Entering the second half of 2025, the global economy stands at a critical juncture where structural reassessment and risks intersect. Policy disruptions, exemplified by trade protectionism, continue to deepen, interrupting the momentum of global economic growth and exposing systemic risks. Trade barriers are reshaping the global supply-demand landscape, macroeconomic policy tools are nearing their limits, institutional trust mechanisms are weakening, and the long-standing overvaluation of asset prices may further amplify market vulnerabilities. Increasing policy uncertainty is exacerbating structural divergence among major economies.
In the U.S., growth is constrained by disordered policies and a tightening financial environment, with the economy facing a triple pressure of sluggish growth, policy limitations, and anchorless expectations. Growth momentum is weakening, and endogenous risks are rising. In the Eurozone, while attempts at fiscal expansion aim to stabilize economic growth, structural low growth and external disruptions may make it difficult to break through in the short term. Japan’s economy continues to seek a balance between fiscal sustainability, stimulating domestic demand, and controlling imported inflation, but additional shocks from trade protectionism may further limit policy adjustment space.
For emerging markets, the trend of internal divergence is intensifying. High-debt countries are constrained by financing pressures and exchange rate volatility, while economies with demographic dividends and institutional resilience may emerge as winners in the global capital reallocation process. As for asset allocation, the focus of the global market has shifted from short-term variables to evaluating underlying operating mechanisms. The status of the U.S. dollar as a risk-free asset is being reassessed, and the pricing risks of high-valuation, long-duration assets are rising. The global capital market has thus entered a new phase of searching for anchors and is experiencing a restructuring of asset allocation logic. Investors need to remain vigilant against the pressures of market volatility and the revaluation of asset pricing systems during this period of transition. Prudently evaluating and optimizing credit exposure and liquidity management strategies will be key to navigating the cyclical shifts and ensuring stability amidst risk intersections.
The End of Inertia and the Reversal of Trends
At the beginning of 2025, after years of shocks, the global economy maintained good resilience, supported by continuous policy interventions, stage-by-stage repair of global supply chains, and the upcoming wave of artificial intelligence (AI). Global economic recovery momentum continued moderately. However, this momentum abruptly halted under the headwinds of trade protectionism, and the global economy is once again facing a state of heightened uncertainty and volatility. Currently, the global economy’s sensitivity to external shocks has increased significantly. The disruptions caused by trade protectionism are not merely temporary but represent a systemic distortion of the global economic operating logic.
First, the efficiency of global resource allocation has declined. Resources have been forced to shift to less competitive sectors, weakening overall productivity, increasing production costs, and suppressing the expansion of economic activities. Protectionist policies undermine market competition, increase monopolistic and rent-seeking behaviors, and suppress the incentives for innovation and efficiency improvements in enterprises.
Second, weakened policy communication mechanisms have led to disordered market expectations. The market’s original progressive understanding of policy pathways has been disrupted, and macroeconomic expectations are diverging widely and persistently. The efficacy of the original market operation logic has diminished, and it is difficult to provide a stable reference framework. The direct economic impact of the policies has yet to be fully realized, but their shocks have already deeply permeated expectations. Corporate decision-making has become more cautious, financial institutions’ risk appetite has decreased, and credit channels and real investment have further contracted.
At the same time, the stability of the pricing mechanism is being eroded. Although the peak inflation of recent years has passed, new disruptions on the supply side, particularly interruptions in intermediate goods trade and distorted cost transmission chains, are pushing up the lower limit of price volatility. The uncertainty in price paths is raising inflation expectations, forcing the delay of the monetary policy rebalancing window, and creating a new contradiction between growth and prices. The IMF’s April 2025 World Economic Outlook downgraded global economic growth by 0.5 percentage points, forecasting a 2.8% growth rate for the global economy in 2025, well below the 3.3% growth rate of 2024 and the average of 3.7% from the pre-pandemic years (2000-2019). Developed countries and emerging markets have each seen their growth forecasts reduced by 0.5%, to 1.4% and 2.7%, respectively. Among developed countries, the U.S. saw the most significant reduction, from 2.7% to 1.8%, reflecting the negative impact of trade protectionism on the U.S. economy.
Four Systemic Risks Suppressing Global Economic Growth
As we move into the second half of 2025, the global economy still faces deep disruptions and trend suppression from four systemic risks:
First, the continuing deepening of trade protectionism. The current round of large-scale tariff policies has affected nearly all major economies and core industries, and the global trade order is undergoing a systemic restructuring. The IMF’s downgrade of global growth forecasts is largely attributed to the dual impact of trade barriers on global demand and supply chains. Tariff policies rapidly transmit through external demand channels to the global supply system, with global trade in goods and services growth expectations being revised down by 1.5 percentage points. If major economies fail to establish effective coordination mechanisms in the second half of the year, the weak global trade trend is likely to further deteriorate, and export-driven countries will face sustained growth pressure.
Second, the structural dilemma of macroeconomic policy tools. In recent years, fiscal and monetary policies have been massively deployed to respond to the pandemic and geopolitical risks, pushing global macroeconomic policies to their operational limits. In the second half of 2025, the structural constraints of macro policy tools will become increasingly prominent. Geopolitical fragmentation, rising debt levels, and persistent inflation are presenting unprecedented dilemmas for countries. The essence of this disruption is not cyclical fluctuation but the structural dilemmas revealed by the depletion of policy tool space.
In terms of fiscal policy, high public debt and accumulated long-term fiscal deficits have significantly narrowed the space for policy coordination. Against the backdrop of high interest rates and growing refinancing pressure, fiscal consolidation has become an urgent task for most economies, but its political feasibility and social tolerance face severe tests.
In terms of monetary policy, while overall inflation has decreased compared to previous years, some economies still face strong price stickiness, especially under the impacts of trade policy disruptions and supply chain misalignment. Inflation targets are difficult to anchor properly. Although some countries have entered a rate-cutting cycle, monetary easing has limited effectiveness on the real economy due to high debt, high risk premiums, and lack of confidence. Moreover, the independence and effectiveness of monetary policy are gradually narrowing due to fiscal pressure, weakening its role in supporting growth, stabilizing expectations, and rebuilding confidence. The combination of high debt, high interest rates, and high inflation continues to compress the policy space of major economies.
Third, the systematic weakening of trust mechanisms. Whether fiscal commitments, forward guidance on monetary policy, or trade agreements, the effectiveness of policies depends on the stability of the implementation environment, as well as the sustainability and coherence of the policies themselves. Currently, trade policy uncertainty is gradually eroding the global trust mechanism, pushing markets into an irrational cycle dominated by panic and amplified uncertainty, making the execution of public policies more challenging.
Fourth, the amplification of market vulnerability due to overvalued asset prices. Driven by long-term interest rate differentials and liquidity support, certain financial markets continue to see overvalued asset prices. Although market levels have partially adjusted, some valuations remain at historically high levels. If growth expectations deteriorate, this could trigger non-linear repricing of assets and a systemic sell-off. In the second half of 2025, the pricing stability of asset markets will continue to face pressure, and the risk of sharp fluctuations may increase during certain phases.
Structural Evolution of Major Economies at the Intersection of Risks
Looking ahead to the second half of the year, systemic risks will continue to shape global economic volatility. However, different regions face varying transmission paths of external shocks and internal adjustment mechanisms.
U.S. Economy: Structural slowdown under policy disorder and financial tightening
As we had previously anticipated, the U.S. economy is showing significant signs of slowing in 2025. However, the actual pace and extent of the downturn in the first half of the year have exceeded expectations. In the second half of the year, structural constraints are expected to further intensify, with three key pressures systematically curbing economic growth.
First, further amplification of policy uncertainty, including the repeated adjustment of trade policies, tax reform proposals, delays in administrative procedures, and lack of coordination among government agencies. In a market environment where nothing changes in response to change, the private sector is adopting a more cautious stance, and businesses are increasingly inclined to be defensive, making it difficult for economic momentum to recover.
Second, continued tightening of financial conditions. High interest rates combined with volatility in financial markets have led to stricter bank risk controls and a contraction in credit supply. Meanwhile, the pressure of U.S. Treasury supply is pushing up long-term risk-free interest rates, making corporate financing more expensive, limiting private sector leverage expansion, and constraining economic growth.
Third, systemic anchoring failure in market expectations. Frequent shifts in policy signals have weakened the credibility and consistency of policies, disrupting the original macroeconomic expectation framework. This has led to delays in business investment decisions and consumer behavior, while panic in the capital markets spreads more rapidly.
In summary, the U.S. economy is entering a phase of “slowed growth, unstable inflation, and constrained policies,” and without effective fiscal and monetary policy coordination, the economy may face worsening risks related to credit misallocation and resource allocation distortions. This could lead to medium-term structural adjustment pressures. We expect the U.S. GDP growth rate to be 1.4% for the year, with potential rebounds in Q2 due to a slowdown in imports, but with declining growth trends in Q3 and Q4 (1.2% and 0.9%, respectively). By the end of 2025, core inflation is expected to rise to 3%, and unemployment is expected to increase to 4.4%.
Eurozone Economy: Fiscal expansion fails to address the structural stagnation
While the fiscal expansion in the Eurozone in 2025 has provided a marginal positive effect on the economy, its impact is limited by structural low-growth traps and deteriorating external conditions. Under pressure from weak external demand and low domestic consumption, the Eurozone’s recovery remains fragile, and policy space is limited, with some member states still facing debt problems. While inflation in the Eurozone has significantly decreased, and the European Central Bank has become one of the first central banks to begin a rate-cutting cycle, the impact of easing policies on the real economy has been limited. Corporate investment remains weak, productivity growth is slow, and structural debt problems may be further exposed due to stimulus policies. In the medium term, unless productivity and energy efficiency improve effectively, the Eurozone’s economy is likely to remain trapped in a high-debt, low-growth structural dilemma. In the second half of 2025, the Eurozone economy is expected to continue its low-speed stagnation, with expected growth of 0.8%, with Q3 and Q4 growth rates of 0.8% and 0.9%, respectively.
Japanese Economy: Fiscal risks behind monetary normalization
Despite Japan’s gradual exit from its negative interest rate policy and its shift toward monetary normalization, the country’s economy is still stuck in a cycle of structural constraints and policy experimentation, with weak domestic demand, aging population, and labor shortages persisting. Currently, Japan’s economic growth is still highly dependent on fiscal stimulus, but the large scale of debt and the market structure created by the central bank’s long-term bond purchases are posing increasingly severe challenges to fiscal sustainability. The key to Japan’s monetary policy normalization is not only inflation and employment coordination but also long-term management of its highly leveraged fiscal system. However, its short-term debt rollover mechanism is highly sensitive to market stability, and any external shocks could cause sharp fluctuations in financing costs. The restructuring of global trade chains caused by U.S. tariff policies has had a substantial impact on Japan, a country highly dependent on exports and intermediate goods trade, further compressing its macro policy space. The instability of U.S. policies has also accelerated global investors’ attention to debt issues. Under the triple pressures of slow growth, unstable inflation, and emerging financial system pressures, Japan’s economic adjustments are likely to focus more on maintaining stability rather than guiding the new cycle. We expect Japan’s GDP growth in 2025 to be 0.8%, with growth rates of 0.6% and 0.1% in Q3 and Q4, respectively.**
Emerging Market Economies: Divergence trends likely to become more pronounced
In the second half of 2025, emerging market economies will face both internal and external pressures. In the first half of the year, global financial conditions remained tight, although expectations of partial interest rate cuts have emerged, the lagging effects of high interest rates are accelerating, and for high-debt emerging markets, insufficient foreign exchange reserves and high refinancing costs remain important sources of short-term financial vulnerabilities. The spillover effects of U.S. tariff policies are further reshaping global trade chains, causing regional contractions in demand for intermediate goods and capital flows. Some manufacturing transfer recipient countries have not been able to synchronize capacity and infrastructure development, leading to a situation where industrial hollowing out and foreign capital outflows coexist. Geopolitical risks and heightened exchange rate volatility, combined with increased global hedging sentiment, have made most emerging economies more cautious in their policy decisions, limiting their monetary policy space and fiscal expansion capacity. In the second half of the year, emerging markets will rely more on internal structural reforms and regional cooperation mechanisms, such as ASEAN and Latin American regional cooperation. Against the backdrop of divergent growth paths, emerging economies with demographic dividends, fiscal discipline, and institutional stability may attract more global capital.
The Gentleman Does Not Stand Beneath a Dangerous Wall: Global Asset Allocation
Currently, the anchoring power in the financial sector is weakening. The volatility of major currencies and commodities has significantly increased, with capital’s patience weakening and liquidity accelerating, creating a positive feedback mechanism of risk premiums within the financial system. Exchange rates are the first variable to respond, but their fluctuations can no longer be fully covered by traditional macroeconomic logic. The valuation system of financial assets is beginning to detach from the traditional inflation or interest rate-based pricing logic, shifting toward considerations of more structural uncertainties at the geopolitical, credit, and institutional levels. In the second half of 2025, the path of global capital flows will no longer simply follow interest rate arbitrage or growth comparisons but will undergo anchor revaluation across multiple dimensions, including risk aversion logic, policy stability, institutional credibility, and asset-liability structures. The financial market is exhibiting high sensitivity, increasingly seeking relative safety in high volatility, and the behavior function of capital allocation is undergoing profound changes.
Among the many uncertainties, the most certain trend is the repricing of global risk-free assets. The long-standing demand for U.S. Treasuries and the dominance of the U.S. dollar in international settlements have somewhat weakened market sensitivity to U.S. fiscal sustainability. However, the current excessive fiscal leverage, the constraints on monetary policy responses, and the market’s revaluation of the U.S. asset pricing system are collectively driving the global financial system into an adjustment cycle of “U.S. dollar relative contraction, risk aversion re-anchoring.” The fiscal deficits and debt burdens, previously masked by the dollar’s reserve currency status, are gradually becoming unavoidable visible issues. For the global capital market, long-term investors have started reassessing the risk-return ratio of U.S. assets. In this process, the allocation of non-U.S. currencies and physical assets (such as gold, Swiss francs, and yen) as safe-haven assets, along with other major reserve currencies, may further increase. More importantly, the anchor position of U.S. Treasuries as the “risk-free asset benchmark” in the global financial system, once disrupted, will form widespread spillover effects through valuation systems, collateral systems, and risk pricing systems.
This change means that not only will financing costs increase overall, but the internal dynamics of the capital markets will also face a reconstruction of credit ratings and liquidity expectations. Once the trend begins, it will not easily end. The global capital market may enter an unprecedented asset trust rebuilding cycle, redefining what “safety” means. This process will inevitably trigger liquidity tightening, rising risk premiums, and imbalances in asset transmission. The global capital market may thus enter a new round of credit tightening cycles, with macro liquidity and financial stability both under pressure. Private capital and institutional funds will accelerate their rotation rhythm, playing the game between high-frequency data, political signals, and interest rate changes, with a greater tendency for short-term arbitrage and event-driven strategies.
Although emerging markets are expected to continue facing external liquidity constraints in the second half of the year, the institutional credibility and growth stability of certain emerging markets will become key variables in attracting capital. If emerging market countries can maintain policy clarity and growth stability, they may gain structural benefits in the global capital reallocation. Countries with strong foreign exchange reserves and domestic asset markets, supported by demographic dividends and manufacturing substitution effects, may become the preferred areas for global industrial chain restructuring and foreign investment.
In summary, as the global risk-free asset anchor structure undergoes evolution, investors should be cautious of the market volatility and phase adjustment pressures brought about by the revaluation of asset pricing systems. The prudent evaluation and optimization of credit exposure and liquidity management strategies will be crucial in navigating the cyclical shifts and ensuring steady progress amidst the intersection of risks.