Global Trade Policy and Economic Trends in 2025

Current Economic Climate: Uncertainties and Divergences

The present economic landscape is characterized by significant uncertainty in trade policies, indicated by rising indices that measure economic policy uncertainty. A phenomenon observed among US consumers illustrates a dual perception: many feel secure about their local situation, yet express concerns regarding broader economic trends, often summarized as the “I am OK, but you are not OK” mindset.

Central banks are divided on policy directions, with some opting to await further developments in inflation rates. Recently, both India and the UK implemented interest rate cuts as measures to stimulate growth and address economic challenges.

Interest Rate Adjustments

On February 7, the Reserve Bank of India reduced its repo rate to 6.25%, marking its first rate cut in almost five years, aimed at spurring growth amid slowing economic conditions. Meanwhile, on February 5, the Bank of England’s Monetary Policy Committee decided to lower their bank rate to 4.5% in a bid to manage economic pressures effectively.

Growth Projections Amid Challenges

Developed markets are generally witnessing a recovery trajectory, while emerging markets encounter more complex challenges. The Conference Board’s projections indicate that the eurozone can expect GDP growth of 0.8% in 2024, gradually improving to 1.3% by 2026. Conversely, growth in the UK is projected to slow to around 0.4% in early 2025, before recovering to near 1.5% later that year. In India, GDP growth for fiscal year 2026 is expected to fall between 6.3% to 6.8% amidst global uncertainties.

Consumer Confidence Trends

Despite a robust spending season during the holidays, overall consumer confidence appears to be waning, as evidenced by the declining consumer confidence index in the US and Brazil. The US index fell from 109.5 in December to 104.1 in January, while Brazil’s consumer sentiment dropped to 86.2—the lowest since February 2023—amidst rising borrowing costs.

Inflation Expectations and Trends

As inflation expectations rise, US consumers anticipate rates at around 3.0% over one- and three-year horizons, with median five-year expectations climbing to 3.0%. In January, inflationary pressures notably accelerated, with commodity prices generally increasing, excluding energy, which remains subdued.

Global Price Developments

The landscape for global prices is uneven, with industrial metals experiencing price hikes due to tariffs and uncertainties, whereas the FAO Food Price Index showed a decline owing to improved supply conditions for specific commodities. Traditional assets like gold are seeing price increases driven by inflation concerns, while cryptocurrencies like Bitcoin faced declines tied to regulatory uncertainties.

Sectoral Performance: Manufacturing vs. Services

Evidence from the latest reports shows stability in the manufacturing sector after a prolonged contraction, though companies report weak external demand. Developed economies like the US report slight improvements in industrial production and manufacturing PMIs, while the UK experiences ongoing challenges with low demand and rising costs. The services sector continues to grow, albeit at a slower pace, with indications of softening demand in some areas.

Emerging Markets and Employment Trends

Emerging economies are facing varied trajectories. While China’s manufacturing PMI indicates contractions, India reports strong performance in manufacturing driven by exports. Employment data remains stable across many surveyed economies, though India experienced a notable rise in unemployment rates recently.

Market Reactions and Global Trade Dynamics

February saw stable asset prices, with some markets recovering amid geopolitical tensions, such as the situation in Ukraine. The trade volume has crept up by 1.1% in December 2024, largely supported by advanced economies’ growth, although concerns linger regarding supply chain stability due to ongoing geopolitical uncertainties.

Future Economic Directions

The coronavirus pandemic and geopolitical events like the invasion of Ukraine continue to pose intricate challenges for global economies. As a result, future predictions are fraught with uncertainty, necessitating vigilance and adaptability from policymakers and businesses alike.

Conclusion

As we navigate 2025, the interplay between consumer confidence, inflation rates, and central bank policies remains critical. By closely monitoring these multifaceted aspects, stakeholders can better position themselves to respond effectively to ongoing economic shifts.

About the Authors

The insights and analyses in this publication are the result of collaborative efforts by Sven Smit, Jeffrey Condon, and Krzysztof Kwiatkowski, experts from McKinsey & Company.