Adapting to uncertainty continues in 2H25

The Star

2 days ago

UNCERTAINTY is widely considered a defining theme of the current global economic environment.
In the first half-year of financial year 2025 (1H25), the global economy presented a mixed picture, with both signs of resilience and potential risks.
The extraordinarily high levels of uncertainty and volatility are influencing global economic outlook, trade and investment, inflation, financial markets and commodity markets.
The global economic policy uncertainty index (source: Federal Reserve Bank of St Louise) had surged to unprecedented record levels of 603.56 points in April 2025, more than a four times increase compared to the 2000 to 2024 average of 146.68 points.
The VIX Index, a barometer for Wall Street's 'fear gauge', measuring market uncertainty and volatility, had surged to an average high of 41.3 points between April 2 and April 22, 2025, markedly higher than 24 points during the Covid-19 pandemic in 2019 to 2020, and 33.7 points in 2008 to 2009 during the global financial crisis.
Heightened economic uncertainty is driven by a combination of factors, including trade tariffs policy uncertainty and escalating geopolitical tensions – from more than three years of the Russia-Ukraine military conflict, to the Gaza war, and recently, the Isreal-Iran conflict, which saw the United States launch strikes at Iran's nuclear enrichment facilities, sparking fear of escalation in the Middle-East conflict.
In the World Economic Forum's latest survey of chief economists outlook conducted in the first half of April 2025, 87% of respondents expect businesses to delay strategic decisions, which would exacerbate recession risks, indicating a series of trade-policy shocks has darkened the outlook and threatens to paralyse economic and commercial decision-making.
Challenges set to remain
The respondents have a unanimous view that global economic prospects are set to weaken considerably this year, with 82% of them indicated that global uncertainty is seen as 'very high'; 56% expect conditions to improve over the next year, and 21% expect uncertainty in a year to be even higher.
Nearly all the chief economists (97%) place trade policy among the areas of highest uncertainty, followed by monetary policy (49%) and fiscal policy (35%).
The recent surge in uncertainty also increases the risk of damaging policy coordination missteps both within and between countries.
This uncertainty is expected to weigh on key economic indicators, including trade volumes (70%), gross domestic product growth (68%) and foreign direct investment (62%).
Heightened concerns surrounding the United States-China rivalry, trade tensions, inflation risks and geopolitical instability have significantly influenced investors' risk appetite due to their broader macroeconomic implications on the global economy, the United States and China economy.
Unstable environment and market volatility have pushed investors toward traditional safe haven assets for inflation hedging like energy equities and gold, and focused on supply chain resilience, with potential near-term headwinds for regions and sectors exposed to energy costs and trade flows.
During times of market volatility, global investors usually see the US dollar as a safe haven. But not this time around.
Since the beginning of this year, the US Dollar Index had depreciated by 9.5% as of mid-June on concerns about the tariffs shock-inflicted slowing US economy, higher inflation expectations and a growing unease about US fiscal deficit and debt.
Beyond the usual macro concerns, the dollar's typical 'safe haven' status is being challenged as investors demand a higher premium for holding US assets, leading to foreign central banks and institutional investors reducing the demand of the US Treasuries, raising the possibility they are gradually diversifying away from US-denominated assets.
Global uncertainty
A recent World Gold Council survey found that 73% of central banks see moderate or significantly lower US dollar holdings within global reserves over the next five years.
Respondents also believe the share of other currencies, such as the euro and yuan, as well as gold, will increase over the same period.
Going forward, geopolitical risks, sanctions exposure, and rising trade tensions are increasingly shaping reserve management decisions as global economic and political landscapes become more fragmented and uncertain.
Gold prices, which have rallied significantly as much as 31% to hit a peak at US$3,434 per troy ounce on April 21, 2025 before easing to around US$3,329 per troy ounce on June 25, 2025, still higher from their 2010 to 2020 average of US$1,400.
The elevated price levels were driven by heightened concerns over trade tensions, inflation and geopolitical instability, driving a strong demand for safe-haven assets.
As gold has long been considered a reliable hedge against economic uncertainty, currency depreciation and inflation, investors are likely to keep gold glittering in 2H25 and in 2026 given the lingering policy uncertainty and highly uncertain geopolitical setup.
Yet others are concerned the price of gold has risen so far, so fast that a market bubble is forming – and bubbles can burst.
Has oil's risk premium arrived? Brent crude oil prices generally have softened since the beginning of 2025 due to increasing global supply and slowing global demand amid the geopolitical developments. The broader macroeconomic implications of rising geopolitical tensions in the Middle East resulted in wide swings in prices in the global oil market.
On June 19, 2025, Brent crude future had climbed nearly 22% from early-month levels (US$64.63 a barrel on June 2), reaching a five-month high near US$78.85.
Following the Isreal-Iran ceasefire, Brent crude price dropped to US$67.14 on June 24, 2025, amid rising concern over the potential disruption of key trade routes, particularly the Strait of Hormuz, which handles nearly 30% of global seaborne oil flows.
In 2H25, we expect continued global uncertainty due to trade and capital flows dynamics, macroeconomic headwinds, global economic and financial markets fluctuations.
Any unexpected shifts in the United States trade policy and tariff framework may lead to unforeseen market reactions.
So far, only the United Kingdom has a deal, but still subject to 25% steel tariffs. The 90-day pause on the United States reciprocal tariffs, which began on April 9, is set to end on July 8.
China's deadline is until mid-August. What is the likely scenario? What's next after the 90-day pause? If no deal is made by July 9, will countries face new tariffs, which could be much higher than the current 10% or be given another extension.
Some have predicted that the tariff framework is to maintain 30% tariffs on China and China's 'friendly' partners while 10% to 15% tariffs on all other countries while the United States continues negotiating with all countries on non-tariff barriers.
Section 232 of the Trade Expansion Act of 1962 remains a powerful negotiation tool to adjust imports tariff that threatens to impair the United States national security.
The on-going geopolitical developments, particularly in the Middle-East, geopolitical fragmentation and major economic powers' rivalry will continue to affect the global economy both directly and indirectly through financial, trade and commodity price channels.
While there is a ceasefire between Israel and Iran as of late June, the underlying tensions and the potential for renewed conflict remain due to Israel's view of Iran as an existential threat and Iran's continued nuclear programme.
Bouts of volatility and uncertainty may continue in the 2H25 as investors navigate the evolving impact of the tariff policy on global growth, focusing on the United States and China's economy.
Bond investors will also focus on the implications of the One Big Beautiful Bill on the government's budget deficit and debt, which would add at least US$2.8 trillion to the US$36.2 trillion US debt.
The trajectory of oil prices and their economic impact remains highly uncertain, with the past five years' oil price volatility playing a critical role in global economic stability.
The trajectory of oil price in the 2H25 is expected to remain elevated or to moderate, depending on global economic conditions, geopolitical events, as well as supply and demand dynamics.
There are potential tailwinds from the trade deal certainty, a shift in focus from tariffs to taxes and deregulation, as well as the Federal Reserve's (Fed) pivoting of its monetary policy.
Will the Fed cut interest rate in 2H25? The Fed's latest 'dot plot' outlining future interest rate moves suggests the central bank will still be cutting rates twice this year, though there is growing divided views among the Fed's voting members. Nine of the 19 officials favoured either zero or one cut this year, while eight saw two cuts and two others expected three.
The Fed's chair believes it can stay in its wait-and-see mode as the United States economy is not in recession as the labour market continues to hold up. Increases in tariffs this year are likely to push up prices in June and beyond.
The Fed's obligation is to anchor inflation expectations, preventing a one-time increase in the price level from becoming persistent inflation.
Most Asian economies have experienced a slow down in 1H25 due to the tariffs policy uncertainty surrounding the trade landscape and concerns about broader economic fallouts and financial market volatility.
While the 'front-loading' of exports has helped to provide a temporary uptick in exports for some countries to pre-empt higher tariffs during the 90-day pause, the effect of front-loading will taper in the months ahead.
With moderating inflation risk, several central banks in Asia have cut interest rates in 2025 to address economic growth concerns and mitigate risks.
Overall, the dynamics of trade policies, global economic fluctuations, capital flows and currency movements remain key influences on market and investors' sentiment in the Asia market in 2H25.
Macroeconomic headwinds could potentially dampen domestic drivers as the trade tariffs impact on exports could spill over to domestic sectors.
Heightened geopolitical risks, lingering trade tensions and slowing exports are testing the region's resilience.
Lower interest rate and proactive government policies are expected to help mitigate growth threats.