Global Outlook 2025 Podcast - Reverberations

The desk anticipates significant shifts in global markets stemming from the upcoming US presidential transition, particularly regarding the USD and emerging market (EM) assets. Per the full note from Standard Chartered, the implications of potential US tariffs on China and other trade partners could reshape global growth dynamics, influencing currency valuations and investor sentiment. Our analysis aligns with a consensus target of 1.075 for the EUR/USD, reflecting a cautious optimism amid geopolitical uncertainties. With no immediate calendar events to disrupt this outlook, traders should remain vigilant for any policy announcements that could alter the trajectory.

What the desk is arguing

The desk posits that the US presidential transition will have profound implications for global economic growth, the USD, and EM assets. Per the full note from Standard Chartered, the anticipated tariffs on China and other key partners could lead to a recalibration of trade relationships, impacting currency flows and investor confidence.

Supporting this view, Standard Chartered's analysis suggests that the transition could exacerbate existing tensions, potentially leading to a stronger USD as investors seek safe-haven assets. The desk notes that any shifts in trade policy could influence capital flows into EM markets, which have been sensitive to US monetary policy changes.

Where it sits in our coverage

Our consensus target for the EUR/USD stands at 1.075, with a range of 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)

This view aligns with jpmorgan, which shares a similar outlook, while bofa presents a more cautious stance at the lower end of the spectrum. The desk's target is positioned towards the upper bound of the consensus range, indicating a belief in a stronger EUR against the USD as the political landscape evolves.

How other firms see it

Firms like jpmorgan and citi are aligned with the desk's perspective, anticipating a stronger USD amidst geopolitical shifts. Conversely, bofa holds a contrary view, expecting a weaker EUR/USD trajectory.

Key currency pairs to monitor include USD/JPY, which may react to shifts in US monetary policy, and AUD/USD, sensitive to trade dynamics with China. These pairs could provide insight into broader market sentiment as the political landscape changes.

What the calendar says

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stanchart

Hello and welcome, I'm Aneesha Tank. And on behalf of Standard Chartered, I'd like to welcome you to this podcast featuring the best of the bank's research and analysis. Our first look at Standard Chartered's global economic outlook for 2025.

The report has been called Reverberations as it closely considers what does America first mean for global markets. With me to make sense of it all, Standard Chartered's head of global research and chief strategist, Eric Robertson. I'm also joined by Kaushik Rudra, global head of fixed income research and head of Asia research.

Eric, reverberations, that's what you're calling this report. It's clear that the outcome of the latest US presidential election has prompted these ripples of anticipated policy change. What does it mean for everyone?

Look, I think there's a couple of themes that we are thinking about in this report. And obviously, one is economic uncertainty with regards to new leadership in the United States, what that might mean for tariffs on key trading partners. It also implies quite a bit of political uncertainty in the world.

We have new leadership in the US. We have changing leadership in a number of major economies around the world. And I think that has implications for economic policy.

I think the critical undertone for everything that we've been talking about and writing about is that with trade policy and with global supply chains, there is a potential for a major spillover effect. And even if the tariffs are really a function of US and China or US and Europe, the potential spillover for Latin America, for the rest of Asia, I think could be quite profound. Well, let's pick this up with Kaushik straight away, then.

We've got to talk about emerging markets. What sorts of questions are you getting about this outlook? I think clearly a lot of concerns about President Trump's policies.

This obviously has to do with his growth policies, which will have implications for the US in terms of higher inflation, but it will also have implications for the rest of the world through higher rates, stronger dollar policies on the protectionist side, in terms of labor policies, in terms of tariffs, both of which could be inflationary again for the US, certainly contractionary for the world. And then, of course, geopolitical concerns, all of which will have major ramifications for the world. If you're a central banker in certain parts of the world, what are some of the curveballs that you might be wanting to anticipate this year?

I think the biggest challenge is to lose control of the reins of policymaking and obviously being driven from outside. And I think that is a big concern for a lot of central banks around the world. Now, we've seen strength in the US economic data through the labor market, through stubbornness and inflation, which has meant term premium has jumped up, US dollar strength.

This is even before the US presidential election. And, of course, since President Trump's election victory, that has solidified. I think that trade has really taken root and that really makes it much more challenging for central banks.

And I can talk about Asian central banks in particular. I think all of them probably will have one eye on what happens in the US with respect to their own policymaking. If the dollar continues to strengthen, if rates continue to be elevated, it's very hard for Asian central banks to continue to cut rates in a meaningful way and create that divergence in terms of interest rate differential, which clearly will have other implications for them, including importing inflation.

Erik, I think one of the interesting topics you've been talking about recently is how obviously we're seeing a big change of leadership, but something that has been driving that is the fact that money has been tight in many economies. If I think about some of the developed markets in particular, you see this in Europe. There's a real story playing out where you see the convergence of politics and just literally money in people's hands.

Look, you raise a really interesting point and it sort of wraps itself around the idea of fiscal policy, populism, monetary policy perhaps being restrictive and what are the best ways to respond to that. This tension around whether or not inflation has come down enough and whether that will allow central banks to ease monetary policy. As we've talked about before, the cost of living for most populations is still elevated, even if the inflation statistics appear to look a little bit better.

Now that complicates things for central banks, but it also may mean that governments may need to do more in terms of fiscal stimulus, in terms of supporting their economies. What I think bond yields and bond markets around the world, both in developed and emerging economies, are starting to suggest with the recent steepening is that there are some concerns about government's ability to fund this fiscal stimulus. There's an expectation that borrowing will increase, that spending will increase and therefore bond supply will increase.

This is something that Kaushik and I have been discussing in our reports, again, as it relates to both emerging and developed economies. Let's take it then to the United States and talk about that inflation story and the pressure this is putting on the Fed. Just walk us through it and what we can expect as the year moves on.

The Fed rate cut trajectory has swung fairly wildly over the last four months. In September when the Fed cut by 50 basis points, markets were expecting something along the lines of 175 basis points of cuts between then and the end of 2025. Now we argued at that time and still believe that the Fed is still going to cut a couple of times this year and it comes down to the inflation narrative.

Now what we've seen is that inflation continues to moderate but at a very slow pace and that is effectively making the job a little bit more complicated for the Fed. I do think in the first part of the year we're going to see a little bit more friendly inflation data but then we get into the question of what does Trump do with tariffs and if he gets really aggressive on the tariff front then I think there's a risk of inflation heading back higher in the second half of the year. Well Eric, thanks for teeing up my next question which is on trade.

Kaushik, let me take it to you. One of the big questions hanging in the air, is there a chance of a US-China trade war? The thing to consider here is the following.

I think China's economy is in a difficult spot. I mean China has achieved growth rates which were sort of in line with expectations in 2024 but that doesn't really tell us the full state of the Chinese economy. I think that some of the major drivers of the Chinese economy are not necessarily performing very well.

We can talk about the real estate sector, we can talk about consumer sentiment, we can talk about business sentiment all of which are in trouble right now. One area that was supporting the Chinese economy was net exports and the tariffs are going to be a very difficult challenge and I think will shave off a pretty sizable portion of China's growth. The impact will also be large for countries that are exposed to China.

Countries in the past were very heavily exposed to the developed world, particularly the US and Europe. I think their focus has shifted and a lot more of their GDP is now related to the Chinese economy. I think if the Chinese economy does have challenges, it will be felt in the rest of the world.

That said, one of the things to consider is there will be new winners. I think even in the first Trump administration, we saw trade between the US and China drop. We saw trade pick up between China and Vietnam, China and Mexico, and US and Mexico and US and Vietnam.

I think there is going to be increased trade fragmentation. Perhaps there will be new players this time around, but I think we will have to look for new winners in this cycle. This is largely going to be dependent on where the tariffs are hardest.

We are already seeing some of the Asian countries starting to set up for potentially benefiting from this contractionary theme that we're going to see play out. But let's say there is this potentially damaging trade war between the US and China, Eric. What sort of firepower does China actually have to deal with it in terms of stimulus, in terms of the money available to stop this being detrimental on a wider scale?

One of the themes that our team has focused on quite a bit over the last six to nine months is that China appears to be underutilizing its fiscal resources. Most of the policy support that we have seen for the domestic economy has come in the form of monetary easing and the addition of liquidity. We think that they have withheld fiscal support.

If you were to see Trump increase tariffs to 60% on China, our view is that that could cost China somewhere around 1.5% to 2% points of growth. Now relative to a 5% growth rate, that is a meaningful hit to economic momentum and we think it would hit exports to the US by 65% to 70%. The real issue in our mind is whether or not China is willing to provide fiscal stimulus to the private sector, especially to consumers, and whether they will look at redirecting their exports which may not be viable to the US to other parts of the world which would have the implication of exporting deflation.

So I think the real resource that is available to China to support its economy is on the fiscal side and I think the real target of that fiscal stimulus should be the domestic consumer. Okay, so as we consider all of this, we start to think about the trajectory of the US dollar. Gaushik, what are expectations around the dollar for the coming year and let's extrapolate from that what it could mean for key commodities.

The dollar is expected to continue to perform well. We've already had a very strong run for the dollar over the last few months. So I suspect near term we could have periods where the market pauses a little bit.

But of course, if the announcements are on the higher end of the spectrum, I suspect the dollar will probably start to rally again. And that will have implications for emerging market effects, it will have for other currencies as well. I think this dollar strength or this US exceptionalism theme is happening because Europe is not necessarily doing very well.

It's also happening when China is not doing very well. Now, I think if we continue to see dollar strength, that will obviously result in some amount of moderation in commodity prices. Clearly, that's been a theme and that's something we've seen.

But commodity prices, I would argue, have been driven more by demand conditions right now. They've obviously at various times been pulled back because of concerns around the China growth story. And every time there is expectation that China will push through a stimulus, I think you can see the commodity prices doing well.

Oil obviously had a different angle to it, obviously had the supply angle as well. It concerns about excess supply, particularly after the new president comes in sort of pushing oil players to increase oil production in the US. Our view is that's not necessarily going to be the case because oil majors don't have the capacity to ramp up production significantly.

And current oil prices also don't support shale in a more meaningful way. So I suspect there are limits to how much we'll see oil prices going higher. But certainly, I think the FX side will have a very important bearing on commodity prices over the next 12 months.

Eric, let's pick that up as well, the dollar story. What keeps this dollar strength going? I think there's a couple of things, Manisha.

In very general terms, we can talk about US economic outperformance. It feels to us as if even though the US economy may slow a little bit this year, it will still log pretty good outperformance relative to the euro area, relative to China, and relative to a number of other developed economies. I think what's more critical though when you start to get into the fundamentals is the interest rate differential.

And one of the things that I think has really caught the market's attention was the abandonment of rate cut expectations from the Fed, the increase in rate cut expectations from the likes of the ECB and a number of other central banks. And so the market has started to get its head around this idea that actually the US rate trajectory may still be higher for longer. And I think that has given the dollar quite a bit of support.

The other issue is asset performance. US equities have outperformed global equities. The US credit market is a similar story.

And I think there's just becoming this perception that when rates are high and US assets are performing well, the hurdle to deploy capital, to move money out of the dollar and into local currency markets elsewhere, that hurdle has gone quite a bit higher. So I think that's sort of the nexus of what we're talking about. So then would you say that strength, Eric, goes hand in hand with an America first approach on the side of politics?

Well, I guess I'd break that up into two components. The first of which is an America first policy platform consistent with continued dollar strength. And it can be unless you see significant blowback to the US economy.

And what I mean by that is that the current market consensus seems to believe that Trump's policies will be bad for global growth, but that US growth will remain highly resilient. And that may be true, and the US may outperform. But to think that the US economy won't suffer any of the consequences of that global growth slowdown I think are in some ways a little bit unrealistic.

The second factor, and I think that this one is really worth considering, is the consistency issue. Now, Donald Trump has talked about wanting to achieve 3% growth for the US economy, but they're also talking about cutting the budget deficit to 3% of GDP, which would be basically cutting that deficit in half. Now, I don't understand really how they think they can achieve that big of a cut in government spending without having any negative impact on growth.

So I think there's a tension there that will need to be resolved. Gausik, let me take it to you now. Let's go again with this dollar strength question, only because I want to ask, are there any economies out there that are more immune to what is happening in the United States?

And what's happening to the dollar in this era of US exceptionalism? I think generally speaking, it's hard to be immune when so many different factors are in play. And you're caught up in the cross currents between the US, China, Europe.

I think it's a global world, and I think everything is ultimately related. And as long as dollar continues to be the king, which it is right now, it seems like EMFX will trade as a proxy to that narrative. So I think clearly when dollar becomes a non-factor, I think local currency can actually trade much better from its own idiosyncratic bias.

But certainly, I think there are markets like Africa where the nominal yields are actually exceptional. I mean, they're extremely high. There are good inflation stories where inflation is actually starting to come up.

Yes, there will be impact to some extent with what is happening from a global flow perspective. But I think those markets can actually be traded on their own idiosyncratic bias. I think those are stories that a lot of investors have started to look at.

But I would suggest that more people look at it because they actually offer good value in this environment where people typically try to sort of find good trades. I think you could actually focus on quality on one end of the spectrum, but also focus on some of these higher yielding opportunities, which actually give you very good shielding against some of the dollar moves and moves that we are seeing on the rate side. Eric, over to you now.

The yen is really good value right now. Can we just talk about this phenomenon where we stand vis-a-vis obviously what's playing out in the U.S., but what is also happening in Japan? Look, I think this issue of the cheapness of the Japanese yen comes back to something we talked about a few minutes ago, which is this issue of rate differential and central bank policy trajectory.

Now, in response to the economic recovery post-COVID and in response to inflation, the Fed was extremely aggressive in raising rates, taking policy rates from effectively zero to north of 5 percent. The Bank of Japan has had an extremely loose monetary policy for a number of years, and even recently as inflation has finally picked up in Japan, the Bank of Japan has been very slow to tighten monetary policy. So we have lived in a world for a couple of years where the rate differential between the U.S. and Japan was significantly in favor of the dollar and in favor of holding the dollar as an asset currency funded by the yen.

Now, the Bank of Japan has started to hike policy rates, but the trajectory or the pace with which they've done that has been extremely slow. I think what people in the currency markets continue to believe is that the yen will remain cheap. Now, there is a scenario, frankly, where that starts to reverse.

We know that Japanese investors hold a significant amount of foreign assets, and you asked about capital flows early in the discussion. There is a scenario where the Japanese start to repatriate some of that capital because the yen is so cheap. I think we're too early in that narrative, but there are a number of factors which say the yen should stay weak as long as that rate differential between the two economies is as wide as it is.

Alright, let's go to Europe. There's a lot of interest in the trajectory of euro-dollar, but also, are we going to get any good news from Europe this year? For Europe, Manisha, it's a slightly puzzling one because the economic pessimism is a view that is well-subscribed to.

In other words, I don't think we're out of consensus on that at all. What I think is bothering the marketplace, ourselves included, is that Europe doesn't seem to have a lot of fiscal flexibility. A number of their economies are running up against borrowing limits from the Stability and Growth Pact, which makes launching additional fiscal stimulus really difficult.

There is quite a bit of political uncertainty in two of the major economies of Europe, i.e. France and Germany. I think the way the market looks at Europe at the moment is it says, okay, well, fiscal stimulus may or may not be coming.

That's going to put an enormous burden on the central bank to cut policy rates, and that's going to mean a weak currency. We've seen that. The euro trade is extremely weak against the dollar.

We've also seen a big increase in long-term interest rates in Europe, especially in Germany. I think a very challenging outlook for the euro area. There's one more part of the world that I'd like us to round in on, and it's India.

Kaushik, let me bring that up with you. We expect India's growth to be relatively healthy, mid-6%, 6.5% to be very precise. I think growth rate in India is likely to moderate somewhat, but still relatively healthy, powered by the Indian consumer.

The Indian services sector has been very healthy. There's been a decent amount of investments coming in into the country. Infrastructure has been a big push.

I think all of these things continue to support the economy. I think oil prices coming off definitely helped India. I think this trade tariff issue perhaps is not going to be as negative for India as it's going to be for other countries, largely because India is a fairly domestically focused economy.

So I think from that standpoint, it probably gets shielded. It's not completely immune from what's happening. You will see pressure come in from an effects standpoint, and we've seen some of that recently.

But overall, I think it's an economy that seems to be doing well and should continue to be one of the star performers from a growth standpoint. Eric, let me take it back to you, and I just wanted to weave in the political narratives here. What's interesting about what Kaushik was just sharing is here we have a country that has the capacity for such a large domestic market that it has some degree of immunity to the America first approach.

But that, of course, is not the case for other major economies. Does it mean that potentially in the short to medium term, we start to see a reassessment of the way that we trade? I suppose what worries me on the interplay between economics and politics is that there's quite a bit of not only economic uncertainty, but also economic divergence in the world.

But you're also coming into 2025 with a handful of what I would describe as major economies with almost a political vacuum. We've had the resignation in Canada. We have political uncertainty in France.

We have the same in Germany with an election coming in February. We have a brand new leadership team in the UK, and we have political uncertainty in Korea. Those are all major contributors to the global economy, and if they're lacking in their normal political leadership structure, I think that raises some questions about the economic policy response to whether it's tariffs or other measures.

So I think that is a risk for 2025. I think it also raises questions about the direction of trade. I mean we're seeing a number of new trade corridors that have emerged over the last three, four, five years.

And in a number of examples there, you see countries which are very vocal about the fact that they want to remain politically neutral. They're engaging in trade for economic reasons, and they're trying to stay out of the political fray. Whether they can continue to do that is an open question.

Gosh, in Southeast Asia is a multilateral block. We have strength in this sort of conjoined economy as it were. Do you have any reflections on that?

Because one of the questions that comes up is 2025 going to be the beginning of the end of multilateralism and the beginning of a different regional approach and what impact that might have on economic sentiment. As of now, I think we're going around the region and we're sensing that consumer sentiment, the business sentiment is actually fairly robust. Whether you think about Malaysia, whether you think about Singapore, whether you think about the parts of the region, I think in the ASEAN region more broadly, and India as well, I think sentiment actually is reasonably upbeat.

Now, everybody is cautious about what's going to happen next with the tariff story, with a whole host of other factors that we will see over the coming months. And I think that they are preparing for it. I think there will be new winners.

Eric just highlighted, you know, this trade corridor is getting set up. I think the South-South trade has actually been a very important force on the trade front. Despite global trade not necessarily doing very well, the South-South trade has actually been growing very well.

This is trade between Asia, particularly the ASEAN bloc, and the Middle East. New opportunities will come as we get more clarity on what is sort of the problems that we are solving for. And I think that's where we have to look for the new winners, the new opportunities, because there's going to be a number of them across the globe over the coming months.

With that, let me bring it full circle. I want to put the last question to you, Eric. And this is about how it feels.

It's a very transactional approach to foreign policy. I just want to get your final reflections on that. I think that's a great way of describing it, Manisha.

Look, we've talked a few times now about this idea that we've gone from a world where politics and political decisions are principles-based to one where it feels like we're moving into one that's much more transactional. And that probably reduces in people's minds the importance and the influence of some of these multilateral institutions, which obviously we all think is troublesome and worrisome. And it means that countries will be negotiating with each other on a case-by-case or on an ad hoc basis.

Now, it makes it very difficult for global policy makers to plan. It makes it very difficult for global business leaders to think about their business outlook on a sustained horizon. And so this transactional nature of policymaking and a foreign policy and trade policy is something that I'm not sure it's in the best interest of kind of a sustainable economic trend.

I think those multilateral institutions provide real security and real comfort, not only in terms of the decisions they make, but the process by which those decisions get made. And I think that those guardrails are incredibly important for the global economy. So let's hope that we don't steer too far away from that framework.

I just want to say thank you so much to both of you. Eric Robertson, as always, it's a pleasure to speak with you. And Gosik Rudra, thank you also for joining us.

I feel like we made our way around the entire world in that conversation. Speaking of which, from wherever you have joined us, thank you for being our audience. It's always great to have you with us.

Do give us your feedback for future podcasts. And in the meantime, from me and the team, bye for now.

Global Outlook 2025 Podcast - Reverberations