Have you read our latest market insights report, Are You Ready for 2025? A key focus of the report is a regional economic outlook which shows that the trajectories of the world’s leading economies are diverging sharply. Each of these regional developments has significant implications for businesses that operate across borders, making it crucial to understand how they could shape currency risk in the year ahead.
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Below we dive into key trends and projections for the US, Europe, China, Canada, and Australia, and explore how businesses can leverage this information to craft robust currency risk strategies for 2025.
Divergence to drive FX moves
The global economy is poised for a year of divergence, with some advanced economies exhibiting resilience, and others grappling with persistent challenges in the emerging market. This has profound implications for global trade and businesses operating across borders.
In the US, for instance, the economy has displayed remarkable resilience, achieving growth of over 2% in all but one of the last eight quarters. This unexpected growth has led to predictions of rate cuts, giving way to expectations of sustained high yields. On the other hand, Europe continues to struggle with growth, hampered by structural issues and underinvestment. These regional disparities highlight the importance of a nuanced understanding of the global economic landscape, particularly in relation to developing economies, global growth, the world economy, and a potential global recession.
This deviated outlook requires businesses to adopt tailored currency risk strategies, as a universal approach is ineffective in a world where the US dollar’s strength sharply contrasts with the euro’s volatility.
USA: Captain Exceptional
Despite widespread expectations of a recession in 2024, the US economy has shown exceptional resilience. Growth has exceeded 2% in seven out of the last eight quarters, defying gloomy predictions. This unexpected strength has recalibrated market expectations, shifting from predictions of multiple rate cuts to none, as inflation surprised on the upside for four consecutive months. This unexpected growth provided a stronger-than-expected start for the US dollar, which continues to appeal to investors due to its high yield and growth potential.
The USA’s economic outperformance can be attributed to a combination of factors, including pandemic-era fiscal stimulus and a robust labor market. While the housing and industrial sectors have slowed, consumer spending has remained a key driver of growth, supported by rising real incomes, easing inflation, and gains in the stock market. Interestingly, consumer data surprises have reached their highest levels since 2011, underscoring the power of the American consumer to fuel economic expansion.
Looking ahead, US GDP is forecasted to grow 1.9% in 2025. As the Federal Reserve begins to ease interest rates, inflation should continue to decline. However, political uncertainty following the next presidential election could disrupt this growth slowdown, and shifts in fiscal and trade policy could revive inflationary concerns, necessitating a more flexible currency risk approach.
Canada: Easing into 2025
Canada’s economy performed slightly better than expected in 2024, largely driven by household spending. However, growth remains about 3% below pre-pandemic levels due to tight monetary policy. The Bank of Canada (BoC) took a more dovish stance than its G7 peers, becoming the first central bank in the group to cut interest rates in mid-2024. The BoC’s move to reduce rates to 4.25% reflects its optimism that recession risks are easing.
Inflation in Canada has cooled significantly, and while a temporary uptick might occur in early 2025, weaker wage growth and softer oil prices should keep it within the BoC’s 2% target by mid-year. Business investment is expected to pick up, aided by projects like the Trans Mountain Pipeline and a weaker Canadian dollar boosting exports. However, with a growing deficit, the government’s ability to continue stimulating the economy may be limited.
As growth is projected to slow to 1.4% in 2025, the BoC is likely to continue cutting rates, potentially reaching 2.75% by late 2025 to support the economy. This softer stance could lead to a weaker Canadian dollar, impacting cross-border businesses reliant on imports. Firms with CAD exposure should incorporate additional flexibility for hedging and closely monitor inflation trends to manage currency risk effectively.
Europe: Growth struggles continue
The eurozone’s economic woes persisted through 2024, with growth in key economies like Germany, France, and Italy stalling. Germany, in particular, has struggled with structural issues since the 2022 energy crisis, and its industrial sector remains 20% below its pre-pandemic trend. This persistent underperformance has been exacerbated by underinvestment in R&D compared to the US, eroding long-term growth potential.
Business confidence in the eurozone is weak, with key indicators like the Ifo and Sentix indices showing sharp declines. Although inflation has moderated to 2.2%, it remains below the ECB’s 2% target, raising concerns about declining inflation and deflationary risks. The ECB’s cautious approach to monetary policy could delay much-needed rate cuts, increasing the risk of over-tightening and hampering the fragile recovery.
The Eurozone outlook remains challenging given GDP is projected to reach just 1.4% in 2025 thanks to a cyclical uptick, and with structural issues and a shift towards fiscal consolidation likely to dampen growth further. Businesses exposed to the euro may face increased volatility as monetary policy shifts, therefore currency strategies need to account for sudden policy changes and the potential for a prolonged economic slump.
UK: Cautious optimism amid resilience
The UK economy has defied expectations, outpacing its G7 peers with a projected growth rate of 1.25% for 2024. Manufacturing has rebounded, and the services sector continues to expand. Headline inflation has returned to the Bank of England’s 2% target, even dropping below that of the US and Eurozone in mid-2024. However, services inflation remains stubbornly high at 5%, complicating the outlook for further rate cuts.
Despite these pressures, real wages are set to grow, thanks to public sector pay rises. As a result, household incomes could see a boost in 2025, driving growth to 1.8%, exceeding the post-global financial crisis average.
The new Labour government provides a degree of political stability and the promise of closer EU ties, although planned tax hikes could weigh on the fiscal outlook. Businesses operating in the UK should keep an eye on fiscal policy changes and inflation trends, as these will significantly impact the value of the pound and overall economic performance.
China: Grappling with structural shifts
China’s economic outlook for 2025 remains challenging, with GDP growth expected to slow to 4.5% due to significant structural shifts. Three primary factors have impacted the economy in 2024: a global manufacturing slowdown weakening export demand, a struggling domestic property market, and demographic pressures from an aging population and shrinking workforce.
Policymakers are focused on stabilizing the property sector and transitioning the economy away from an investment-led growth model. However, these efforts have only shown partial success, and deflationary pressures continue to complicate the outlook.
The People’s Bank of China is expected to maintain accommodative policies, including targeted fiscal measures like infrastructure investments. However, businesses must adjust currency risk strategies to account for the continued uncertainty and slower growth in China. Hedging strategies that consider potential trade tensions and geopolitical developments will be essential.
Australia: Economic luck running out?
Australia’s economy struggled in 2024, with GDP growth falling to 1.0%, down from 1.9% in mid-2023. The once-booming housing market has been hit hard by aggressive rate hikes from the Reserve Bank of Australia (RBA), and over half of mortgage-holding households now spend more than 30% of their income on housing. This has strained consumer confidence, even as unemployment remains relatively low.
While unemployment remains low at 4.2%, the trend is concerning, up from 3.7% earlier in 2024. Adding pressure, a slowdown in net migration—from 528k in 2022-23 to a projected 260k in 2024-25—poses risks to growth.
Externally, the Chinese slowdown has forced Australia to diversify its trade. Exports to China have fallen from 42% in 2021 to 33%, while Japan’s share has risen to 18%. Commodity exports like iron ore and coal are stable, but gas prices are nearing decade lows.
For businesses with exposure to the Australian dollar, managing currency risk will be crucial, especially if the RBA is forced to keep rates higher for longer to control inflation.
Developing a currency risk strategy for 2025
The 2025 global outlook remains challenging and the unique economic outlook of each region will likely shape currency risk strategies in the year ahead. A strong dollar in the US may offer early hedging opportunities, but potential political shifts could introduce volatility. Canada’s weaker currency and lower rates may impact import costs, while Europe’s sluggish recovery suggests adopting a cautious approach.
Balancing inflation and fiscal policy will be crucial for the UK, while China’s slower growth demands a long-term view on hedging. Australia’s economic struggles underscore the importance of managing exposure to a weaker dollar and declining commodity demand.
Grasping these regional dynamics is essential for crafting a robust currency risk strategy. Businesses must remain proactive and adjust strategies as economic conditions evolve, ensuring resilience in a rapidly changing global landscape. Contact our specialists to discuss the unique needs of your business.
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