Back in December 2024, our 2025 Global Economic Outlook identified key themes for 2025: i. Peace and truce, ii. Shift from globalization to regionalization, iii. Rising geopolitical influence, iv. Arms race centered on artificial intelligence, v. Ongoing energy supply struggles, vi. Sequential global central bank rate cuts.

In Q1 this year, after Trump took office, the Russia-Ukraine situation began to ease. Tariffs and counter-tariffs hit international trade, with the U.S. pushing manufacturing repatriation, reinforcing regionalization. Trump’s tariff uncertainties and threats to exit NATO heightened geopolitical risks. Trump also launched the “Stargate” plan, investing $500 billion over four years to build 20 mega data centers. Countries like China and the UK boosted AI infrastructure: Alibaba pledged at least $52.4 billion over three years for cloud and AI, while Tencent reported $10.7 billion in 2024 capital expenditure, up 215% year-on-year. Central banks cut rates: RBA (-25bps), BOE (-25bps), ECB (-25bps), and BOC (-25bps). We believe the economy aligns with our prior themes.

‍

United States

Bloomberg economists lowered 2025 GDP growth forecasts from 2.3% in January to 2.2% (Goldman Sachs and others expect 2%), reflecting doubts about tariff-driven growth. The U.S. economy shows slowdown signs: the Leading Economic Index (LEI) fell 0.3% month-on-month in January 2025, with a 0.9% drop over six months, signaling contraction. The University of Michigan Consumer Confidence Index dropped from 71.7 in December 2024 to 57.9 in March 2025, the lowest since July 2022. February retail sales rose to 0.2% month-on-month from -0.9% in January but missed the 0.6% consensus, as trade uncertainties curb consumer spending.

Policy Impacts

Trump swiftly enacted tough tariffs: i. 25% on global steel and aluminum from March 12, ii. 10% on China on February 3 and March 4 (total 20%), iii. 25% on all Canadian and Mexican goods on March 4, delayed to April 2, iv. 200% threatened on European alcohol on March 13. Planned measures include April’s “reciprocal tariffs” (based on partners’ rates) and high tariffs on autos and chips to force manufacturing back. Delaying Canada’s tariffs signals:

• Trump targets even close allies, urging vigilance,

• Everything is negotiable, but talks will be prolonged.

Tariffs may raise U.S. prices and spark ally retaliation (China, Canada, Mexico, Europe have countered), risking inflation. Yet, they could hasten supply chain shifts (e.g., TSMC’s U.S. expansion), boosting jobs. Retaliatory tariffs may worsen global trade tensions despite negotiation flexibility.

Our prior article noted Trump’s tariffs increase uncertainty, raising consumer prices and eroding confidence, foreshadowing a short-term slowdown. While domestic demand and manufacturing may grow, structural shifts will be gradual.

‍

Fed Policy

The U.S. economy is at a tipping point: tariff uncertainty and weak consumption slow growth and raise unemployment as firms delay investments, while tariffs lift prices, stoking Fed inflation fears.

‍

On March 19, 2025, the Fed held rates at 4.25%-4.5%, with markets expecting 25bps cuts in July and October.

‍

Stock Market Performance

As of March 19, the S&P 500 and Nasdaq 100 stood at 5614.66 and 1948.36, down 4.54% and 7.28% year-to-date. The MAGS ETF (Google, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla) fell 15.51% year-to-date, driven by tariff uncertainty and tech overspending fears. Over 50% of S&P 500 stocks rose this year, but big tech losses hid gains. Funds shift from growth to value stocks to navigate volatility. Tech sell-offs stem from hedge funds and retail, while pension funds and institutions wait. Most capital will likely adjust between U.S. stocks and bonds.

‍

China

Economic Growth Targets and Challenges

With AI innovations like Deepseek and positive Two Sessions signals, we project 4.6%-4.8% GDP growth (Bloomberg average: 4.5%). The economy is stabilizing: weak real estate is offset by infrastructure, and consumption policies aim to lift demand. We’re cautiously optimistic—stimulus effects on consumption are limited, and infrastructure leans on central funds. More policy rollout and data improvement are needed. Hitting 5% growth may require stronger monetary and fiscal action.

Trade Tensions and Policy Responses

After U.S. tariffs hit 20%, China imposed 10-15% retaliatory tariffs on U.S. agriculture (chicken, wheat, corn) and curbed dual-use imports by some U.S. entities on March 4, potentially affecting $21 billion in U.S. exports, per Reuters. January-February exports rose 3.4% year-on-year, including to the U.S., showing no tariff impact yet. Effects of U.S. tariffs (10% on February 4 and March 4, 25% on steel/aluminum from all nations on March 12) await March-April steel data.

‍

National Two Sessions

In early March, the Two Sessions set targets:

1. 5% GDP growth, CPI inflation cut from 3% to 2%,

2. Budget deficit raised to 4%,

3. 1.8 trillion yuan in special bonds: 300 billion for consumer trade-ins, 500 billion for bank capital (remaining 1 trillion likely for equipment and high-tech manufacturing),

4. 4.4 trillion yuan in local bonds for infrastructure, real estate, and debt relief.

The Finance Minister called fiscal policy “more proactive,” with ample reserves. The People’s Bank of China will balance easing and exchange rate stability, cutting rates and reserves as needed. U.S. tariffs in early March may not be reflected, suggesting possible H2 extra-budgetary measures.

‍

Stock Market Performance

Boosted by AI like Deepseek, the Hang Seng Tech Index hit 6105.5, up 36.65% year-to-date. The Hang Seng and CSI 300 rose 23.33% and 1.85%. Tech gains stem from strong growth and Deepseek-driven sentiment. However, Shanghai/Shenzhen gains are muted, and international funds remain cautious, awaiting fundamentals.

‍

Conclusion

We’re cautious on Q2 2025 amid overlapping themes. Investors must stay vigilant and adaptable.

• United States: Trump’s tariffs dent short-term confidence but show early manufacturing gains. Long-term data is needed to confirm a shift. The economy avoids recession, retaining structural strength.

• China: Tariff effects on exports are pending, with Q2 data key amid trade war risks. The Two Sessions’ “fiscal boost + monetary flexibility” may counter real estate woes via infrastructure and upgrades. AI-driven tech rallies lift sentiment, but foreign capital awaits fundamentals. Policy execution and private sector/consumer confidence will determine if growth beats expectations.

‍