Ukraine war is expected to peak and move toward a ceasefire in 2025, BCA anticipates that geopolitical risks will shift to the Middle East, particularly the escalating conflict between Israel and Iran. The report estimates a 75% likelihood of military escalation, driven by Iran’s nuclear ambitions and the fallout from U.S. sanctions.
BCA points to a deteriorating security landscape in the region, with Iran likely to leverage its proxy networks and air defense systems to deter attacks. However, Israel, seeing a rare strategic opportunity, may act decisively to set back Iran's nuclear program. "The Israeli Defense Forces may never get a better chance," the report states.
Trump’s return to office could further inflame tensions. His administration’s enforcement of "maximum pressure" sanctions and potential realignment of U.S. foreign policy are expected to exacerbate volatility in the region.