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Trade Agreements Fuel Optimism but Uncertainty Beckons

 

The International Monetary Fund (IMF) downgraded global GDP growth forecast to 2.8% and 3.0% for 2025 and 2026, respectively from 3.3%. This revised rate is well below the historical average (2000-2019) global growth rate of 3.7%. Advanced and emerging/developing economies are now projected to expand by 1.4% and 3.7% in 2025 down from 1.9% and 4.2%, respectively.  Global inflation is projected to soften to 4.2% and 3.6% in 2025 and 2026, respectively. Trade tariff is projected to curtail global trade volume growth to 1.7% compared to 3.8% in previous projection.

 

Multilateral cooperation is coming under renewed threat from a second Trump presidency. This could potentially blunt the fruits of globalization leading to increased supply chain fragmentation and structural rise in global inflation. President Trump’s policies on global conflicts, trade, taxes, deficits, and immigration are primed to drive market volatility throughout 2025. However, the anticipated volatility will also provide compelling investment opportunities across all asset classes for shrewd investors. 

 

After having front-loaded rate cuts by a total 100bps during 2H24 the FED decided to stand pat at the latest June FOMC meeting. The combination between a resilient U.S. economy and steady labor market allowed the FED to remain patient in normalizing policy. The latest dot-plot suggests a total of 50bps of incoming rate cuts for 2025 with 25bps cut each in September and December.  The FED downgraded CY25 and CY26 U.S. economy outlook for the second time this year from 1.7% and 1.8% to 1.4% and 1.6%, respectively. CY25 and CY26 core PCE were upgraded from 2.8% and 2.2% to 3.1% and 2.4%, respectively. 

 

The ongoing culling (both planned and implemented) of the federal workforce totals 216k positions thus far with another 75k accepting voluntary buyout offers. This puts more workers into what is already a finely balanced U.S. labor market. The U.S. Federal Government employs 2.4 million workers (excluding U.S. postal service) accounting for 1.9% of the entire U.S. civilian workforce. This could ultimately amount to the biggest job cut in U.S. history. Recently, Judge Susan Illston has issued preliminary injunction that pauses further reductions in force of the federal government. The Trump administration has appealed this decision.  

 

 

 

 

U.S. leading indicators deteriorated as fears over unemployment and inflation expectations mount. Tariff polices remain in constant flux. The 90-days reciprocal tariff reprieve which was originally supposed to expire on July 8th was deferred to August 1st to allow for more trade negotiations. Japan and EU has since successfully negotiated trade agreements with the U.S. A 15% tariff on goods exports will be applied to EU and Japan in exchange for binding energy purchases and investments. Certain goods categories may see lower or higher tariffs subject to further negotiations. A 30% baseline is applied to China down from 145% earlier. 

 

After eight consecutive rate cuts, the ECB held rates unchanged at the latest meeting. The ECB earlier downgraded GDP growth outlook to 0.9% for CY25 and projects slightly lower GDP growth for CY26 at 1.1%. The ECB’s asset purchase program (APP) and pandemic emergency purchase program (PEPP) no longer reinvests principal payments from maturing securities.  The ECB is on an aggressive easing pivot to bolster meager economic growth amid challenged external demand.

 

BOE Governor Andrew Bailey has signaled an expedited approach to monetary easing and followed through with a 25bps policy rate cut in February and May to 4.25%. In May, the BOE downgraded 2025 GDP growth forecast from 1.5% to 1%. The BOE is anticipated to cut at policy interest rate at least once more in 2025. Headline and core CPI rose 3.6% YoY and 3.7% YoY, respectively in June driven by services. The BOE expects inflation to move towards 2% overtime.

 

After the BOJ held policy rate steady at the December meeting, the central bank voted 8-1 to hike policy rate by 25bps to 0.5% in January to a 17-year high. Inflation has persistently hovered above the 2% BOJ’s target. The market is now pricing a full a cycle high of 50bps in total policy tightening for CY25 as surges in food price may drive inflation overshoot. Regardless, the BOJ maintains the optionality to moderate the pace of rate hikes should trade tariff negatively threatens near term growth and inflation outlook.  China’s economy continues to expand faster than the 5% official target. GDP expanded by a stronger than expanded 5.4%YoY in Q1CY25 followed by 5.2% in Q2CY25. 

 

India’s GDP slowed to 6.5% in FY24 due mainly to the contraction in government spending after a robust 8.2% growth in 2023.  India’s benchmark equity index, remains 4% below all-time-high. Nevertheless, RBI’s cumulative 100bps rate cuts over past three consecutive meetings, a projected rise government spending, moderating inflation and tax relief has sparked optimism.  The RBI sees stable 6.5% GDP growth for FY25.   

 

 

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Arun Pawa, IP, FM, IA, Investment Strategist 

CIMB Thai Bank (CIMBT)