As we look ahead to 2025, global economic conditions will be shaped by disinflation, softening labour markets, and evolving monetary policy across major economies. These dynamics present both challenges and opportunities in navigating financial markets, foreign exchange trends, and central bank actions. Here are the key economic insights driving the outlook for 2025:

1. Global Disinflation and Easing Monetary Policies

Disinflation remains the prevailing trend worldwide, as shown in figure 1, as inflation across goods has normalized post-pandemic, while services inflation—though still elevated—shows signs of easing. Central banks worldwide are expected to loosen monetary policy as inflation converges toward their respective inflation targets.

Labour markets, previously resilient despite aggressive monetary tightening, are now weakening. Unemployment rates are on the rise globally, with cyclical sectors such as construction showing early signs of contraction. High mortgage rates continue to suppress housing activity, underscoring the restrictive stance of monetary policies. In many economies, overall employment growth has shifted to non-market sectors, leaving private sector employment stagnant or declining—a pattern typically associated with recessions.

While rate cuts are already largely priced into bond markets, deeper easing may be necessary, particularly in economies facing fragile labour markets. Central banks may risk maintaining overly restrictive policies, heightening recession risks even as they aim for a soft landing.

Figure 1

2. Government Bonds Poised for a Comeback

Government bonds are set to outperform cash in 2025, following years of underperformance amid hawkish central bank surprises. With interest rates expected to fall across major economies, bond yields are likely to follow suit.

In a soft-landing scenario or even in the event of a recession, central banks may exceed the rate cuts currently anticipated by markets. For example, the US Federal Reserve, which began its cutting cycle in September, is on track to deliver 100-bps worth of cuts by the December meeting. Similar dovish surprises are expected from the European Central Bank and the Bank of England.

3. The Dollar’s Peak Is Near

The US dollar is expected to experience continued short-term strength before reaching its peak in 2025. The dollar tends to rise during periods of US economic outperformance, and current indicators, such as GDP growth and economic surprise indices, suggest this momentum will continue in the near term.

However, the dollar’s strength is likely to wane as the FED adopt more aggressive easing measures. Faster disinflation outside the US could lead to deeper rate cuts abroad emerging market, further narrowing the interest rate differential that currently supports the dollar. While the dollar index (DXY) may rise to 110 during recessionary pricing, it is expected to trend lower as the year progresses.

4. The Bank of England to Deliver a Dovish Surprise

The Bank of England (BoE) is poised to surprise markets with more aggressive easing than anticipated. Core inflation in the UK is on a downward trajectory, with rent inflation—a key driver—decelerating sharply. Meanwhile, the UK labour market is softening, with rising unemployment and slowing employment growth signalling a broader economic slowdown.

While markets are currently pricing in 89-bps of rate cuts for 2025, the BoE’s need to stimulate the economy could lead to even deeper cuts. This dovish stance aligns with broader global trends of monetary easing.

5. The Bank of Japan to Maintain a Hawkish Stance

In contrast to other G10 central banks, the Bank of Japan (BoJ) is expected to remain hawkish in 2025. Evidence of a virtuous cycle between wages and prices is emerging, driven by rising real wages and increased consumer spending. Services inflation is gaining traction, supported by robust wage growth, including a 5.1% increase in union wages earlier this year.

The BoJ’s focus will remain on sustaining its 2% inflation target, with the 2025 Shunto wage negotiations serving as a critical marker for future policy actions. As other central banks ease, Japan’s unique economic conditions could set it apart in terms of monetary tightening.

Conclusion

The economic landscape in 2025 is marked by global disinflation, weakening labour markets, and divergent monetary policies. While government bonds are set to rebound, the dollar’s strength may peak, and central banks like the BoE and BoJ could take contrasting approaches. Navigating these dynamics will be critical for businesses seeking to manage risks and capitalize on emerging opportunities in the year ahead.