During February, unpredictability and confusion around President Trump’s policies raised concerns over escalating geopolitical risks. President Trump’s tariff threats reignited retaliation warnings from China, increasing nervousness amongst traders and investors. Economic data sent mixed signals: in the US, core inflation increased to 3.3%, but consumer spending unexpectedly dropped. With heightened volatility, the S&P 500 (-1.4%) and Nasdaq (-2.8%) posted their worst monthly declines in over a year, while the Dow lost -1.6%.
Other global markets were mixed. Australia’s ASX 200 was down -4.22%, Japan was down 5.7%, but European markets were decidedly upbeat. The UK was up 1.57%, France up 2.03%, and Germany up 3.77%. Perhaps a partial reversal of the Trump trade, which saw US markets outperforming their European peers, is underway.
Commodity markets were also mixed, with energy prices according to The World bank dropping by 4.2% and coal down around 10% over February. Over the month gold prices experienced a notable increase, while copper and iron ore prices saw more modest gains.
The Australian dollar remains stuck in weakness around the USD 0.62 level, off almost 5% over the last 12 months. Bond markets were mostly unchanged but with a slight drop in yields and the US 10 year Treasury ended the month at 4.24%, and the Australian 10 year bond at 4.39%.
Global outlook: growth, inflation, and policy shifts
Globally, we expect real GDP growth of 2.5% to 2.7% in 2025, supported by tailwinds from growth in real disposable household income and easing financial conditions. We anticipate that US growth will continue to outpace its peers, driven by significantly stronger productivity growth. We also expect global core inflation to gradually fall to around the mid-2% level by year-end, enabling central banks to maintain their policies of slow but steady rate cuts.
We expect the US Federal Reserve (Fed) to deliver two further rate cuts in 2025, likely followed by an additional 25 basis point (bp) cut in June 2026, bringing the terminal rate to around 3.75%
In the Euro area, continued structural headwinds in the manufacturing sector, trade policy uncertainty, and ongoing fiscal consolidation are likely to result in further stagnation, particularly as the two largest European economies, Germany and France, face political challenges. We expect the European Central Bank (ECB) to continue delivering rate cuts until the policy rate reaches 1.75% by mid-year.
In China, we expect real GDP growth to slow to 4.5% year-on-year (yoy) in 2025, as the significant step-up in policy easing measures only partially offsets weak domestic consumption, the ongoing property market downturn, and higher US tariffs. We remain cautious about China’s growth outlook, given structural challenges, including deteriorating demographics, a multi-year debt deleveraging trend, and global supply chain de-risking.
The US and Trump uncertainty
Uncertainty surrounding US policy remains high, with risks tilted toward higher tariffs, which could significantly impact US growth and inflation, with larger growth drags in Europe and China. Geopolitical developments are also concerning, as the conflict in the Middle East continues, US-China relations remain strained, and the resolution to the Russia-Ukraine war remains highly uncertain.
The stock market has struggled in recent months. The global benchmark, the S&P 500 index, has been trending sideways for almost four months, its longest period of stagnation since the 2003 correction. The previously strong performers, the Magnificent 7, have been virtually unchanged since July last year.
Several factors are likely contributing to the recent market disappointments, including weaker economic reports,
declining consumer confidence, cautious corporate outlooks, worsening inflation reports with selective increases in
commodity prices, and ongoing concerns about Trump tariffs.
In Australia, election risks approaching
A federal election must be held before 17 May 2025, with the Prime Minister expected to announce the date in the coming weeks.
Recent opinion polls suggest the Labor (ALP) government is trailing the opposition Liberal/National (LNP) Coalition. While the election outcome remains uncertain, polls point to a likely hung parliament, where the ALP and LNP would need to negotiate with minor parties and independents to form a minority government. Betting markets currently marginally favour an LNP victory, with surveys highlighting electorates’ concerns about the high cost of living, housing affordability, and the state of the economy.
Analysis indicates that Australian elections typically have only a modest, temporary negative impact on ‘soft data’ such as consumer confidence, with little effect on consumer spending or business investment. The last hung parliament in 2010, for example, resulted in only a temporary dip in consumer sentiment (a reversal of around 5%, which was short-lived) and had no significant impact on economic data or the equity market.
From a longer-term perspective, material differences in policies – particularly those related to energy, resource mining, environmental protection, migration, and housing – are worth monitoring.
Lastly, the January inflation data came in close to market expectations. The Monthly Consumer Price Index (CPI) Indicator rose 2.5% year-on-year to January, compared to the market median of 2.6%. The trimmed mean for January was 2.8%, a modest increase from 2.7% in December.
Over the past two months, the monthly core inflation measures have all been running below 3%, marking an
improvement from previous months. We expect core inflation to continue drifting lower. We remain cautiously
optimistic about the economic outlook for both Australia and the global economy, though we are alert to any data
that could signal an inflection point for the business cycle.
