THE NEXT FEW YEARS WILL BE DOMINATED BY KNOWN UNKONWNS
2025 will likely be a voyage into the unknown for many companies and investors, as I discuss in this week’s ICIS Chemical Business.
The key issue is simply that recent experience is unlikely to prove a good guide to the outlook. Instead, the world is becoming more complex and uncertain.
It will increasingly be dominated by Donald Rumsfeld’s concept of ‘Known Unknowns’. As the former US Defense Secretary noted, these are issues “that we are aware of, but don’t properly understand”.
US President-elect Donald Trump highlighted this approach in his recent Wall Street Journal interview, claiming China’s President Xi would never blockade Taiwan under his presidency, as “he respects me and he knows I’m (expletive deleted) crazy”.
THE CONCEPT OF BUSINESS AS USUAL NO LONGER WORKS
The chart provides a high-level example of these ‘Known Unknowns’:
- Until recently, we have been living in a world where genuine surprises were few and far between. ‘Business as usual’ was the norm. And when something changed, past experience was usually able to help us find the answer
- But today, our world is increasingly dominated by known unknowns. We know what the key issues might be, but we can only guess at how they might turn out.
It is clear that ‘Business as usual’, as experienced over the past 40 years, is unlikely to return. But we don’t, and can’t, know what will replace it.
TARIFFS ARE THE OBVIOUS POTENTIAL FLASHPOINT
Trump argued in the same interview that: “To me, the most beautiful word in the dictionary is ‘tariff’”.
Since his election, he has threatened to introduce 25% tariffs on all goods from Canada and Mexico, and raise tariffs on Chinese imports by 10%.
He has also warned of a trade war with Europe, unless it agrees to increase oil and gas imports from the US.
Clearly, therefore, Trump is happy to threaten trading partners, and to accept this might lead to retaliation and a trade war, where the strongest player will win.
But we also know that Trump sees himself as master of “the deal”. He may well see these threats as a negotiating ploy designed to reshape today’s landscape into a new direction.
ASIAN CURRENCIES ARE ANOTHER KEY UNKNOWN
Asia Currencies Fall to Two-Decade Low Amid Hawkish Fed
We have warned for some time that the consensus expectation of a major fall in the value of the US$ was likely wrong.
Now, our concern is moving into the mainstream, as Bloomberg’s chart suggests for Asia’s major currencies. Trade wars will further disrupt the global supply chains on which their previous growth has depended.
CHINA’S FOCUS ON EXPORT-BASED MANUFACTURING CREATES DEFLATION RISK
Even more worryingly, the accelerating collapse of China’s interest rates suggests that deflation is now becoming a real threat.
The 10-year bond rate has fallen from 2.04% at the end of November to just 1.6% today. And December’s data on Consumer and Producer prices highlights the risk:
- Consumer prices have been flat for some time, after the inflation caused by Covid disruptions
- Producer prices, however, have now been negative for over 2 years, confirming the lack of demand
The problem is, Beijing never developed a fallback plan to cope with the implosion that began in the property market with Evergrande’s bankruptcy in 2021. Construction was 29% of GDP at the time, and the leadership’s response of boosting export-oriented manufacturing was always likely to prove inadequate.
Companies and investors mostly know the key issues that they face. But in 2025, none of us can be sure that we know how they might develop.
Scenario Planning will be critical to provide advance warning of what might happen.
Please click here to read the full analysis in this week’s ICIS Chemical Business