The global economy has proven to be surprisingly resilient despite the shocks of US trade wars and the wars in Ukraine and the Middle East.

Eli Lee
Managing Director,
Chief Investment Strategist,
Chief Investment Office,
Bank of Singapore Limited

The US economy is suffering mild stagflation as the supply shock from its steep tariff hikes slows growth from almost 3% in 2024 to around 1.6% in 2025, while also pushing core inflation back towards 3%. But activity in the Eurozone, the UK, China, Japan and India has held up better than expected this year.

The US Federal Reserve (Fed) has begun to reduce interest rates again, easing rates by 25 basis points (bps) in September. The Fed thus joins the European Central Bank (ECB), the People’s Bank of China (PBOC), the Bank of England (BOE) and the Swiss National Bank (SNB) that have lowered interest rates to 2%, 1.4%, 4% and 0% respectively.

Resilient activity and falling interest rates have been important tailwinds for financial markets. We expect the Fed to still reduce interest rates twice this year. But investors need to be aware of longer-term risks. Higher tariffs may keep global growth subdued around 3% in 2025 and 2026. Inflation is proving sticky, making it unlikely that major central banks will cut interest rates much more now. The Trump administration’s efforts to curb Fed independence could lead to higher inflation, steeper yields and a much weaker US Dollar.

Investors should therefore continue to maintain diversified and resilient portfolios given the longer-term threats to the outlook.

US – The Fed is making limited “insurance” rate cuts

The Fed’s September policy meeting was important on two counts. First, for the Federal Open Market Committee’s (FOMC’s) decision on interest rates and, second, whether officials would continue to act independently of the White House’s desire for aggressive rate cuts.

On the first point, the FOMC as widely expected reduced its fed funds rate for the first time this year, by 25bps to 4-4.25%, as officials acted to cushion the slowing US labour market rather than keep curbing inflation. The Fed’s statement said: “downside risks to employment have risen.”

The FOMC also updated its forecasts, projecting GDP growth to fall from 2.8% in 2024 to 1.6% in 2025 as US tariffs hurt activity, while core inflation is expected to stay high at 3.0% this year and 2.6% next year. The stagflation outlook resulted in FOMC members being split on the need for further rate cuts. Seven members forecast none or only one more 25bps rate cut this year while 10 officials projected two more cuts in 2025 to 3.50-3.75%. Similarly, the average forecast was for only one further 25bps cut each in 2026 and 2027.

On the second point regarding the Fed still setting monetary policy independently of the White House, the FOMC meeting was encouraging. Chairman Jerome Powell suggested further rate cuts would be limited, observing: “I think you could think of this in a way as a risk management cut.”

The FOMC was also almost unanimous in voting 11-1 for just a 25bps rate cut. Only new Governor Stephen Miran voted for 50bps. In contrast, Governors Christopher Waller and Michelle Bowman - who had already favoured reducing interest rates when the Fed previously met in July, perhaps to signal to President Trump their ambitions to succeed Powell as Chairman from May 2026 - sided with the majority.

We thus keep our view of only a limited Fed rate cutting cycle as inflation remains above its 2% target. We see two further 25bps cuts in the fed funds rate this year to 3.50-3.75% but no more next year until Powell leaves as chairman. “Insurance cuts” should support stocks and gold, weaken the US Dollar further while keeping 10Y US Treasury (UST) yields in an elevated 4-5% range.

China – Strong stock markets but subdued economic data

China and Hong Kong stocks have outperformed over the last 12 months, rallying 40-50% in US Dollar terms. Three economic drivers - improving liquidity as the PBOC has reduced its short-term 7-day reverse repo interest rate from 2.00% in 2023 to 1.40% in 2025, the rebound of the Chinese onshore renminbi (CNY) from 7.35 against the US Dollar in April (when President Trump announced major US tariffs) to 7.12 now; and hopes that the Chinese government is likely to provide further fiscal stimulus, have all supported China’s stock markets.

In 1H2025, economic activity was boosted by firms front-loading exports to beat the imposition of US tariffs. China’s 1Q2025 and 2Q2025 GDP expanded by 5.4% year-on-year (YoY) and 5.2% YoY respectively, exceeding Beijing’s target of “around 5% growth”. But in 2H2025, activity has stepped down as higher US tariffs, prolonged consumer caution after the pandemic and weak property markets have resulted in subdued growth since the summer. For example, August’s retail sales only expanded 3.4% YoY. Fixed asset investment barely rose 0.5% YoY and industrial production growth slipped towards 5% YoY from almost 8% YoY in the spring.

Despite the slowdown, we think China’s equity markets will stay supported. If growth falters, the government is likely to respond with new subsidies for consumption and infrastructure spending to cushion economic activity this year.

There has also been a resurgence of US-China trade fears, following China’s move to expand export controls on its rare earth supply chain, a critical resource for the technology and defence sectors. President Donald Trump plans to impose a 100% tariff on Chinese goods from 1 November or earlier, depending on China’s actions, in response.

While Trump has walked back some of the rhetoric, underlying tension and uncertainty remain. The Trump’s administration has signalled it remains open to a deal with China, and Trump is still expected to meet with Xi Jinping at APEC at the end of October.

But the US has also said all options are open for retaliating against China’s move to tighten exports of rare earths. Meanwhile. Beijing said it would be taking cues from Washington’s next steps.

From an investor’s perspective, the situation remains fluid, but assessments lean towards negotiation posturing rather than full-scale escalation. Nonetheless, portfolios should be positioned to withstand short-term volatility. Defensive equity sectors like consumer staples and utilities are favoured, while non-China firms involved in REE (rare earth elements) and critical metals may benefit. Conversely, US software firms and industrials reliant on REE inputs could face headwinds.

Europe – Less chance of further rate cuts now

This year, European growth has been surprisingly resilient despite much higher US tariffs as the ECB has reduced interest rates from 4.00% last year to 2.00% in June and the BOE has cut its Bank Rate from 5.25% in 2024 to 4% now, helping support activity.

But with inflation back at the ECB’s 2% target, the ECB kept its deposit rate at 2% for the second meeting in a row in September. We think its interest rate cutting cycle is over now. The ECB’s new forecasts project inflation staying close to its 2% target for the next three years and President Christine Lagarde said, with the US and European Union signing a new trade deal, “risks to economic growth have become more balanced.”

Similarly, the BOE kept its Bank Rate unchanged at 4% in September - as inflation has rebounded to 3.8% - and officials were hawkish, warning: “upside risks around medium-term inflationary pressures remain prominent.”

We thus have pushed back our view of one last 25bps cut to 3.75% from November 2025 to February 2026. The BOE still seems ready to ease as the UK labour market slows, but inflation will limit further rate cuts - to the benefit of the GBP.

Japan – BOJ may still hike rates gradually

The Bank of Japan (BOJ) kept its overnight call rate at 0.50% in September. BOJ Governor Kazuo Ueda gave no signal when the BOJ will resume rate rises after last hiking 25bps to 0.50% in January, saying he wanted to see more data on the impact of US tariffs. But we think the BOJ will restart its gradual cycle of rate hikes.

First, two BOJ officials voted to raise rates at September’s meeting. Second, the BOJ surprised by deciding to start selling its stock of ETFs, a form of monetary tightening. Last, core inflation at 3.3% has been above its 2% target for three years now.

A fluid political backdrop is complicating the outlook for fiscal policy. The ruling Liberal Democratic Party (LDP) has lost its junior coalition partner after a highly successful alliance lasting 26 years. Komeito decided to leave the government after an LDP funding scandal. The LDP can still lead a minority administration as it remains by far the largest party in the Diet’s two houses.

But Komeito’s exit complicates the outlook for financial markets.

First, Komeito has said it will not support Sanae Takaichi, the new LDP President, when the Diet votes to elect her Japan’s next prime minister. The ballot has been pushed back to 21 October or even later this month now.

Second, the LDP will need to rely on at least two opposition parties to win votes in the Diet. Komeito has said it will continue to support the LDP when passing legislation. But now Takaichi’s party will require assistance from a second party to enact new laws.

Third, fiscal risks are set to rise further. Rising interest rates increase the costs of servicing Japan’s more than 200% of GDP government debts. But Takaichi favours looser fiscal policy to stimulate growth and opposition parties want to cut taxes to support consumers.

Investors thus will watch Takaichi’s policies if she becomes prime minister including whether she will exceed last year’s supplementary budget of JPY14 trillion and whether the next financial year 2026’s budget leads to new bond issuance above the current fiscal year’s JPY37 trillion.

Equites are still set to be supported by structural reforms under a Takaichi government. But with the LDP having to govern alone, the Bank of Japan may face less pressure to refrain from hiking interest rates. We thus see the BOJ lifting its overnight call rate 25bps at its next meeting on October 30 to the benefit of the Japanese Yen.