Global Economic Overview – October 2025

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Global

Fears over US-China trade tensions reemerged this month after President Trump threatened an extra 100% tariff on Chinese imports and an abandonment of a summit with President Xi. This latest dispute is less to do with rebalancing US-Sino trade, but the supply of critical rare earth elements and magnets, an issue that has been bubbling under the surface for some time. In fact, despite wider trade talks having been extended by an additional 90 days to 10-Nov both countries have been undertaking tit-for-tat policies including additional fees on Chinese ships at US ports (and vice versa), and restrictions on advanced US chips exports to China. China had previously implemented restrictions on rare earths, but its latest move, which looks to be a mirror image of the US’s Foreign direct product rule* is its most severe and risks undermining current talks.

Chart 1: Respective US and Chinese tariffs (effective rather than headline)



* China’s new export controls require foreign companies to seek approval to export magnets containing even trace amounts of Chinese rare earths, ** We assume Trump’s 100% threat is stacked on the existing 10% baseline and 20% fentanyl tariffs.
Source: Macrobond, Investec Economics, PIIE

China has significant leverage in this space given that in 2024 it represented 60% of global extraction and 91% of global processing and production of specialist magnets, crucial to many energy and advanced tech applications. This global dominance is not something the US can address in the short term, which together with China’s willingness to play hardball - it threatened to retaliate to any tariffs - may have played a role in Trump offering a more conciliatory tone just days later. Ultimately, we suspect that this latest bout of tension fizzles out with a late October meeting between Trump and Xi still going ahead, allowing the two leaders the chance to find an off-ramp.

Chart 2: China - the major player in magnet related mining & refining of rare earth metals



Source: IEA Global Critical Minerals Outlook 2025

In such an event, as is our base case, we see few reasons to change our China forecast. This is a view supported by Q3 GDP data, which whilst recording a slowdown to 4.8% (y/y) still leaves the economy on track to reach the government’s ‘around 5%’ growth target. 2026 has been uplifted very marginally to 4.4%. Similarly, we see few reasons to adjust our global growth outlook, that being one of resilience in the face of US tariffs. Our forecasts envisage global growth of 3.3% in 2025 and 3.1% in 2026, unchanged versus our views in Sep. IMF forecasts published in its October WEO paint a very similar picture to our own, its estimates for global growth standing at 3.2% and 3.1%.

Chart 3: The global growth outlook remains stable



Source: Macrobond, Investec Economics

Equity markets were quick to shake off the latest trade headlines, the S&P 500 recovering those initial losses. Tariffs do remain a risk, but a diminished one, not least due to the lack of retaliation by US trading partners - just 3 have taken firm action. As such it has fallen down investors’ list of concerns. In fact the latest BoA fund manager survey fails to include trade in the top three, with resurgent inflation and Fed independence ranked two and three. Top of investors’ concerns were valuations over AI stocks, something that the BoE and the IMF have also highlighted as a risk this month. The rally in AI stocks has been the key driver behind the S&P 500’s three-year bull market run. The answer as to whether there is a bubble remains to be seen, but with a 25x 1-yr forward PE, its highest since 2002, S&P 500 valuations look stretched.

Chart 4: S&P 500 returns since Jan 2023 ex 17 AI-associated stocks



Source: Macrobond, Investec Economics

But it is not just AI where questions are being asked- private credit is also under the microscope given the collapse of several companies this month. Meanwhile gold has enjoyed a startling rally this year, hitting a record high of $4356/oz, although even this rise has been outshone by other PGMs. Nervousness and safe-haven demand may be a factor, but not the only, with reserve diversification likely another. Central banks have been mayor gold buyers acquiring +1000ts* in ’24. Purchases have continued this year and are likely to continue with central banks expecting gold to represent a higher proportion of reserves in 5yrs time**.

Chart 5: Precious metals have significantly outperformed the S&P 500 (% ytd)



* ECB ‘Gold demand: role of the official sector’ Jun-25 ** World Gold Council, Central Bank Gold reserves survey 76% expected a moderately/ higher proportion of gold in reserves in 5y time.
Source: Macrobond, Investec Economics

Reserve diversification raises a question over the markets’ ability to absorb Treasury supply. Yet stablecoin could represent a new source of demand. Unlike Bitcoin and other crypto currencies, stablecoins are typically backed 1:1 by fiat currencies, predominantly US T-Bills. Just five years ago the total stablecoin market cap stood at $3bn, but which has grown to $300bn and as per some estimates could hit $2trn* by 2028, growth which is likely to be driven by mainstream adoption with 10 major banks announcing plans to explore a G7 currencies backed stablecoin this month. With many governments running large debt burdens, stablecoin demand may  increasingly evolve towards being backed by longer-term sovereign bonds.

Chart 6: Stablecoin market capitalisation has risen sharply



* US Treasury Borrowing Advisory Committee (TBAC)
Source: Macrobond, Investec Economics

United States

Arguments between the Republicans and Democrats, especially over Medicaid entitlements, have resulted in an impasse on government funding in the Senate and a shutdown in 'non-essential' government operations since 1 Oct. At the time of writing, there seemed few prospects of a quick end to the shutdown, raising the prospect of its duration exceeding the previous record of 35 days in 2018/19.  Although the GOP holds a 53-47 majority in the Senate, in practice a 'supermajority' of 60 is required to invoke 'cloture' to shorten the debate and prevent the minority party filibustering the bill. Treasury Secretary Bessent put the cost of the shutdown at $15bn per week, some 2½% of GDP.

Chart 7: Duration of US government shutdowns – heading towards a record?



Source: Macrobond, Investec Economics

The shutdown has resulted in a suspension of most official economic data releases. Unhelpfully this includes the BLS's jobs numbers – weak payroll data over the summer prompted the FOMC to resume easing in Sep. In a recent speech, Fed Chair Powell argued the labour market was less 'dynamic' i.e. both the demand and supply of workers had fallen, but 'Rising downside risks to employment have shifted our assessment of the balance of risks'. He added a caveat that, before the shutdown, economic growth seemed firmer than expected. Indeed the Atlanta GDP nowcast suggests GDP ran at an annualised pace of 3.9% in Q3, which sits a little uneasily with soft employment trends.

Chart 8: The jobs market has weakened but Q3 GDP looks buoyant!



Source: Macrobond, Atlanta Fed, Investec Economics

There has been a lack of progress in getting inflation down - the core PCE measure in August stood at 2.9%, identical to August last year. This seems to be tariff related and not a symptom of underlying price dynamics, hence more likely to be just a one-off jump in prices. Sep’s FOMC minutes showed that members generally expected inflation to return gradually to the 2.0% objective, some noting that tariff effects had been muted so far. Also work published in the IMF's latest WEO shows that the effect on inflation from the Trump tariffs has been smaller than it had expected (Chart 9). This is also good news, as long as it does not simply reflect a longer lag between higher prices at the port and main street and that the latest trade tensions with China subside.

Chart 9: Impact of tariffs on prices (PCE) - IMF expectations (bars) and outturns (blue diamonds)



Source: IMF WEO October 2025, Investec Economics

Sep’s CPI is due for release on 24 Oct, but the absence of most official data means the Fed is largely 'flying blind' on the economy and more reliant on surveys and anecdotal reports. As Chart 10 shows this tends to confirm the looser labour market story, though these figures can be unreliable guides to the jobs data. The FOMC now seems set to opt to bring forward rate reductions as an insurance policy against missing the full employment objective in its dual mandate. A cut on 29 Oct now looks likely and on balance we judge that the FOMC will ease on 10 Dec too, taking the Fed funds target range to 3.50%-3.75%. For 2026 we now see two 25bp moves to 3.00%-3.25% by end-year, broadly consistent with the FOMC’s view of neutral.

Chart 10: Surveys and anecdotal evidence tend to confirm labour market loosening



Source: Macrobond, Beige Book, Investec Economics

Dallas Fed President Lorie Logan recently argued that the Fed funds target should be replaced in favour of a repo rate such as the Tri-Party General Collateral Repo (TGCR) rate, as the former market has shrunk dramatically over the years. This may well gain traction but even the TGCR rate has become more volatile in recent weeks (Chart 11). This does not seem to be a structural issue but one of shrinking money market liquidity, due to the continuation of the Fed’s Quantitative Tightening (QT), currently running at a ‘cap’ of $40bn per month. Indeed reserves at the Fed fell below the $3trn level recently, having peaked above $4trn 2021. It seems logical for the FOMC to decide to announce that it will halt QT at a meeting before end-year.

Chart 11: Overnight repo rate volatility has begun to rise again (as it did in 2018)



TGCR: Tri-Party General Collateral Rate
Source: Bloomberg, Macrobond, Investec Economics

The absence of official data complicates forecasters’ lives too. As mentioned above, If the economy was robust in Q3, it raises the question as to how far the labour market has loosened. True GDP growth looks set to slow over Q4, but the shutdown will be at least partly responsible. The forecasting community has become more dependent on steers from the Fed and it is not out of the question that economic conditions generally are more resilient than the FOMC believes. But for now markets are going along with the Fed narrative, prompting a significant rally in US Treasuries. We have lowered our end-2025 and 2026 10-year targets to 4.00% and 3.75% from 4.25% (for both periods).

Chart 12: The Treasury curve has flattened over the past month



Source: Bloomberg, Macrobond, Investec Economics

Eurozone

France has remained in the limelight this month. The big picture amid all the drama is that there is no incentive for President Macron, at whose sole discretion this is, to dissolve parliament (let alone resign), given polls suggest Marine Le Pen’s RN would be well ahead in that scenario (Chart 13). The price to secure the Socialists’ support has been heavy: Macron’s flagship pension reform will now not take effect before the next presidential election in 2027. France’s large fiscal deficit is to be reduced from an estimated 5.4% in 2025 to 4.7%-5% in 2026 regardless, with PM Lecornu’s proposed Budget envisaging other spending cuts. Judging by the 10y OAT-Bund yield spread, which is now 78bps, down from 86bps on 7 October, markets judge that this is much more deliverable. 

Chart 13: Opinion polls give no incentive for Macron to call a French parliamentary election



Source: Europe Elects, Macrobond, Investec Economics

But whereas fiscal consolidation in France, with its EU-adjudicated EDP#, is on the cards, the picture is quite different elsewhere. Germany’s fiscal plans are making their way through the parliamentary process. The German Stability Council calculates the structural budget deficit will surge from 2¼% of GDP in ’25 to 4% in ‘26, a huge fiscal loosening. Chart 14 shows the budgetary impact of the new measures by year. Meanwhile, Italy’s draft Budget, now signed off by its cabinet and sent to the EU for approval, is seeking to deliver tax cuts and other expansionary measures in 2026-2028, which are to average c.€18bn p.a. The EU Commission will add up all plans, but the aggregate Eurozone fiscal impulse will not be as restrictive as France’s. 

Chart 14: A huge fiscal loosening is coming in Germany relative to previous plans (% of GDP)



*Negative numbers mean more expenditure/less revenue, # Excessive Deficit Procedure
Source: German Stability Council, Investec Economics

Certain fiscal measures in the offing for next year will also have a direct bearing on inflation: for instance, Germany will lower the VAT rate on restaurant meals from 19% to 7% and reduce transmission grid fees and gas storage levies. The latter will, as per the German government, lower annual utility bills by c.€150 per household. This should weigh perceptibly on Eurozone aggregate inflation in 2026. Along with the impact of cooling wage growth and thus services inflation, and that of the stronger Euro and the lower oil price, we forecast average Eurozone inflation of 1.7% in 2026. That is not only below the 2.1% we predict for 2025 but also below the ECB’s 2% target (Chart 15).

Chart 15: Eurozone inflation to run below but close to target in ’26 (to coin an old phrase)



Source: Eurostat, Investec Economic and Macrobond

Our forecast for Euro area GDP growth as a whole remains unchanged from last month: we still expect an expansion of 1.4% in both 2025 and 2026. This comes despite a slight mix in its composition. Germany’s recent monthly data outturns point to a weaker Q3 than we previously thought. In fact, even allowing for a material rebound in industrial output in September, it is possible Germany witnessed a second consecutive drop in GDP in Q3, putting it into a (brief) technical recession again. France though has performed quite well again in Q3, it seems. So even with a hit to GDP from political turmoil likely hampering investment in Q4, we have lifted our French GDP growth forecasts a tad (Chart 16).

Chart 16: The Eurozone economy has proven more resilient than we previously thought



Source: Macrobond, Investec Economics

How is the ECB perceiving this situation? We see little reason for it to shift away from its previous, oft-repeated, message that policy is in ‘a good place’ for now, despite a temporary minor shortfall of inflation relative to target during 2026. We forecast a steady Deposit rate of 2.00% as our base case. That said, the chance of more rate cuts remains. Having warned against ‘fine-tuning’, we doubt the ECB would move rates lower unless it was contemplating more than one 25bp rate cut. That would require a materially weaker inflation outlook. This could come about on mounting signs of trade diversion to the EU by Chinese exporters, which the EU monitors monthly in a heat map. To date, this is flashing amber not red (Chart 17).

Chart 17: Chinese trade diversion to the EU is detected in some but not all sectors



ROW: Rest of world. WW: Whole world
Source: European Commission, Investec Economics

Alternatively, a rise in unemployment or indeed a sharp lurch higher in the EUR could be the cause. With regard to the Euro, our forecasts remain for a gradual strengthening: we forecast EURUSD to rise to $1.20 by the end of this year and to $1.25 by the end of next year. Against GBP, we also foresee an appreciation, but a more muted one, to 88p and 89p, respectively (Chart 18). Underpinning that is our view that the Eurozone has already concluded its monetary loosening, whereas the US and the UK will see further rate cuts. In addition, France’s issues notwithstanding, the market looks more likely to fret about the fiscal trajectory in the US and the UK than in the Eurozone as a whole.

Chart 18: The Euro looks to have further to run



Source: Macrobond, Investec Economics

United Kingdom

With the Budget just over a month away (26 November) speculation has intensified as to its contents. Chancellor Reeves will have to dig deep to find savings/revenue raisers to cover the U-turn on winter fuel payments (~£1.0bn), the watering down of the welfare bill (~£2.5bn), the likely scrapping of the two child benefit cap (~£3.5bn) and the similarly likely freeze of fuel duty and extending the 5p reduction for a further year (~£2.6bn). This alone amounts to £9.6bn. Added to this is the overshoot in borrowing relative to the OBR’s forecasts so far this fiscal year (£13.0bn), the need to maintain some degree of fiscal headroom and of course any changes to the OBR’s forecasts. It is shaping up to be a difficult Budget.

Chart 19: So far this FY the current budget deficit is £13.0bn larger than OBR projections



Source: Investec Economics, Macrobond, OBR

Indeed, the extent to which the OBR adjusts its forecasts will have a huge bearing on the scope of fiscal corrective action needed. For example, a 0.5%pt pa downgrade to the March productivity forecasts would leave a current budget position (on which the fiscal rules are judged against) of close to -£30bn by 2029/30, as Chart 20 shows, which the Chancellor would need to fill. We expect a series of tax rises (including ‘stealth’ rises) to plug the gap, as we explained in our recent Budget preview. Alternative options are borrowing more, which would risk the wrath of financial markets, or spending cuts, which are possible but could lead to the loss of backbench support. That does not make tax rises cost free, however.

Chart 20: Different productivity assumptions have a huge impact on the current budget position



Source: Investec Economics, OBR

This is particularly so given Labour’s standing in the polls, with Reform UK’s popularity having surged over the last year. Indeed, two MRP polls released in Sep (YouGov and More in Common) suggested that if an election was to be held today, Reform would hold the largest number of seats in Parliament. Whoever is in government will face the same challenges in terms of a trade-off between voters’ wants and needs and being fiscally responsible. Reform UK appears to have faced up to this reality, having recently dropped its 2024 manifesto pledge of £90bn of tax cuts in favour of fiscal sustainability. It is unclear whether this sharp U-turn will hurt the party in the polls.

Chart 21: YouGov MRP poll - if election was held today*, Reform would be just short of majority



*Survey was conducted between 31 Aug and 24 Sep
Source: Investec Economics, YouGov

One wider concern about the Budget is that the uncertainty in the lead up acts as a restraint on economic activity, as we have seen in the run up to past fiscal events. Surveys are already suggesting that Budget nerves have curtailed investment and spending decisions and the monthly GDP data for August was not exactly inspiring (+0.1% m/m). It is now looking very unlikely that growth in Q3 will reach the Bank of England’s 0.4% q/q forecast (we think +0.2% is more likely). Yet thanks to a strong start to the year the annual figure is still likely to be healthy – we predict growth of 1.5% this year and 1.4% next. We agree with the IMF’s prediction that the UK will have the second fastest growing economy in the G7 this year, a forecast Chancellor Reeves will no doubt try to sell.

Chart 22: IMF predicts UK to have 2nd highest GDP rate this year, but also highest inflation in G7



Source: Investec Economics, IMF forecasts

The Chancellor might be less vocal however about the IMF’s prediction that the UK will also have the highest rate of inflation, both this year and next. UK CPI inflation remained at 3.8% in Sep, with services inflation still proving problematic at 4.7%. This has been driven by steep rises in administered services prices (Chart 23), which includes VAT on private school fees, water charges and transport prices. Market-based service inflation has been tracking lower, similar to that of the Eurozone, which has experienced much lower overall services inflation. UK administered price inflation should ease next year, as for example the effect of 20% VAT on private school fees drops out of the annual figure. 

Chart 23: Administered services are the main culprit behind sticky overall services inflation



Source: Investec Economics, Macrobond, ONS,

Aside from services inflation, food inflation has also been a concern, especially given its influence on inflation expectations. But the notable fall in food price inflation in the latest CPI data might alleviate some fears on the MPC, edging open the door to further rate cuts. We expect we will have to wait until Feb next year though for this door to be fully open, and thereafter expect rates to slowly head lower, ending the year at 3.25%. During this time, we expect sterling to gain ground against a weaker dollar (end-26: $1.40) but struggle against the euro (end-26: 89p). In terms of the near-term, GBP could be hampered by Budget uncertainty, but given Ms Reeves’ commitment to fiscal responsibility, we do not foresee any long-term effect on sterling.

Chart 24: Sterling set to gain against a weaker dollar but struggle against a more dominant EUR



Source: Investec Economics, Macrobond

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