Macroeconomic Outlook for February 2025

Eugeniu Circeu

Mar 24, 2025

In February, investors' attention was primarily focused on economic policy. Markets became more volatile. The rhetoric around inflation expectations and GDP growth often changed and sometimes did not correspond to the movement of the stock and bond markets that one might expect.

Last month, the index of global high-quality bonds rose by 1.4%, and global high-yield bonds by 0.79%. Emerging market bonds increased by 1.6%. High-quality US bonds rose by 2.2%, and high-yield ones by 0.67%. The developed countries' stock index decreased by 0.69%. The S&P 500 index lost 1.3% of its value, and the seven largest companies in the index fell by 8.7%. Emerging market stocks rose by 0.5%, and Chinese stocks (MSCI China index) soared by 11.8%. The expected volatility of the S&P 500 index for the next month increased to 19.6 amid falling stock markets and growing uncertainty.

Macroeconomic statistics remained quite stable. In February, the growth of consumer prices in the US was 0.2% for both the main and core consumption baskets. Inflation over the past 12 months decreased to 2.8% and 3.1%, respectively. A good signal is also that these values are not the result of a sharp drop in prices in any particular part of the basket, and the slowdown in inflation is still comprehensive. The labor market situation remains stable, although the pace of job growth has become more moderate than in previous months. The US economy added 151,000 jobs, and the unemployment rate rose to 4.1%. Labor force participation decreased by 0.1 percentage points to 62.4%, returning to January 2023 levels. Wage growth also remains moderate: in February, it was 0.28%.

The trade policy of the Trump administration remains one of the main factors of uncertainty for investors. At the same time, the informational noise around trade tariffs exaggerates their scale: there are significantly more threats than actions. Among the implemented measures, there are none that investors did not expect. On the contrary, tariffs on many goods were either postponed or reduced (for example, goods from Canada and Mexico that comply with USMCA rules, which require goods to originate from North America, were temporarily exempted). Meanwhile, manufacturers are clearly concerned about the possible rise in goods prices, which has already led to an anticipatory increase in imports and stockpiling.

This was reflected in the assessment of the US GDP growth rate in the first quarter, as indicated by the Atlanta Fed GDPNow indicator. Since the end of February, it has been signaling a possible drop in US GDP by more than 2% (annualized). As recently as mid-February, the indicator pointed to economic growth at a rate of 2.3%. The contrast is striking, but most of it is explained by the reassessment of expected import growth, which subtracted almost 4 percentage points from the GDP growth rate estimate. It should be remembered that this indicator is very volatile, unlike the official GDP growth estimate. The reduction of the indicator solely due to increased imports does not indicate a sharp economic contraction and clearly reflects the desire of manufacturers and sellers to increase inventories in anticipation of tariffs. In other words, the significance of this indicator for assessing the current state of the US economy should not be overestimated, but medium-term risks of current economic policy, as well as changing conditions in US fiscal policy and capital markets, should not be forgotten.

Economic and political processes occurring in the US and the rest of the world have a mixed impact on inflation and economic growth. The trade and migration policy of the current US administration may lead to increased inflation. However, potential disinflationary factors are no less strong. Among them are: a decrease in energy prices, a reduction in government spending and jobs in the public sector, as well as a decline in speculative sentiment in the markets and a correction in the prices of risky assets. Together, they may lead to a significant slowdown in consumer price growth.

High volatility in the debt markets indicates that investors have not yet reached a consensus on the balance of these forces. The situation is complicated by the fact that trade and migration policies mainly affect aggregate supply, while other factors affect aggregate demand. With high probability, both measures will slow economic growth or lead to a recession. The impact on prices remains uncertain and will depend on the scale of political and market processes, as well as the ability of the economy and institutions to adapt to changing conditions (elasticity of demand and supply).

Already at the beginning of March, markets became even more volatile amid important political events. European government bonds showed one of the strongest daily declines in recent decades. Planned increases in government spending and weakening fiscal discipline in the largest EU countries will require significant borrowing growth. In the absence of systemic reforms in the economy, this may lead only to short-term growth acceleration. Increased defense spending is usually ineffective unless it addresses a truly acute security issue. In the medium term, the benefit from increased spending is likely to be disproportionately small compared to the accompanying complications, such as high debt burden and rising borrowing costs. The risk that European countries will try to solve their debt problems through high inflation has increased. Another ECB rate cut still seems justified in the context of the current level of inflation, but the risk is growing that monetary policy will become too soft again.

In this context, US economic policy, which is taking a diametrically opposite direction to the European one, seems more reasonable. At the same time, it should be understood that the situation can change dramatically for better or worse — US policy has become less predictable but more pragmatic. Changes in the economy, markets, or European politics may improve its relations with the US.

It is worth noting separately the sharp rise in the Chinese stock market, which went against global indices. The reasons for this growth seem more speculative than fundamental. Undoubtedly, economic stimuli play an important role. Among them are very low rates, a new package of consumer goods subsidies, and attempts to reverse stock market price dynamics through stock buyback lending. At the same time, real estate prices, although slowly, continue to decline. This indicator now seems to be one of the most important for assessing economic sentiment. Since the beginning of the year, prices have decreased by another 0.2% despite all monetary and regulatory stimuli. This indicates that there is no clear reversal in the fundamental economic picture, and it is possible that the current rally will be as short-lived as the market growth in October last year.