(Source: Merlea Macro Matters)

Summary

Tariffs and Tensions: Global Economic Outlook for Q3 2025

The third quarter of 2025 marks a critical juncture for the global economy. After a volatile first half shaped by aggressive trade policies, geopolitical tensions, and shifting monetary strategies, Q3 begins with cautious optimism tempered by persistent risks. Global GDP growth is now forecast at 2.7%, down from earlier projections of 3.0%, reflecting the cumulative drag of trade disruptions, policy uncertainty, and weakening investment sentiment.

A key driver of this uncertainty is the resurgence of tariff threats from the United States. President Donald Trump recently extended his reciprocal tariff program, targeting 14 countries with new rates set to take effect in August. Nations such as Japan, South Korea, Malaysia, and Bangladesh face tariffs ranging from 25% to 37%, while others like Laos, Myanmar, and Cambodia are hit with rates as high as 49%. Trump also threatened a 200% tariff on pharmaceuticals and proposed a 10% blanket tariff on BRICS-aligned nations, citing “anti-American” policies. These moves have reignited fears of a global trade war, further distorting supply chains and elevating input costs.

Deglobalisation continues to accelerate. Countries are increasingly prioritising domestic resilience over global integration, reshaping trade alliances, and reshoring manufacturing. This trend is evident in the rise of regional trade blocs and strategic decoupling from traditional supply chains, particularly in the tech and energy sectors.

Meanwhile, de-dollarisation is gaining traction. Confidence in U.S. dollar-denominated assets has weakened amid fiscal imbalances and erratic policy signals. Major economies like China and Russia are actively promoting alternative currency arrangements and diversifying their foreign exchange reserves, challenging the dollar’s dominance in global trade.

The spectre of stagflation looms large. In the U.S. and parts of Europe, inflation remains stubbornly high while growth slows, creating a dilemma for central banks. The Federal Reserve has delayed rate cuts despite signs of economic deceleration, wary of reigniting inflation through premature easing. This cautious stance has added to market volatility and investor unease.

Geopolitical tensions are also fuelling a surge in global military spending, which has exceeded $2.7 trillion in 2025—a 37% increase over the past decade. Conflicts in Ukraine and the Middle East, along with strategic competition in the Indo-Pacific, are driving defence budgets higher, often at the expense of social and infrastructure investment. This shift raises concerns about long-term fiscal sustainability and economic inclusivity.

Despite these headwinds, financial markets have shown resilience. Equity indices have rebounded from Q2 lows, buoyed by strong tech earnings and temporary easing of geopolitical tensions. However, bond markets remain volatile, and investor sentiment is fragile, hinging on central bank guidance and trade developments.

In Q3 2025, the global economy continues to face a range of challenges. Growth is slowing, monetary policies vary across regions, and geopolitical tensions remain elevated. These factors contribute to a more fragmented international economic environment. For investors, this calls for careful risk management and diversification. Policymakers are tasked with maintaining price stability while supporting economic activity, all within a context of increasing protectionism and shifting global alliances.

Bonds

Central banks, particularly the U.S. Federal Reserve, have begun cautiously cutting rates at the short end of the curve. The Fed has reduced its benchmark rate by 1% since late 2024, bringing it to a range of 4.25%–4.50%. However, persistent inflation and geopolitical uncertainties, including tariffs, have led to a more measured pace of easing in 2025 This has created a divergence in the yield curve: while short-term yields are gradually declining, long-term yields remain elevated.

This divergence reflects market scepticism about the effectiveness of rate cuts in curbing inflation and concerns over fiscal deficits. The Fed’s slower balance sheet runoff also supports liquidity but hasn’t significantly compressed long-term yields.

US Long-Term Yields: Elevated and Volatile

In the U.S., 30-year Treasury yields have recently pushed above 5%, the highest level since 2007. This spike is attributed to concerns over rising fiscal deficits and a proposed tax-and-spending bill that could fuel stronger growth and inflation. The 40-year Treasury, though less commonly traded, has also seen upward pressure, reflecting investor demands for higher compensation amid long-term fiscal uncertainty.

Despite the Fed’s rate cuts, long-term yields remain sticky due to expectations of sustained government borrowing and inflation risks. The bond market is expected to remain volatile but range-bound, with yields fluctuating within the highs and lows established in 2024.

Japan’s Yield Spike: A Global Ripple Effect

Japan’s long-term government bond yields have surged dramatically in 2025. The 30-year JGB yield hit a record 3.2%, while the 40-year yield climbed to 3.37% as of July. These levels are nearly 1 percentage point higher than a year ago, driven by weak demand and shifts in Bank of Japan policy. The spike has sparked fears of a carry trade unwind, where Japanese investors repatriate funds from overseas markets, particularly the U.S., in search of higher domestic returns.

This repatriation could destabilise global markets, especially U.S. equities, which have benefited from Japanese capital inflows. The rise in Japanese yields also reflects broader concerns about global liquidity tightening and its impact on growth and asset prices.

Implications Across the Curve

The current yield curve dynamics—declining short-term rates and elevated long-term yields—suggest a market grappling with conflicting signals. On one hand, central banks are signalling easing to support growth; on the other, markets are pricing in long-term risks tied to inflation, fiscal deficits, and geopolitical instability.

This environment presents challenges for fixed-income investors. Short-duration bonds may offer limited upside due to falling yields, while long-duration bonds carry duration risk amid persistent inflation concerns. However, elevated long-term yields could provide attractive entry points for investors seeking income and capital preservation.

The outlook for global debt and bond yields in 2025 reflects a gradual adjustment in monetary policy alongside ongoing fiscal expansion. While central banks have begun to ease short-term interest rates, long-term yields remain relatively elevated. This divergence suggests that markets continue to factor in concerns related to inflation, fiscal sustainability, and geopolitical developments. The recent increases in long-term yields in both the United States and Japan point to evolving investor expectations and highlight the importance of maintaining a balanced approach to risk management within fixed-income portfolios.

Listed Property

The Australian A-REIT (Australian Real Estate Investment Trust) sector is entering the third quarter of 2025 with renewed momentum, supported by improving macroeconomic conditions, easing financial pressures, and evolving demand dynamics, particularly in the office segment. While industrial and retail REITs continue to lead performance, the outlook for office REITs is gradually improving as return-to-office trends gain traction and capitalisation rates begin to stabilise.

Q3 2025 Sector Overview

The A-REIT sector has shown resilience in the first half of 2025, with the S&P/ASX 200 A-REIT Index rebounding strongly despite volatility in individual names such as Goodman Group. More than half of listed A-REITs exceeded earnings expectations during the February reporting season, and diversified exposure—particularly through ETFs like VanEck’s MVA—has helped investors capture upside in retail, office, and residential sub-sectors.

As the Australian economy experiences mild growth and the Reserve Bank of Australia signals a more accommodative stance, investors are increasingly positioning for a falling rate environment. Historically, A-REITs have outperformed during such cycles, and Q3 is expected to continue this trend, with strong income returns and improving valuations.

Return to Office: Evolving Demand in Commercial Real Estate

One of the most notable shifts in Q3 2025 is the continued acceleration of return-to-office mandates. Office utilisation rates have steadily improved since 2023, and larger corporations are now enforcing stricter in-person attendance policies. This trend is particularly evident in financial and professional services sectors, with technology firms beginning to follow suit.

While hybrid work remains a fixture, the increased physical presence of employees is driving higher demand for well-located, amenity-rich office spaces. In Australia, CBDs such as Sydney and Melbourne are seeing renewed leasing activity, especially in premium-grade buildings. This shift is helping to stabilise net absorption rates and reduce vacancy levels, which had previously weighed on office REIT valuations. However, the recovery is uneven. Older and less centrally located office assets continue to face challenges, and some tenants are still downsizing. As a result, office REITs must remain agile, focusing on asset quality, tenant retention, and strategic refurbishments to remain competitive.

Cap Rate Trends: Signs of Stabilisation and Compression

Capitalisation rates, which reflect the expected return on property investments, are showing signs of stabilisation in Q3 2025. After rising in response to interest rate hikes in 2022–2023, cap rates across office, retail, and industrial sectors are now either plateauing or beginning to compress.

CBRE forecasts that cap rates will tighten across major cities as interest rates decline and investor confidence returns. For example, Sydney’s prime office assets are seeing cap rates around 4.7%, with expectations of further compression as borrowing costs fall and leasing activity improves. Industrial assets, which remain in high demand, are trading at cap rates averaging 6.4%, up slightly from earlier quarters but still attractive given strong fundamentals.

Retail cap rates have also edged higher, averaging 6.7% in Q3, but are expected to stabilise as consumer sentiment improves and rental growth continues. The overall trend suggests that investors are beginning to reprice risk more favourably, particularly in sectors with strong income visibility and low vacancy rates.

Outlook for Q3 and Beyond

The third quarter of 2025 is shaping up to be a pivotal period for the A-REIT sector. With monetary policy easing, population growth driving demand, and return-to-office trends supporting office utilisation, the sector is well-positioned for continued recovery. Cap rate compression and stabilising asset values are enhancing the attractiveness of listed REITs, particularly for income-focused investors. While risks remain—especially in underperforming office assets and regions with oversupply—the broader outlook is positive. Diversified REITs with exposure to industrial, retail, and high-quality office assets are likely to outperform, and strategic capital allocation will be key to navigating the evolving landscape

Australian Equities

As the third quarter of 2025 unfolds, Australia’s economic landscape presents a mixed picture of cautious growth, policy restraint, and structural challenges. While headline GDP continues to expand, underlying indicators suggest a more nuanced reality, with per capita output in decline and corporate earnings facing downward revisions.

The Reserve Bank of Australia (RBA) held the cash rate at 3.85% in July, defying market expectations for a cut. The decision, driven by persistent inflation—particularly in services—and weak productivity growth, led to a modest market correction and a stronger Australian dollar. Investors had anticipated a more dovish stance, and the RBA’s cautious tone has pushed back expectations for near-term easing.

On the fiscal side, the federal government’s 2025–26 Budget adopts an expansionary approach, aiming to support households and stimulate growth. Key measures include $30 billion in cost-of-living relief, $17.1 billion in infrastructure investment, and nearly $8 billion to strengthen Medicare bulk billing. Additional funding for housing, education, and skills development reflects a broader commitment to social investment. However, questions remain about the budget’s ability to address Australia’s long-standing productivity challenges.

Productivity remains a central concern. Despite high employment, output per worker has stagnated. The Productivity Commission attributes this to underinvestment in innovation, regulatory inefficiencies, and capital shallowing, where population growth outpaces infrastructure and capital investment. Without reform, weak productivity could limit wage growth and long-term competitiveness.

Corporate earnings are also under pressure. After a strong end to 2024, Q1 2025 saw a 0.5% decline in profits, with financials, mining, and utilities leading the downturn. While retail and telecommunications posted modest gains, analysts have revised earnings forecasts downward due to soft consumer demand, margin pressures, and global uncertainty.

Australia is emerging from a prolonged per capita recession, following eleven quarters of declining GDP per capita. While recent data shows signs of stabilisation, the broader outlook remains fragile, particularly amid renewed global trade tensions. U.S. President Donald Trump’s latest tariff threats, including proposed levies on copper and pharmaceuticals, have raised concerns about Australia’s export resilience. Although Australia has avoided direct tariffs, the indirect effects—such as commodity market volatility and supply chain disruptions—could weigh on sentiment and growth.

This shifting trade environment reinforces the need for structural reform. To ensure that economic expansion translates into broad-based prosperity, policymakers must prioritise productivity-enhancing measures, diversify trade relationships, and invest in innovation and infrastructure. Without these reforms, the recovery in per capita output may be short-lived, and Australia’s exposure to external shocks could intensify.

America

As the third quarter unfolds, the U.S. economy continues to show signs of resilience, but cracks are beginning to appear beneath the surface. Growth remains positive, though momentum is slowing, and the economy is clearly in the late expansion phase of the business cycle. GDP forecasts have been revised lower, and while headline employment figures remain stable, underlying indicators such as job openings and average weekly hours suggest softening demand.

The U.S. dollar has been under pressure, extending its decline from February highs above 110. The dollar index is now testing support around 96.8, with a possible technical rebound toward 99. However, structural headwinds—including renewed trade tensions and shifting global capital flows—are likely to cap any sustained recovery. The dollar’s weakness has helped fuel a rally in commodities and precious metals, which continue to benefit from inflation hedging and increased global demand.

Source JP Morgan S&P 500 valuation measures: This chart shows the S&P 500’s forward P/E ratio, while the table contains additional valuation metrics and their 30-year averages. This information should help investors determine whether the U.S. equity market seems over- or undervalued.

Equity markets remain elevated, with major indices pushing higher following recent technical breakouts. Valuations, however, are stretched, and stocks appear priced for perfection. The path of least resistance may still be upward, but there’s little room for error. Bond yields have crept higher, with the 10-year Treasury now around 4.4%. While this hasn’t yet posed a threat to equities, a move above 4.5% could pressure high-duration sectors like tech and consumer discretionary.

Donald Trump’s latest tariff threats—particularly the proposed 50% levy on copper—pose a significant risk to industrial and tech sectors. Copper is critical to semiconductors, electric vehicles, and AI infrastructure, and a sharp rise in its cost could delay investment and raise input prices across the economy. These tariffs, combined with broader trade uncertainty, are adding pressure to supply chains and investor sentiment.

Compounding these concerns is Trump’s escalating rhetoric toward the Federal Reserve. His repeated threats to remove Chair Jerome Powell and install a more compliant successor have unsettled foreign investors and raised alarms about the Fed’s independence. The notion of politicising monetary policy undermines confidence in U.S. financial institutions and risks triggering capital outflows, particularly from global investors who rely on the Fed’s credibility and stability. Preserving the central bank’s autonomy is critical to maintaining market trust and ensuring sound economic governance.

Looking ahead, the U.S. economy may continue to grow, but the foundation is less stable than it appears. Structural reforms, a more predictable trade policy, and a commitment to central bank independence will be essential to sustaining momentum and mitigating downside risks in the quarters to come.

Europe

As we enter the third quarter of 2025, the Eurozone economy is showing encouraging signs of recovery. After a period of stagnation and mild recessionary pressures, the region is now emerging with renewed momentum, supported by falling interest rates, easing inflation, and improving business confidence.

The European Central Bank’s rate cuts over the past year have helped restore liquidity and stimulate investment. With the deposit rate now at 2.0% and inflation back near the ECB’s 2% target, financial conditions are becoming more favourable for both businesses and consumers. This shift has contributed to a noticeable uptick in sentiment across key sectors, particularly services, construction, and professional industries.

Despite ongoing global trade tensions, including the impact of U.S. tariffs on European metals and industrial goods, the Eurozone has managed to maintain stability. While these tariffs have weighed on manufacturing output—especially in Germany and Italy—the broader economy has been cushioned by strong domestic demand and resilient consumer spending. Export challenges remain, but they have not derailed the recovery.

One of the standout stories this quarter has been the performance of European equity markets. Institutional investors have increasingly turned to the Eurozone, attracted by more attractive valuations and a relatively stable policy environment. The STOXX indices have posted solid gains, and mid-cap industrials have benefited from both capital inflows and improving credit conditions. Compared to U.S. markets, European equities remain reasonably priced, offering upside potential as earnings growth stabilizes.

Another important development is the rise in military and strategic infrastructure spending across the continent. Germany’s €500 billion commitment to defence and innovation is part of a broader trend that is expected to support GDP growth over the medium term. These investments are not only boosting industrial output but also creating jobs and fostering technological advancement.

At this point, the Eurozone appears to be transitioning out of the trough and into a new expansionary phase of the business cycle. While manufacturing remains subdued, services and consumption are driving growth. Unemployment is at a record low, and inflation is under control, setting the stage for a more sustained recovery.

United Kingdom

Early Expansion and Elevated Rates: A Strategic View of the UK Economy

The United Kingdom’s economy is beginning to show signs of renewed momentum. Following a period of subdued growth and tightening financial conditions, recent indicators suggest the UK is entering the early expansion phase of its business cycle. Business investment is gradually recovering, consumer sentiment is stabilising, and trade prospects have improved, supported by new bilateral agreements and easing supply chain pressures.

The Citigroup Economic Surprise Index for the UK is on an upswing (unlike some other major economies, such as the US), reflecting that recent economic data has beaten expectations.

Despite these positive developments, the recovery remains uneven. The manufacturing and construction sectors continue to face headwinds, particularly from global trade tensions and elevated input costs. However, the services sector—representing the majority of UK GDP—has remained resilient, helping to anchor overall economic activity. GDP is expected to grow by approximately 1.1% in 2025, a modest but encouraging improvement from earlier forecasts.

A defining feature of the UK’s current economic landscape is its interest rate trajectory. The Bank of England’s base rate remains at 5.0%, significantly higher than the Eurozone’s 2.0% deposit rate. This divergence reflects the UK’s more persistent inflation dynamics, driven by strong wage growth, elevated service costs, and recent tax adjustments. While inflation has begun to ease, it remains above the central bank’s 2% target, prompting policymakers to maintain a restrictive stance for longer.

The Bank of England has made it clear that interest rates will remain elevated until inflation risks are fully contained. This commitment to price stability—even at the expense of short-term growth—reinforces the institution’s credibility and underscores the importance of long-term macroeconomic discipline. For businesses and investors, this means navigating a higher-rate environment that may temper expansion in the near term but ultimately supports financial and price stability.

Looking ahead, the UK’s recovery will depend on a combination of sound policy execution, targeted investment in productivity-enhancing sectors, and careful management of external risks. The government’s focus on infrastructure, digital transformation, and skills development will be critical in supporting sustainable growth. At the same time, geopolitical uncertainty and global trade disruptions remain key risks that must be managed with strategic foresight.

To sustain the recovery, the UK government must focus on key policy actions: boosting productivity through infrastructure and innovation investment, supporting SMEs, enhancing workforce skills, maintaining fiscal discipline, and strengthening trade resilience. With coordinated policy, strategic investment, and careful risk management, the UK is well-positioned to build on its early expansion and move toward a more robust, sustainable growth path.

Japan

Japan’s Economy in Transition: Inflation, Tariffs, and the Road to Recovery

Japan’s economy finds itself at a delicate juncture. After a mild contraction earlier in the year, the country is showing tentative signs of stabilisation, though the recovery remains fragile. Current data suggests Japan is in a late-cycle stagnation phase, with growth momentum soft but not yet in full retreat.

GDP growth rate

The primary cause of this negative growth was a significant negative contribution from external demand due to a sharp increase in imports. However, the recovery in domestic demand was also lacking in strength and failed to sufficiently offset the decline in external demand. While the economy is gradually recovering, its momentum is weakening.

Leading indicators offer a cautiously optimistic view. The Leading Economic Index rose modestly in May, and consumer confidence has improved, reaching its highest level since early 2024. Households are feeling slightly more secure about employment and income prospects, and sentiment around durable goods purchases has picked up. However, the labour market is showing signs of strain, and inflation continues to weigh on real incomes.

Inflation, while easing slightly, remains above the Bank of Japan’s target. Core CPI is projected at 2.2% for the year, down from 2.6% in 2024, but still high enough to erode purchasing power. Although wage growth has accelerated, it has not fully offset rising living costs, which continues to dampen household consumption and limit the strength of the domestic recovery.

Externally, Japan faces growing risks from U.S. trade policy. President Trump’s administration has imposed a 25% tariff on Japanese automobiles and a 10% baseline tariff on other imports, with further measures under consideration. These tariffs are expected to reduce Japan’s GDP by up to 0.8% this year, with the auto sector—one of Japan’s most critical export engines—bearing the brunt. Reduced U.S. demand is already impacting production schedules, investment plans, and employment in the automotive supply chain.

Other export-oriented sectors such as electronics, machinery, and steel are also vulnerable. The uncertainty surrounding global trade has led many firms to revise earnings forecasts downward and delay capital expenditures. While Japan’s service sector remains relatively resilient, the export drag is becoming more pronounced.

Japan’s stock market has remained notably resilient in 2025, outperforming many global peers due to a combination of structural reforms, attractive valuations, and strong sector performance. Corporate governance improvements—such as increased shareholder returns and transparency—have boosted investor confidence, while foreign capital inflows have surged as global investors seek alternatives to overvalued U.S. and European markets.

Looking ahead, Japan’s economic trajectory will depend on its ability to stimulate domestic demand, manage inflation expectations, and navigate external shocks. Targeted fiscal support and cautious monetary policy will be essential to avoid a deeper slowdown. While the risk of recession cannot be ruled out, Japan’s strong corporate balance sheets, improving wage dynamics, and stable financial system provide a foundation for recovery, if global conditions stabilise.

China

China’s economic landscape is gradually stabilising, supported by a series of targeted government stimulus measures. Notably, the real estate sector—long a source of concern—has begun to show signs of a turnaround. The implementation of the “whitelist” policy, which has directed over ¥5.6 trillion in bank loans to viable housing projects, is helping to revive stalled developments and restore confidence in the property market. While housing completions remain below expectations, this initiative marks a meaningful step toward recovery.

Consumer confidence in China is gradually rebounding, supported by a range of targeted government policies aimed at easing financial pressures on households. Measures such as reductions in mortgage rates and subsidies for essential goods—like home appliances and electric vehicles—have helped improve disposable income and stimulate spending. For instance, recent cuts to existing mortgage rates have lowered monthly payments for millions of homeowners, freeing up cash for consumption.

Despite these efforts, overall loan demand remains relatively weak, indicating that households and businesses are still cautious about taking on new debt. This hesitancy reflects broader economic uncertainty, although the trend is slowly improving. Inflation remains subdued, with the Consumer Price Index (CPI) rising just 0.1% year-on-year in June. This modest uptick marks a tentative step out of deflation, which had gripped the economy for several months. However, the Producer Price Index (PPI) continues to decline—falling 3.6% in the same period—highlighting persistent weakness in industrial pricing and profitability.

China’s economy is now in the early recovery phase, showing signs of stabilisation after a prolonged slowdown. Fiscal stimulus and accommodative monetary policy are beginning to take effect, particularly in the housing and consumer sectors. While domestic demand remains soft, the overall trajectory points toward gradual improvement.

China appears to be redirecting its exports through other markets

On the international front, China is navigating renewed trade tensions with the United States. Under President Trump’s administration, tariffs have been reinstated, contributing to a 34.5% year-on-year decline in Chinese exports to the U.S. In response, China has intensified efforts to diversify its trade relationships, strengthening ties with India, the EU, and ASEAN nations. Recent negotiations have led to partial tariff rollbacks and a temporary pause in retaliatory measures, offering a window of opportunity for improved bilateral relations.

A key strategic concern remains the semiconductor sector. U.S. export controls have restricted China’s access to advanced chips, prompting a robust domestic response. The government’s $47.5 billion semiconductor fund is driving innovation, with companies like Huawei and SMIC making notable progress in developing homegrown alternatives. While underground supply channels have emerged, China’s long-term strategy is focused on achieving technological self-sufficiency.

From an investment perspective, China’s stock market continues to offer fair value. As of July 2025, the market’s price-to-earnings (P/E) ratio stands at 9.89, which is within the historical fair range based on five-year averages. This valuation suggests that while the market is not deeply undervalued, it remains attractively priced relative to long-term norms. Sector leaders in technology, healthcare, and consumer services are showing strong fundamentals and benefiting from policy tailwinds. In summary, China’s economic recovery is underway but fragile. For investors, the current environment presents selective opportunities, especially in sectors aligned with domestic policy priorities.

Emerging Markets

Emerging markets with strong trade ties to advanced European economies are experiencing a modest recovery in household spending, which is positively influencing manufacturing production. In emerging Asia, manufacturing sectors linked to the improving electronics trade cycle are also showing signs of rebound, driven by increased global demand for semiconductors and consumer electronics.

Latin American economies continue to benefit from robust demand from the United States, which has supported manufacturing output. However, the anticipated slowdown in U.S. growth and the lagging effects of elevated interest rates in other advanced economies introduce uncertainty regarding the sustainability and pace of these trade cycle improvements.

The resurgence of protectionist trade policies, particularly from the United States, has introduced new challenges for EMEs. The implementation of higher tariffs and sector-specific trade barriers is disrupting supply chains and dampening investor sentiment. These measures are expected to disproportionately affect export-reliant EMEs such as Mexico, Brazil, and Colombia. While some economies may experience short-term gains due to currency depreciation, the long-term consequences include reduced foreign direct investment and slower economic expansion.

As of July 2025, the third-quarter outlook for EMEs remains cautiously optimistic. Global growth is projected to slow to 2.3%, while EMEs are expected to grow at a rate of 3.8%, slightly below earlier forecasts. Despite outperforming advanced economies in relative terms, growth remains weak by historical standards.

Key factors shaping the Q3 outlook include:

• Trade volatility stemming from evolving U.S. tariff policies.
• Elevated defence and fiscal spending due to ongoing geopolitical tensions.
• Uncertainty in investment flows, particularly in sectors dependent on cross-border trade.

Looking ahead, we anticipate that emerging market companies will increasingly lead the development of the “new economy,” driven by innovation in digital infrastructure, green energy, and financial technology. Projected GDP growth for EMEs is expected to remain subdued at 3.9% in 2025, with a modest recovery to 4.0% in 2026.

The depreciation of the U.S. dollar presents a potentially favourable shift for many EMEs, particularly those with substantial dollar-denominated debt. As the dollar weakens, the local currency value of external debt declines, thereby reducing the cost of servicing and repaying these obligations. This can significantly ease fiscal pressures and improve debt sustainability for countries that have struggled with high external liabilities.

Additionally, a weaker dollar tends to encourage capital flows into emerging markets, as investors seek higher yields and diversification. This can enhance liquidity, support domestic investment, and contribute to economic growth. Commodity-exporting EMEs may also benefit from rising global prices, as commodities priced in dollars become more attractive to international buyers, boosting export revenues and improving trade balances.

However, it is important to note that these benefits are not uniformly distributed. The extent to which EMEs can capitalize on a weaker dollar depends on their economic structure, institutional resilience, and exposure to global risks. Countries facing internal challenges such as inflation, political instability, or weak governance may find it difficult to fully leverage these external tailwinds.

Moreover, the current global environment remains uncertain. Protectionist trade policies, particularly new tariffs from advanced economies, continue to disrupt supply chains and dampen investor confidence. These factors may offset some of the gains from a weaker dollar and require careful policy management to ensure macroeconomic stability.

In conclusion, while the weakening of the U.S. dollar offers a window of opportunity for highly indebted EMEs to improve their financial positions and attract investment, the overall impact will depend on each country’s ability to navigate the broader economic landscape.

Commodity Market Outlook

The global commodity landscape is being shaped by a combination of macroeconomic shifts, geopolitical tensions, and climate-related disruptions. A key driver across all markets is the weakening U.S. dollar, which has lost over 10% of its value this year due to protectionist trade policies and fiscal uncertainty. This depreciation is broadly supportive of commodity prices, as most are priced in dollars—making them cheaper for foreign buyers and boosting demand.

Gold

Gold continues to perform strongly in 2025, with prices hovering near record highs around $3,300 per ounce. Investor appetite remains robust, driven by persistent inflation, geopolitical instability, and central bank diversification away from the dollar. With real interest rates low and monetary policy uncertain, gold is expected to maintain its bullish trajectory into Q3 and Q4. Forecasts suggest prices could reach $3,675–$3,867 by year-end.

The Precious Metals Index, which tracks gold, silver, platinum, and palladium, is also trending upward. Silver has gained nearly 20% in the first half of 2025, supported by industrial demand from solar and electronics. Platinum has emerged as a standout performer, rising over 40% this year due to supply constraints and its role in clean energy technologies.

Oil

Oil markets have experienced volatility in early 2025, but signs point to a potential recovery later in the year. OPEC+ has begun unwinding production cuts, with a 548,000 bpd increase starting in August. Despite this, global inventories remain below the five-year average, and seasonal factors—such as a harsh winter forecast—could drive demand for heating fuels and diesel. Brent crude is projected to rise from current levels to around $59 per barrel by Q46. Additionally, tariff-related inflation may prompt strategic cooperation between oil producers and consumers to stabilize prices.

Agricultural Commodities

Agricultural markets are facing a complex mix of pressures. Climate change is increasingly disrupting production, with droughts, floods, and heatwaves affecting yields in key regions like Brazil, India, and the US. A mild La Niña event is expected to further impact rainfall patterns. Meanwhile, countries are increasingly stockpiling food and imposing export restrictions to safeguard domestic supply, reducing global availability and adding upward pressure on prices.

Despite these challenges, global food prices are forecast to rise moderately—about 2.9% in 2025. However, specific commodities like wheat and maize may see price declines due to strong harvests and expanded cultivation. Rice prices, which fell sharply earlier this year, are expected to stabilise as India eases export restrictions and boosts output.

In summary, the weakening dollar is broadly supportive of commodity prices, especially for exporters. Gold remains a safe haven, oil may rebound on seasonal and strategic factors, and agricultural commodities face mixed prospects amid climate volatility and shifting trade policies. Organization of the Petroleum Exporting Countries has been firmly in the driver’s seat over the past few years, strategically cutting production to prop up prices. The group of oil producers and their allies, together known as OPEC+, however, agreed at a meeting earlier this month to start phasing out voluntary production cuts after the third quarter, while leaving other curbs in place.