A year of tectonic shocks: How 2025 broke the old global economic order

The long-term effects of the tectonic shifts visible in 2025 are hard to parse

Major shifts in economic policy or in an economy’s dominant technology have long-lasting and sometimes unpredictable effects on internal political dynamics, wealth distribution, and inequality. The age of easy money, for example, led to asset prices ballooning and entrenched wealth disparities, creating a politics of populism and political divides between generations and educational strata. Freer trade led to geographical disparities developing in industrial nations and to the reduction of the social and political power enjoyed by traditional landowning castes and classes in countries like India — again, with major consequences for political trends decades after the economic shift in question began. 

The year 2025 has been tectonic in multiple ways. Two major shifts in policy have taken place globally, alongside one major development in the technological substrate. The world’s trading architecture is being remade; politics has turned against the migration of people; and investment in artificial intelligence has become the driver of global growth. Each of these will have important — but sometimes clashing — consequences. 

The re-election of Donald Trump to the White House has brought us to a more transactional, less connected moment in our global economic architecture. The rise of China had already led to some constraints on trade flows — in India, the European Union, and elsewhere — to protect crucial infrastructure like telecom and power, or to retain strategically important manufacturing sectors like automobiles. But Mr Trump has ensured that trade skirmishes stop being bilateral and local, and instead become a global conflict. It is now a world war, with unexpected adversaries arising every month. Last December, it would have been hard to predict that within a year Mexico would be imposing 50 per cent tariffs on Indian cars. 

The shift away from efficiency to security as the core principle for the design of trade will have major implications. Prices will have a tendency to rise. Given that central banks will nevertheless target moderate levels of inflation, this means that specific tradeable goods will become relatively expensive. That is equivalent to saying that other tradeables and non-tradeables will become relatively cheap, and those who produce them will find their purchasing power reduced. This might include the providers, for example, of low-level entrepreneurial services — barbers in the West, pakoda-makers in India. Over time, this immiserisation will cause the growth of political factions that demand access to cheaper goods — or, more likely, demand specific sector-focused welfare. Trade barriers certainly create jobs, but each job created will be prohibitively expensive when seen in terms of income and welfare foregone for other citizens. Over time, that creates its own discontent. In addition, if the jobs created by trade barriers are concentrated in certain areas, that will intensify political resentment between geographies. 

In many countries of the West, politics has turned as much against the movement of people as it has against the movement of goods. Anti-migration forces are now in power in the United States (US), Japan, and parts of Europe, and may well seize other major countries — including Britain, Canada, France, and Germany — by the end of 2029. The aggressive way in which the Trump administration has moved on extra-judicial deportations may normalise such behaviour across the West. This might certainly reduce migration in the medium term, but will also create domestic unrest. From an economic point of view, however, it will directly affect those sectors which are propped up by overseas labour. These include health care, agriculture, and small urban services like deliveries. The costs associated with providing these services will grow, creating resentment particularly in urban areas. While in Europe, the focus has been on reducing lower-skilled migration and leaving higher-skilled migration unchanged, this will not satisfy more right-wing ethno-nationalists of the sort that have attacked even the H-1B programme in the US. Higher-skilled migration may also be paused. This will be a net loss for technological development, as high-skill clusters are necessary for growth. At a local level, however, such clusters in source countries for migrants — such as Bengaluru — might prosper. The average expected income for a developing-nation potential migrant with high skills, however, will fall as opportunities in the West close themselves off. The additional income in the prospering areas will thus accrue to companies and investors and not to engineers or entrepreneurs. 

The movement across frontiers of goods, technology and people might face restrictions going forward, but that of capital will apparently continue unimpeded. In other words, producers and skilled workers will find their markets constrained, while financiers will not. The logical fallout of this disparity is for the returns to finance to grow at the expense of returns to investment in production or human capital. At a macro level, this might further unbalance some economies — such as Britain’s — that are already too dependent on financial services. Other economies will see internal pressures increase unless household savers are allowed to access some of the financial returns that are being delivered to more mobile capital. In countries like India, where prudential norms prevent this from happening, and other misguided regulatory concerns limit even the ability to invest in indices abroad, this will come to be seen as amounting to the expropriation or repression of regular savers. 

While the consequences of these policy shifts on the global and domestic political economy are relatively predictable, their interactions are not. Investors in Western delivery apps might make more money (thanks to the free flow of capital) even as their specific services become more expensive for end-users (thanks to restrictions on immigrants) while such services  sectors become relatively cheap (thanks to the relative price of non-tradeable services decreasing) although the actual food delivered might become more expensive (thanks to trade barriers). 

The final ingredient in this unstable cauldron is artificial intelligence (AI). Whether or not it is a bubble, the fact is that investment in AI is a major component of growth in multiple economies. When the supportive infrastructure is built out, it will reduce costs for some services and processes while replacing some human roles in the supply chain for those services. But we do not yet know the degree to which it will raise productivity, the sectors it will render redundant, and the spatial and class distribution of the long-term returns to this investment. 

In other words, a broadly predictable global economy has been thrown into long-term chaos by the events of 2025. Perhaps 2026 will provide some clarity as to the effects of the tectonic changes over the past year.