Global trade sees countries forging new alliances
As the US continues its global trade war, the rest of the world is busy forging new alliances and strengthening existing ones. Europe and Asia, in particular, are eager to maintain open trade links and implement growth-supportive policies. This shift is giving rise to a fascinating phenomenon: the emergence of bilateral trade agreements that bypass the US as these regions seek to insulate themselves from the unpredictable whims of US politics. Indeed, we see this happing in real time.
As the global economy navigates uncharted waters, one thing is certain: the US is no longer the sole captain steering the ship. The country’s unpredictable politics, marked by a flurry of executive orders, have created a ripple effect that impacts trade and fiscal policies worldwide. This erratic behaviour has led to a softening of short-term economic growth. While we see an elevated risk of a recession looming on the horizon, it is essential to note that any downturn would be unlikely to be long-lasting, since the US economy is not plagued by major domestic imbalances. The US Federal Reserve is likely to react slowly given tariffs’ potential inflationary impact. We forecast two 50-basis-point (bps) rate cuts in the second half of the year. However, companies are adopting a wait-and-see approach, putting investment and hiring plans on hold until the dust settles, which is softening the US growth outlook.
Europe and Asia are responding to the US tariffs with stimulus measures
Meanwhile, European countries are poised to ramp up public spending, having demonstrated remarkable fiscal discipline in recent years. By easing regulations and cutting red tape, they are creating fertile ground for businesses to thrive. Looking ahead to the second half of 2025, we expect to see a surge in efforts to reduce the regulatory burden, increase fiscal spending, and stimulate growth without triggering inflation. We expect monetary policy in Europe to become expansionary in 2025, with the European Central Bank set to cut rates by 25bps at each of its next three meetings, accompanied by growth-supportive fiscal policies in 2026.
In Asia, and particularly in China, trade talks will remain a source of volatility, but more supportive domestic and monetary policies should mitigate the impact. The world will respond to US tariffs primarily with stimulus measures rather than by imposing retaliatory tariffs. The rebalancing of global trade will be driven by stronger growth in Europe and Asia, and weaker growth in the US.
Actively managing currency risk is essential
A shift in global capital flows is underway, with investors increasingly looking beyond the US for returns. This has significant implications for the foreign exchange market and has much to do with the USD’s safe-haven status, which was questioned in the wake of ‘Liberation Day’. When the US finds itself at the epicentre of a crisis, the USD does not benefit in the early stages of risk-off episodes, but rather once recession risks spread from the US across the globe. Hence, we expect the USD to remain within its lower trading range of EUR/USD 1.10–1.20, with substantial downside risks. Traditional safe-haven currencies, such as the CHF, remain a better choice for investors seeking refuge, despite the rising probability of a zero or even negative interest rate policy. In the context of a changing world order and heightened uncertainty, actively managing currency risks is paramount for investors.
Hope is not a strategy, but a robust strategic asset allocation including gold is
2025 will not be an easy year for investors. Geopolitics, US policies, and fiscal errors, particularly in the US, remain major concerns. The geopolitical transition is a complex process that introduces volatility into markets. This makes a broadly diversified investment strategy, designed to provide robustness amid choppy waters, all the more important. Hope for the best, but prepare for the worst. Investors’ strategic asset allocation remains the fallback solution when uncertainty increases. Gold remains an integral part of any asset allocation, offering protection and diversification benefits amid economic and geopolitical risks. Trade tensions, and the related risk aversion in financial markets, are cyclical add-ons to gold’s structural bull market, which is determined by central-bank buying. Both are a manifestation of our multipolar world, increasing our conviction about the solidity of the gold bull market.
Find out more about the current investment environment in our Market Outlook Mid-Year 2025.