As we step into February, the global economy remains in a delicate balancing act, shaped by central bank policies, inflation dynamics, and geopolitical developments. Markets are closely watching key economic data for signs of resilience or slowdown, while policymakers face the challenge of sustaining growth without reigniting inflationary pressures.

In the U.S., recent inflation trends continue to influence Federal Reserve policy expectations, as a slightly rising headline PCE price index, along with a jump in personal spending, reinforces investors’ expectations regarding the timing and scale of potential rate adjustments. The Eurozone remains under pressure from sluggish growth and ongoing policy shifts at the European Central Bank, despite the recent 25-basis-point rate cut. The U.K. continues to grapple with inflation concerns and weakening consumer demand.

China’s economic performance remains a focal point as policymakers introduce measures to stabilize growth, though structural challenges persist. With the Lunar New Year holidays over and companies and stock markets resuming operations, the impact of the DeepStack storm should be closely monitored. Meanwhile, emerging markets face a mixed outlook—some benefit from easing inflation and capital inflows, while others struggle with external vulnerabilities and currency pressures.

Commodity markets, including oil and gold, remain highly sensitive to geopolitical risks and shifting demand patterns. In the cryptocurrency space, volatility persists as regulatory developments and institutional adoption continue to shape market sentiment.

However, the U.S. and Chinese economies ended last year with solid momentum, leading us to anticipate a more gradual slowdown in growth for both countries this year compared to previous forecasts. However, we still expect global GDP growth to decelerate from an estimated 3.1% in 2024, as higher tariffs and the lingering effects of past monetary tightening weigh on economic activity.

This outlook provides a deeper dive into key economic regions, analyzing their current conditions and expectations for the coming month.

U.S. Economic Momentum and February Outlook

According to the latest published data, the U.S. economy maintained strong growth in late 2024, with real GDP expanding by 2.3% in Q4 and 2.8% for the year, surpassing the pre-pandemic average. Robust consumer spending, up 4.2% in Q4, was the main driver, fueled by rising incomes and durable goods purchases. However, some of this demand may have been influenced by tariff concerns, with new levies on Canada and Mexico set to take effect soon.

Business investment declined 5.6% in Q4, mainly due to lower inventory accumulation and weaker spending on equipment. Despite this, core capital goods orders showed signs of recovery, suggesting potential improvement ahead. Residential investment rebounded 5.3%, driven by increased homebuilding despite high mortgage rates. New home sales held up as builders used incentives to counter affordability challenges.  

Inflation progress remains slow, with the core PCE deflator at 2.8% year-over-year. While wage pressures have eased, disinflation has been incremental, but personal spending jumped by 0.7% in December keeping the Federal Reserve cautious on rate cuts for the rest of the year as well, after holding the current range of 4.25%-5.50% in its first meeting in 2025. Meanwhile, potential new tariffs pose a downside risk to economic momentum.

Of course, Trump 2.0 is still in its early days, with President Trump having just been inaugurated last days of January. That said, the administration’s commentary and proposed policies have largely aligned with initial expectations. Notably, President Trump has proposed a 25% tariff on both Canada and Mexico, set to take effect on February 1. He has also floated the idea of a 10% tariff in China, or possibly no tariffs at all while highlighting the U.S. trade deficit with the European Union. However, a universal tariff has not been a major point of discussion. Overall, headline volatility surrounding tariffs is likely to persist until proposals translate into concrete policy.

Despite the potential restraining effect of U.S. tariffs on economic activity, we still expect a degree of U.S. economic outperformance to persist. As a result, our monetary policy outlook remains unchanged from our last major international forecast update in January. We now see greater justification for the Federal Reserve to cut interest rates less aggressively, with only two rate cuts expected in 2025.

USD and Wall Street Outlook!

On the currency front, our U.S. dollar outlook remains largely unchanged this month, and we continue to anticipate broad dollar strength over the medium term. We expect the dollar to remain strong through most of 2025 and 2026, supported by U.S. economic resilience and a less dovish Fed, which should keep the greenback firm against most G10 currencies. Additionally, higher U.S. yields, tariff-related uncertainties, and softening sentiment toward China are likely to put depreciation pressure on emerging market currencies, with the Mexican peso, Chilean peso, and Brazilian real among those expected to weaken against the dollar.

Unlike the currency market, we hold a more cautious outlook on stock markets. The current pressures on stock prices, following the Fed policy meeting and the volatility in tech stocks, are likely to persist through February.

US Economic Calendar for February!

On the economic Calendar front, these releases provide key insights into employment trends, inflation, productivity, and wage dynamics, which are crucial for assessing the U.S. economic outlook in February: PMIs for January (February 3, Monday), Job Openings and Labor Turnover Survey (JOLTS) for December 2024 (February 4, Tuesday), NFP report for January 2025 (February 7, Friday), Consumer Price Index (CPI) and Real Earnings for January 2025 (February 12, Wednesday), Producer Price Index (PPI) for January 2025 (February 13, Thursday), Retail Sales for January 2025 (February 14, Friday), and Home Sales for January 2025 (February 21, Friday).

UK Economic Outlook – February 2025

The UK economy faces mounting challenges, exacerbated by global headwinds from the U.S., where rising tariffs could fuel inflation. These factors have significantly impacted bond markets, particularly in the UK, where concerns over stagnant growth and persistent inflation have led to rising bond yields. This, in turn, has increased government borrowing costs, limiting fiscal flexibility and raising the likelihood of spending cuts or tax increases.

The UK government is prioritizing economic growth to manage rising borrowing costs, but progress has been slow. GDP growth is currently weak, hovering around 1% annually, below the long-term trend. November GDP edged up just 0.1% month-over-month, while December retail sales unexpectedly fell by 0.3%. More notably, UK inflation in December slowed more than forecast, with previously persistent services inflation in particular slowing to 4.4% year-over-year. Inflation has been a persistent challenge due to the war in Ukraine, supply chain disruptions, and housing costs. Although it is gradually declining, it remains elevated. While inflation is slowing, consumer prices remain high, particularly in essential sectors like food. However, with inflation nearing the Bank of England’s 2% target, an interest rate cut in spring 2025 is increasingly likely, which could stimulate economic activity.

The UK labor market remains tight but faces rising costs and long-term challenges. Additionally, an increasing number of people are on long-term sickness benefits, which some attribute to lingering COVID-19 effects or generous welfare policies. This trend could further strain the economy by increasing public spending while reducing workforce participation.

UK Economic Data Overview:

• October 2024 GDP: Decreased by 0.1%, following a similar decline in September.
• Three-month GDP growth: A modest 0.1% increase through October 2024, driven by gains in services and construction.
• December 2024 CPI: 2.5% YoY, slightly down from 2.6% in November.
• Monthly CPI increase: 0.3% in December 2024, compared to 0.4% in December 2023.
• Employment rate (Aug–Oct 2024): 74.9% (steady YoY, slightly up from the previous quarter).
• Unemployment rate: 4.3%, higher than a year ago.
• Wage growth: 5.2% YoY for both regular and total earnings.

BoE Policy Outlook:

For now, our base case remains for the Bank of England (BoE) to lower its policy rate at a 25 basis point-per-quarter pace this year. While that cumulative 100 basis points of rate cuts are already more than expected by market participants, we would not rule out more frequent easing from the BoE during 2025. The Bank of England will announce its latest monetary policy decision on February 6. We expect it will cut its policy rate by 25 basis points to 4.50% and anticipate that the accompanying statement will be overall dovish in tone.

As mentioned above, recent activity and price data strongly support the February rate cut. November GDP edged barely higher, while December retail sales unexpectedly declined. December inflation surprised the downside, including, most significantly, a slowdown in previously stubborn services inflation to 4.4% year-over-year. Still, overall wage growth and domestic inflation remain elevated, hinting at lingering inflation pressures. These data suggest that the BoE has enough reason for at least a 25-basis point rate cut in its first meeting of 2025.

Sterling Outlook:

The British pound has weakened against both the U.S. dollar and the euro, reflecting concerns over the UK’s economic outlook and rising government borrowing costs. For now, Sterling is at its lowest level since November 2023. The stronger U.S. dollar, driven by expectations of higher U.S. interest rates, combined with lower expected rates in the UK, is likely to push the pound lower in the near term.

Eurozone Economic Outlook – February 2025

In stark contrast to the resilience shown by the U.S. and Japanese economies, sentiment surrounding the Eurozone remains subdued as it faces a series of economic headwinds. Despite a modest increase in GDP growth in Q3-2024, which grew by 0.4% quarter-over-quarter—boosted by a 0.7% gain in consumer spending—the outlook for sustained growth seems increasingly uncertain. As the region navigates the complexities of inflation, political challenges, and global risks, the economic trajectory appears to be slowing, with downside risks to growth in 2025.

While the European Central Bank (ECB), after its 25 bps rate cut in January, has indicated that households may continue to save in order to rebuild their real net worth, the potential for slower job growth raises concerns about a slowdown in consumer spending going forward. With inflationary pressures still in play, European households may face challenges in balancing their savings with higher living costs, which could weigh on future consumption and demand.

Eurozone Economic Data and Sentiment

Economic indicators across the Eurozone demonstrated improvement in December 2024, suggesting gradual stabilization of business activities. The January 2025 ZEW surveys highlighted a slight improvement in the Eurozone. The Eurozone ZEW Economic Sentiment Index rose to 18.0, exceeding the expected 16.9 and the previous 17.0, reflecting improved confidence in the broader Eurozone’s economic outlook despite lingering uncertainties.

The cautious investment climate, coupled with stagnant growth, is reflected in recent Eurozone sentiment surveys, which have shown modest fluctuations since late 2024. The surveys suggest that economic activity is likely to remain at a level consistent with only modest growth in the coming months. With these challenges in mind, our forecast for Eurozone GDP growth in 2025 stands at a modest 0.9%, though risks to this forecast are tilted to the downside. In addition, the growth outlook remains vulnerable to external risks like geopolitical tensions, trade uncertainties, and a potential global economic slowdown. Furthermore, political risks within the Eurozone, especially in larger economies, could further weigh on confidence and investment.

Inflationary pressures remain, though they have been gradually easing to 2.4%. The European Central Bank (ECB) has pointed out that inflation is on track to settle at around 2% in the medium term. However, inflation still impacts consumer spending, particularly on essential goods and services, and could dampen demand.

On the labor market front, while unemployment rates have been relatively stable around 6.3%, the tight labor market and moderation in wage growth suggest that there might be some pressure on household incomes. If job growth slows, consumer confidence and spending could weaken, further limiting economic expansion.

ECB Policy Outlook: Easing Ahead

Despite ongoing inflationary pressures, the ECB has signaled its intention to continue its policy of easing in the coming months. Following its first monetary policy meeting of 2025, the ECB lowered its Deposit Rate by 25 basis points to 2.75%, continuing the easing cycle that began in 2024. While the accompanying statement was not overtly dovish, it pointed to a gradual reduction in inflationary pressures, suggesting that inflation could settle around the ECB’s 2% target on a sustained basis.

ECB President Christine Lagarde’s comments further confirmed the central bank’s cautious approach, indicating that both upside and downside risks to inflation remain, but that the growth outlook is tilted to the downside. The ECB’s decision-making process will remain data-dependent, with future monetary policy adjustments based on the evolution of economic conditions.

Lagarde also mentioned that a report on the neutral policy interest rate would be published in early February. While she acknowledged that discussing where to stop interest rate cuts was premature, her statement strongly hinted that further cuts are on the horizon.

Euro Outlook

Overall, the Eurozone faces a challenging economic landscape in 2025. Although inflationary pressures are moderating, the region’s sluggish growth trajectory will likely keep the ECB on a path of monetary easing, with further interest rate cuts expected in the months ahead. While the modest growth forecast of 0.9% for 2025 remains in place, downside risks suggest that the economy may struggle to gain significant momentum in the near term. The ECB’s continued rate cuts reflect the urgency of supporting growth, but the Eurozone’s recovery is likely to remain slow and fragile, leaving policymakers with a delicate balancing act between fostering economic demand and containing inflationary pressures. With slower economic activity, a weaker outlook, and ECB interest rates, the Euro has less chance against its rivals. Generally, the EUR could enter a new realm of uncertainty and volatility.

China Economic Outlook – February 2025

China’s economy is facing a mixed outlook as it enters 2025, with several challenges dampening growth prospects while a few factors offer potential for stabilization and recovery. The country’s economic performance in recent years has been clouded by both domestic structural issues and external uncertainties, but government measures, including fiscal stimulus and policy adjustments, continue to shape the outlook for February. With the end of the Chinese New Year holiday, February is expected to start strongly in China.

China’s economy ended 2024 on a positive note, with Q4 GDP rising 1.6% quarter-over-quarter, leading to a 5.4% year-over-year growth. Key factors for this performance included interest rate cuts, reduced Reserve Requirement Ratios, government property support measures, and limited fiscal stimulus. However, China’s Q4 growth was heavily driven by strong exports, particularly due to front-loading purchases in anticipation of potential tariffs. Exports accounted for about half of China’s economic growth, while domestic consumption remained weak.

Looking ahead, China’s reliance on exports for growth poses risks, particularly with the potential disruption from tariffs and shifting global supply chains. The lack of a strong domestic consumption engine could further hinder economic growth, as policies to support trade and liquidity might not fully offset softening external demand. Unless the government introduces significant fiscal stimulus to boost household consumption, consumer spending and services are unlikely to improve. As a result, China’s GDP growth is forecasted to slow to 4.5% in 2025, down from 5% in 2024.

China Economic Data Review

China’s trade data for December 2024 showcased robust performance, with exports surging by 10.7% YoY, surpassing the forecast of 7.3% and the previous 6.7%, driven by strong global demand during the holiday season. Imports also exceeded expectations, growing by 1.0% YoY compared to the forecasted -1.5% and the previous -3.9%, reflecting improving domestic demand and higher purchases of raw materials and energy. The trade balance widened to $104.84 billion, beating the forecast of $100 billion and the previous $97.44 billion, underscoring China’s resilience in global trade dynamics and its ability to capitalize on recovering economic conditions worldwide.

China’s economic activity showed signs of weakening in January 2025, as reflected in the latest PMI figures. Composite PMI fell to 50.1 from 52.2 in December, while Manufacturing PMI slipped into contraction territory at 49.1, down from 50.1. The Non-Manufacturing PMI also declined significantly to 50.2 from 52.2, indicating a sharp slowdown in growth. These figures highlight reduced momentum across both the manufacturing and services sectors, as China faces a combination of domestic challenges and external pressures.

On the inflation front, which is one of the main PBOC concerns, while consumer inflation has been improving gradually and was flat in December 2024 (after several months of decline), it remains sluggish, and further stimulus may be needed to boost demand. The shift towards more sustainable consumption patterns, spurred by environmental awareness and rising incomes, may help stimulate domestic consumption in the medium term.

Chinese Monetary Policies, and Market Expectations

In response to the published data, on January 20, 2025, the People’s Bank of China (PBOC) decided to keep the one-year loan prime rate steady at 3.1% and the five-year rate, which guides mortgage rates, unchanged at 3.60%. The move aims to support the weakening yuan, sustain liquidity, and bolster the ongoing economic recovery. However, the decision had a limited impact on market sentiment regarding the yuan, reflecting cautious investor outlooks amid broader economic uncertainties.

For February, we are generally positive about the Chinese stock markets and the Chinese yuan, especially if the wave created by the DeepStack can gain more confirmations.

Additionally, after threats of 60% tariffs, the Trump administration now talks about 10% tariffs on Chinese products and the need for trade talks, which could be a positive sign, at least in the short term.

Japanese Economic Outlook – February 2025

Japan’s economy is facing a challenging yet cautiously optimistic outlook as it enters 2025. The country continues to grapple with the effects of long-standing structural issues, such as a shrinking and aging population, but a combination of domestic fiscal measures and external economic factors may provide some stabilization in the near term. The global economic environment, alongside Japan’s own economic policies, will be key factors influencing its growth prospects.

Japanese Economic Performance in 2024

Japan ended 2024 on a relatively positive note, with GDP growth recovering slightly following a period of stagnation. In the fourth quarter of 2024, Japan’s GDP expanded by 0.4% quarter-over-quarter, supported by moderate growth in both domestic consumption and exports. However, Japan’s economy remains reliant on external demand, particularly from the U.S. and China, both of which are facing their own economic headwinds. The Japanese government’s fiscal stimulus measures, which included infrastructure spending and targeted support for the manufacturing sector, helped cushion the impact of global economic uncertainty.

Japanese Inflation and Economic Growth Conditions

Japan’s inflation data for January 2025 indicated mixed dynamics. The Corporate Services Price Index (CSPI) grew by 2.9% year-over-year, slightly below the forecast of 3.2% and the previous figure of 3.0%, reflecting a modest slowdown in price pressures within the corporate sector. Meanwhile, the BoJ Core CPI, which excludes volatile food and energy prices, rose by 1.9% YoY, surpassing expectations and the prior reading of 1.7%. This acceleration in core inflation aligns with the Bank of Japan’s gradual push toward sustained price growth, signaling ongoing inflationary pressures in the broader economy.

On the trade front, Japan’s trade significantly improved in December. Exports rose by 2.8%, better than the 2.3% expected but lower than the 3.8% in the previous month. Imports, after a 3.8% fall, increased by 1.8% in December, and the Trade Balance reached ¥130.9 billion, a more significant improvement than the expected ¥55.0 billion deficit, following a drop of ¥110.3 billion in November. The Adjusted Trade Balance improved to -¥0.03 trillion from -¥0.39 trillion in November.

The Bank of Japan Raised Interest Rates to a 17-Year High!

While Japanese national inflation has already reached 3.6%, and the central bank believes that rising wages will keep inflation stable around its 2% target, BoJ policymakers on Friday, January 24, raised interest rates by 25bps to 0.50%, as was widely expected. Furthermore, the release of the CPI data for January showcased an acceleration of inflationary pressures in the economy, further validating the BoJ Core CPI rates. Overall, these financial releases could increase pressure on the BoJ to adopt a more hawkish tone, which could, in turn, aid the JPY.

The BoJ Deputy Governor stated, per Bloomberg, that “Looking ahead, it depends on the economy, prices, and financial circumstances, but if our economic and price outlooks are realized, we’ll hike rates accordingly.” Essentially, it appears that the Deputy Governor’s comments are hawkish in nature, and should policymakers reiterate these hawkish remarks, it could further aid the JPY.

JPY Outlook

The BoJ is expected to continue hiking rates throughout the year, during a period when other central banks are expected to cut rates. In our view, with the BoJ seemingly poised for future rate hikes, we would not be surprised to see the JPY strengthening. Thus, should policymakers reiterate hawkish remarks, it could further support the Yen.