EDITORIAL: GLOBAL ECONOMY IN THE LAB

Each year, our economic and capital market outlook is built around a central theme that serves as a metaphor for the prevailing environment in the year ahead. This time, we chose the laboratory. Just as in the global economy, risks and opportunities coexist in the lab, trial and error are essential. Innovation is being rewarded – and many surprises or disruptive factors ultimately turn out to be nothing more than noise in the process of progress.

Admittedly, some scientists are currently creating uncertain experimental conditions. Nevertheless, amidst all the smoke, one should not overlook the opportunities bubbling away in the test tube. Our baseline scenario, 'Eager Experimentation', demonstrates the resilience of the growth experiment. Although there are numerous hazardous substances, these do not prevent the global economy from continuing to grow: the laboratory remains intact.

Base scenario: Eager experimentation

In the global economic laboratory, the Bunsen burners are flickering and geopolitical vapours are obscuring visibility. Yet the grand experiment proceeds with remarkable stability. Despite the 2025 trade conflict, the 2026 war in Iran and rising interest rates, the product of the economic formula is growth.

Reckless individuals failed to seize control of the laboratory and cause the experiment to fail. More decisive, is another process within the economic laboratory: the industrial cycle. After years of little reaction, the heat of reaction from the AI experiment led to a broader upturn in global industry. The export-driven German economy is particularly likely to benefit from this, because many formulas rely on German ingredients. At the same time, it becomes apparent that, following the so-called 'Liberation Day', globalisation is more robust than anticipated, with world trade functioning even beyond China's export successes. The trade truce between the US and China also appears stable enough to avoid blowing up the laboratory immediately.

Many influencing factors – but not highly reactive

Of course, there are also dangerous substances on the shelf: high public debt limits fiscal maneuver. However, there will be no harsh consolidation, and the interest rate solution will not be applied in highly concentrated doses. At the same time, another powerful reaction is taking place, which economists refer to as 'technological progress' – currently taking the form of artificial intelligence above all else. Whether investment in AI will continue to ramp up, whether profits will exceed expectations or whether a political and cultural backlash will cool the reaction are major unanswered questions in this experimental year of 2027. In the baseline scenario, however, the general assumption is that the AI reaction will not be highly exothermic. It will not release enormous amounts of energy in a short space of time.

Thanks to lower energy prices, inflation is likely to ease over the course of the year, strengthening purchasing power and relieving the pressure on central banks to further raise interest rates. Overall, the global economic landscape remains risky, but the 2027 experiment has a good chance of proceeding in a controlled manner rather than explosively.

Negative scenario: Laboratory Accident

In the negative scenario, the global economy resembles a high-risk experimental setup: numerous players with conflicting objectives and explosive substances – a situation in which even minor mistakes could trigger an accident. A toxic mix of political decisions and market developments leading to a recession is imaginable. The geopolitical situation resembles an overheated mixture: Ukraine, Iran, Taiwan, North Korea, and mounting tensions between Russia and NATO. At the same time, AI threatens to transform from a beacon of hope into a smoldering fire: if productivity and profit expectations are not met, investment could abruptly stop, creating a significant demand gap.

Added to this are the issue of unstable public finances. Looming over it all is a US President in 'mad scientist' mode, particularly in relation to China, where stable trade policy is far from certain. In this situation, the experiment is spiraling out of control.

Positive scenario: The Golden Formula

After years of failed attempts and exposure to numerous hazardous substances, achieving a positive outcome by 2027 seems almost like alchemy. Yet, in the global economic laboratory, this feat is achieved. Defying all expectations, the scientists discover the golden formula. There are no new geopolitical shocks, and existing conflicts lose their explosive power as people become accustomed to them. In some places, the situation even improves.

At the same time, the impact of AI is greater than anticipated. Additional investment, multiplier effects, rising share prices and broader application are also boosting sectors that have so far been largely unaffected. The industrial cycle appears to be stronger and more extensive than expected, while global trade is proving to be more dynamic than forecasted – a self-reinforcing upswing is taking hold. Even remaining geopolitical tensions are acting as a catalyst: the EU is using the current environment to establish itself as a reliable partner, access new markets and diversify supply chains. Higher growth is easing distributional conflicts, bolstering tax revenues and weakening populism.

There is bubbling, crackling, banging and hissing. Yet, behind all the smoke and mirrors, there are reactions taking place that could create desirable economic and capital markets products. Don't let the antics of mad scientists and dangerous substances put you off experimenting – trust in the robust economic process!

Yours,