Convera: Trade Tensions to Reshape Global Markets in 2025
The global economy faces fundamental restructuring in 2025 amid resurgent trade tensions and divergent monetary policies, according to research from cross-border payments firm Convera, which warns of increased volatility in currency markets and potential disruption to cross-border flows.
Global Economic Conditions
World GDP will likely expand by 2.7% in 2025, the third consecutive year below 3%.
The US economy has defied recession predictions, growing by more than 2% in eight of the last nine quarters. The labour market in developed economies remains notably tight, with unemployment rates near 4% - levels not seen since the early 1990s.
The US Congressional Budget Office projects the federal deficit to widen from 5.6% of GDP in 2024 to 6.1% in 2025, driven by rising interest expenses rather than primary deficits. The total deficit is forecast to exceed US$1.9tn in 2025, up from US$1.6tn in 2024, as the debt ceiling suspension expires in January 2025.
Monetary Policy and Market Response
Central banks are pursuing markedly different paths toward monetary easing.
The Bank of Canada leads G7 central banks in cutting rates, reducing its benchmark by 175 basis points from Spring 2024's peak of 5% to 3.25%.
In contrast, markets price just 40 basis points of Federal Reserve cuts by end-2025, reflecting potential reflation under Trump's presidency.
The European Central Bank faces pressure to accelerate easing as the Eurozone expanded just 0.75% in 2024. Two years after inflation peaked at 7.5% in developed economies, price growth has halved as supply chains normalised.
However, sticky services inflation has anchored rates above 3%, with only a quarter of central banks globally meeting their 2% target, down from 40% four years ago.
The VIX, known as the "fear index" produced by Chicago Board Options Exchange, fell to its lowest level since July 2018, though volatility spiked in August during a sharp reversal of the Japanese yen carry trade. Bond markets demonstrate resilience, with auctions in the US, Europe and UK seeing bid-to-cover ratios exceeding five-year averages throughout 2024.
"The withdrawal of liquidity pumped into economies during the pandemic crisis could trigger more spikes in volatility in 2025”
Regional Dynamics and Trade Shifts
China's economy faces slowing growth, forecast at 4.5% in 2025 versus 5.2% in 2024, according to Bloomberg data from February 6, 2025.
The property sector continues its multi-year correction while demographic pressures weigh on productivity.
Chinese consumers increasingly favour domestic products, while more than 60% of European companies surveyed by the European Central Bank view China as a potential risk to their supply chains.
Europe's industrial sector has contracted more than 20% from pre-pandemic levels, hit by Russian gas supply losses and Chinese competition.
The region's largest companies spent half as much on R&D as US counterparts from 2015 to 2022.
Both Europe and Japan have recorded their highest monthly bankruptcy filings since 2015 and 2013 respectively. France, Italy, and Poland must achieve primary surpluses exceeding 1.5% of GDP to meet reinstated fiscal rules, despite 2023 deficits.
The UK Treasury's review revealed unrealistic public spending plans and overly optimistic growth forecasts, potentially forcing the incoming Labour government to implement austerity measures.
In Australia, GDP growth fell from 1.9% in mid-2023 to 0.8% by Q3 2024, while net migration will halve to 260,000 in 2024-25 from its peak of 528,000 in 2022-23.
Elsewhere, global trade disputes have intensified to levels not seen since the late 1980s, with annual trade interventions increasing tenfold since the mid-2010s.
Approximately 2,000 industrial subsidies were implemented in 2024, concentrated in North America, Europe, and East Asia. This environment has accelerated friend-shoring, as companies reshape supply chains based on geopolitical alignment rather than cost alone.
Currency Market Implications
The EUR/USD pair traded within US$1.06-US$1.10 for 91% of 2024, failing to break US$1.12 resistance.
In June, a political deadlock in French elections widened the OAT-Bund spread to nearly double its two-year average, triggering a 1.5% drop in EUR/USD within a week.
Sterling gained against more than 70% of world currencies in 2024, with GBP/EUR reaching two-year highs near €1.22 (US$1.27), supported by widening yield differentials between UK and German bonds.
The USD/JPY hit a 34-year high of ¥161.95 (US$1.08) in early July before the yen appreciated 10% following the Bank of Japan's second 2024 rate hike.
USD/CAD broke above CA$1.39 (US$0.98) to reach CA$1.4467 (US$1.02) in Q4, while USD/CNY held around 7.2000 throughout 2024.
“The withdrawal of liquidity pumped into economies during the pandemic crisis could trigger more spikes in volatility in 2025,” the report notes, highlighting unprecedented simultaneous quantitative tightening by major central banks.
A one percentage point rise in US rates typically leads to a 90 basis point increase in other advanced economies.
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