The 2025 International Economic Outlook presents a detailed analysis of global economic conditions under significant policy shifts and leadership changes. With the election of Donald Trump as U.S. president, his administration’s policies on tariffs and fiscal measures are expected to reshape economic trajectories globally. The report emphasizes the challenges and opportunities arising from these changes and their implications for markets.
Key Themes and Economic Forecasts
1. U.S. Economic Outlook
- Growth and Inflation:
- GDP growth forecasted at 2.0% in 2025, slowing due to the introduction of tariffs and tighter fiscal conditions.
- Inflation expected to remain above the Federal Reserve’s target, with core PCE inflation forecasted at 2.5% for both 2025 and 2026.
- Policy Landscape:
- Introduction of a 5% tariff on all U.S. imports and a 30% tariff on Chinese imports in H2-2025.
- Gradual Federal Reserve rate cuts anticipated, with terminal rates reaching 3.50%-3.75% by late 2025.
2. Global Growth and Divergences
- Global GDP: Expected to grow at 2.5% in 2025, down from 2.9% in 2024.
- Advanced Economies:
- Eurozone growth at 0.9%, limited by weak consumer sentiment and tariff-induced uncertainties.
- Japan’s growth forecasted at 1.1%, supported by firm domestic demand despite global headwinds.
- Emerging Markets:
- China: Growth projected at 4.0%, hindered by tariffs and ineffective fiscal stimuli.
- India: Resilient at 5.7%, benefiting from domestic demand and structural reforms.
- Mexico: Facing recession with growth slowing to 1.3%, heavily impacted by U.S. trade policies.
3. Tariff Impacts
- Global Trade Disruptions:
- U.S.-imposed tariffs expected to ripple across economies, with emerging markets facing the brunt of the impact.
- Countries with strong U.S. trade ties, such as Mexico, are particularly vulnerable, while others, like India and Brazil, are relatively insulated.
- Currency Implications:
- U.S. dollar strength to persist, with the euro forecasted to fall below parity at 0.97 by Q1-2026.
- Emerging market currencies, such as the Brazilian real (BRL7.00/USD) and Mexican peso (MXN23.00/USD), are expected to depreciate significantly.
4. Monetary Policy Divergences
- Advanced Economies:
- The European Central Bank (ECB) is expected to aggressively ease rates, reducing the deposit rate to 1.75% by late 2025.
- The Bank of Japan (BoJ) to continue rate hikes, reaching 0.75% by 2026.
- Emerging Markets:
- Most central banks to cautiously ease rates, though fiscal constraints in regions like Latin America may limit policy space.
- Brazil and Turkey are notable exceptions, with the former tightening rates to combat inflation and the latter aggressively easing.
5. Investment Themes
- Equities:
- Defensive sectors like utilities and healthcare in advanced economies.
- Emerging market equities selectively favored in India and Brazil due to domestic resilience.
- Fixed Income:
- U.S. Treasuries and high-grade bonds attractive for yield.
- Local currency EM debt in select regions like Asia and Latin America offers opportunities, though with heightened risk.
- Currencies:
- Favor USD and JPY for safe-haven appeal.
- High depreciation risks for trade-reliant currencies like the Mexican peso and Chinese renminbi.
Strategic Recommendations
- Diversification:
- Emphasize geographic and sectoral diversification to mitigate tariff-related risks.
- Fixed Income Focus:
- Allocate to sovereign bonds in developed markets and carefully selected EM local debt.
- Defensive Equities:
- Concentrate on sectors with stable earnings and limited trade exposure.
- Currency Hedges:
- Utilize USD-based instruments and consider hedging against EM currency depreciation.
- Infrastructure and Technology:
- Invest in transformative themes such as AI, renewable energy, and supply chain realignments.
Conclusion
The 2025 International Economic Outlook underscores the complexity of navigating an evolving economic and geopolitical landscape. Tariff policies and monetary divergence create both risks and opportunities, with active management and strategic positioning crucial for achieving favorable investment outcomes.
