Quarterly Investment Outlook (Q1 2025)

Economic Update and Investment Outlook – Q1 2025

In the first quarter of 2025, the international economic environment faced increased volatility, largely due to US President Trump’s rhetoric and actions to impose tariffs on key tradable goods and services. This strategy has caused concern in the markets, particularly in terms of the potential impact on global trade and economic growth.

International Economics and Geopolitics

• US: Despite heightened uncertainty, estimates for US economic activity remained relatively positive, with several analysts placing annual growth in the range of 1.5%-2%. However, new protectionist measures are slowing down trade, negatively affecting import- or export-dependent sectors (such as the automotive and components industries). Equity markets were corrective (MSCI World -5.8%, MSCI North America -8.6%), while bond markets largely acted as a “safe haven” for more conservative investors.
• Geopolitics: There was relatively milder tension on the Ukraine and Middle East fronts, with the US seeking a temporary lull, proposing alternatives or a ceasefire. US administration statements remain unclear, however, as they combine aggressive trade policy with targeted diplomatic initiatives.

Europe

• European equity markets were more positive than US equity markets, especially towards the end of the quarter, when the major liquidations in the US slowed down. Investors sought exposure to European equities, expecting greater stability, at least in the short term.
• European banks recorded a significant rise (+27.5%), partly due to positive 2024 results, but also due to expectations of improved profitability (mergers, lower provisions for non-performing loans in some countries, etc.).
• The best performing countries in the first quarter were Spain (+13.3%), Germany (+11.3%) and Italy (+11.3%). Despite the apparent fatigue in industrial production in some regions, Spain in particular benefited from the growth in services and an improved tourism picture.
• Europe maintained a wait-and-see attitude regarding the imposition of tariffs, awaiting the final developments in the negotiations with the US administration.

Greece

• In line with major European banks, Greek banks reported record profitability for 2024, leading the relevant banking sector to rise 23.4%. The General Index, which is heavily influenced by banking stocks, rose 14.7%.
• Domestic economic activity is improving, especially in the construction sector (+9.7%), while the expected rise in tourism (due to seasonality and increased demand) further fuels growth. In contrast, retail consumption and car sales remain sluggish, reflecting uncertainty among households.
• On the key macroeconomic indicators front, Greece maintains a stable performance: inflation at 2.6%, unemployment at 8.6% and debt-to-GDP ratio at 163.9%. Although public debt remains high, fiscal performance has improved over the last two years, creating room for flexibility.

Asia

• Asian markets were under pressure due to international trade tensions (including US tariffs). Several export sectors (such as electronics, industrial machinery and raw materials) were negatively affected by uncertainty around volumes and costs of cross-border trade.
• The 7.7 magnitude earthquake in Myanmar and Thailand caused serious loss of life and infrastructure. However, its impact on markets proved to be relatively limited, probably due to the lower degree of integration of these countries into the major international financial centres.
• China is showing resilience, despite pressures from declining net exports, mainly due to continued growth in industrial production (+5.9%) and retail sales (+4%). Inflation remains in negative territory (-0.7%), suggesting that we may see new targeted support policies from Beijing.
• Japan fell by 5% in stock market terms, but maintained positive economic indicators (inflation 3.7%, unemployment 2.4%) except for industrial production which fell slightly (-1.1%).

Interest Rate Policy and Second Quarter Outlook

• The partial reversal of the downward trend in interest rates is already evident as central banks face signs of rising inflation and geopolitical uncertainty. A broader wait-and-see attitude is expected until the effects of the US tariffs on international trade and the real economy become clearer.
• Manufacturing and trade industries and businesses will seek the new equilibrium point as supply chains are likely to be reallocated, adjusting production and transport costs. This process may require a longer period of time before firms regain a stable rate of investment and profitability.

Conclusions

1. Short-term volatility: The corrective movements that started in the first quarter are expected to continue in the second quarter, especially if trade frictions escalate.
2. Resilience at the Macroeconomic Level: The US is not expected to enter a recession in the short term, while Europe is showing relative resilience in the services and tourism sectors, despite concerns about lower industrial production in some countries.
3. Opportunities in Selected Sectors: Banking profitability, particularly in Europe and Greece, is shaping a more optimistic outlook for the relevant sectors, although there is no shortage of challenges from high debt levels and continued inequality in accessibility to finance.
4. Policy and liquidity arrangements: Central banks closely monitor inflation and growth dynamics. It is likely that monetary policy will remain stable in the short term until the true extent of the impact of the tariffs becomes clear.
5. Medium-term perspective: If it is confirmed that no recession results from trade restrictions, some of the uncertainty will recede, creating normalizing conditions. However, any reversal of the trend will depend on how quickly firms and investors reposition themselves in new supply channels and trade partnerships.

Overall, the second quarter of 2025 is called upon to serve as a “test tube” to investigate the real impact of the US tariffs, both at the geopolitical and macroeconomic level. Investors and businesses need to remain vigilant, formulating flexible strategies to respond to possible shifts in international trade and monetary policy.