Quarterly Economic Outlook: Fourth quarter 2025

Summary

• We see the global economy as undergoing a period of “global rewiring” on a number of fronts—evolving patterns and relationships that we anticipate affecting certain economies and markets for some time to come. Such rewiring could cover relationships between countries or developments within particular regions or economies. 
• Our core themes of improving emerging market (EM) fundamentals, US dollar (USD) weakening and geopolitically-induced shifts in global supply chains remain intact, with recent events providing further support to our views.
• Uncertainty remains elevated. Final tariff levels are still not decided for a number of countries. Risks from US tariff and trade policy encompass growth, inflation and/or geopolitical implications and vary by country. Domestic political developments in some countries raise fiscal and other policy concerns. Finally, the current lack of US data as the government shutdown continues and questions over the independence of traditionally non-partisan government institutions further increase uncertainty.
   

Economic and market prospects

͏͏͏͏͏Where we stand now. The change in tariff and trade policy from the United States, following President Trump’s re-election to a second term starting in January, was possibly the most significant shift in the economic landscape this year. This has reverberated throughout world trade with knock-on effects on growth and inflation, albeit with the full impact likely yet to come. Moreover, tariff rates are still not settled in a number of countries. Growth data to date has held up relatively well, but that is partly due to frontloading of economic activity ahead of tariff impositions, and the fuller effects on activity are likely to become more evident as time goes on. Similarly, while there has been a somewhat limited effect on inflation rates in certain countries so far where retailers have absorbed some cost increases, this is not a sustainable situation, and we believe inflation rates—already moving higher in some developed markets—are therefore likely to rise further for some time. This is also indicated by recent surveys showing higher consumer inflation expectations. Political uncertainty has also increased this year, with factors including elections, the loss of confidence votes impacting prime ministers in a number of countries, and the US government shutdown (which started at midnight on September 30).

The tariff landscape has affected other geopolitical outcomes, accelerating some rewiring trends that were already underway.¹ The relationship between the United States and China has turned adversarial again, after a brief period of thawing relations during part of the Biden administration. The latest developments include new Chinese restrictions on rare earths exports, and the US administration’s threat to impose higher tariffs in return. However, the fractious relationship and souring trade ties between the United States and China means that there is scope for other EMs to step into the gap including countries such as Malaysia and India which are well-placed in terms of global supply chains (and, often, they can take advantage of trade with both the United States and China). There is opportunity beyond EMs too—for example, the United States and Australian governments recently signed a US$8.5 billion deal for critical minerals, with significant agreements also made in defense cooperation and some trade deals. Other deals seem to have geopolitical objectives, such as the US-Argentina currency swap deal in October designed to support the Argentine peso.² That said, even as trade agreements between the United States and other countries are being signed, there are also an increasing number of bilateral and multilateral agreements that exclude it. Some ties are also deepening between non-Western centers; recent examples include some agreements and discussions around cooperation on various issues between some African countries (such as Ethiopia and Kenya) with China and/or Russia.   

Strategy and portfolio positioning

Tariff policy is changing trade patterns; globalization is still proceeding, but in a different way from the past couple of decades. We are seeing bilateral and multilateral trade agreements between EMs and between non-US developed nations and EMs. In other words, the trend of deepening global trade networks mostly remains in place, but even as the United States concludes more of its own deals, we see a tendency for other agreements to exclude it. We also note, however, that trade volumes overall have suffered in the new environment. The World Trade Organization raised its latest forecast for world trade volume growth to 2.4% for 2025 (partly due to frontloading) but cut its 2026 forecast sharply from 1.8% to 0.5%, as the global economy slows and as the full impact of tariffs for a full year becomes felt.

The tariff and policy outlook emanating from the United States somewhat dampens—but in our view does not remove—the generally positive conditions for EMs. Sounder policies and reforms in a number of EMs have led to improved economic fundamentals, as illustrated by their resilience against repeated stresses of the past few years (including the pandemic and the rising US interest rate cycle). They are also less directly exposed now to trade with the developed world than a couple of decades ago. Furthermore, we expect various EMs to benefit from reshoring initiatives. So while tariffs will undoubtedly have some cost for EMs, we also believe that many EM countries are well-positioned to navigate this new environment. We further expect that the deteriorating relationship between the United States and China will open up opportunities for other EMs. As the face of global trade shifts more toward regional and bilateral relationships, ensuring security in supply chains and ensuring security between allies, those EMs that can pivot to align with these objectives should benefit from the global trade rewiring currently underway. In general, we think the imposition of tariffs should further underpin the current global trend of regionalization and reshoring. We closely monitor idiosyncratic factors in different countries to identify relative valuation opportunities, with some countries more vulnerable to weaker fundamentals and/or the effects of tariffs and changing US foreign policy.

Structurally, fiscal outcomes—especially in the developed world—remain a concern, as debt levels are set to rise further. Some EU countries (such as Germany) have more scope than others to raise debt levels, but those for the region as a whole are expected to rise, as are those in the United States and Japan. This makes us wary of longer-term bonds, which we would expect to bear the brunt of the implications of fiscal loosening (and could also be affected by inflation increases related to tariffs).