Global Economic Pulse: Trade Wars, Inflation Fears & Fiscal Shifts – February 2025

peachgardenpartner
Feb 2
6 min read

By Natasha Yip

Executive Summary

This comprehensive report delves into the key economic developments that are shaping global financial landscapes in February 2025. It provides an in-depth analysis of:

The increasing likelihood of a full-fledged trade war as the U.S. implements new tariffs, potentially disrupting international commerce.
Rising inflation expectations within the Eurozone following a critical interest rate cut, signaling potential economic challenges ahead.
The UK government’s pension tax reform, which is anticipated to generate substantial revenue and reshape fiscal policies for years to come.

These developments carry significant implications for global trade relations, monetary policy directions, and overall economic stability. Investors, policymakers, and businesses will need to closely monitor these trends to navigate the shifting financial environment effectively.

Macro Overview

Key Indicators at a Glance

Indicator	Latest Value	Previous Value	YoY Change (%)
U.S. Trade Deficit	$895B	$870B	+2.8%
Eurozone Inflation Rate (CPI)	3.5%	3.2%	+9.4%
UK Pension Revenue Projection	£40B (by 2045)	-	-

The macroeconomic environment is evolving rapidly, with significant fluctuations in key indicators. The U.S. trade deficit continues to expand as protectionist policies take effect, while inflation concerns persist across the Eurozone. Meanwhile, the UK’s fiscal strategy is shifting towards long-term revenue generation through pension tax reforms, reshaping economic planning for decades to come.

Economic Developments

U.S. Tariff Policy & Escalation of Trade Tensions

Key Takeaways:

President Donald Trump has escalated global trade tensions by imposing a sweeping 25% tariff on imports from the EU, Canada, and Mexico.
Major trade partners, including Canada and the EU, are preparing robust retaliatory measures targeting key U.S. exports, such as Tesla vehicles and American alcoholic beverages.
Market analysts and economists warn of severe inflationary pressures, rising costs for businesses, and a potential economic downturn.
Stock markets have already responded with heightened volatility, while currency markets are experiencing fluctuations due to uncertainty surrounding the trade dispute.

Market Impact:

The imposition of tariffs has created significant disruptions in global trade flows. The U.S. dollar has experienced short-term strengthening as investors seek safe-haven assets, but long-term ramifications could lead to depreciation if retaliatory measures take full effect. Additionally, oil prices are experiencing upward pressure as supply chain concerns and geopolitical risks intensify. Businesses that rely heavily on international supply chains may face increased production costs, leading to price hikes for consumers and further economic instability.

Eurozone Inflation & Consumer Expectations

Key Takeaways:

The European Central Bank (ECB) made a strategic decision to cut interest rates to 2.75% on January 30, 2025, aiming to stimulate economic activity and address stagnation risks.
Despite this intervention, consumer expectations for inflation have continued to rise, with long-term projections remaining above the ECB’s 2% target.
Many consumers still perceive inflation levels to be much higher due to lingering price pressures in essential goods, particularly food and energy.

Economic Forecast:

Economic experts are divided on the long-term impact of inflation trends. While some analysts predict a gradual decline in inflation over the next 3-6 months due to easing commodity prices, others remain skeptical, pointing to structural supply chain disruptions and continued geopolitical instability as potential risks. Policymakers will need to tread carefully, balancing interest rate adjustments with economic growth considerations.

Fiscal & Policy Updates

UK Pension Tax Reforms & Revenue Forecast

Key Takeaways:

The UK Treasury anticipates generating over £40 billion in tax revenue by 2045 due to significant reforms in pension tax policies.
Changes in inheritance tax (IHT) regulations will impact pension transfers, significantly increasing the number of taxable estates in the coming years.
The pension freedom reforms introduced in 2015 have led to increased pension transfers, making a greater number of individuals liable for inheritance taxes.
The freeze on IHT thresholds until 2030 will further expand the pool of taxpayers affected, creating a sustainable revenue stream for the government.

Long-Term Implications:

This shift in tax policy marks a crucial turning point for UK fiscal strategy. With the number of estates subject to IHT expected to grow significantly, wealth transfers will become a key area of financial planning for individuals and families. Additionally, these changes could influence retirement savings behaviors and alter investment strategies, potentially reshaping the financial services landscape over the next two decades.

Market Implications

Equities & Currencies:

Stock Market Volatility: The ongoing trade tensions between the U.S. and its key trading partners, including the European Union, Canada, and Mexico, have led to sharp fluctuations in global equity markets. The S&P 500 has experienced an 8.2% decline over the past month as investors react to the imposition of new tariffs. The Dow Jones Industrial Average saw a 1,200-point drop in a single trading session following announcements of retaliatory tariffs from the EU. Meanwhile, the VIX volatility index has surged by 35%, signaling heightened investor anxiety.

Euro Depreciation: The euro has weakened by 4.7% against the U.S. dollar in the past three months, reaching a five-year low of $1.05. The divergence in monetary policies between the Federal Reserve (maintaining rates at 5.25%) and the European Central Bank (cutting rates to 2.75%) has exacerbated the euro’s decline. Additionally, Eurozone GDP growth for Q4 2024 was 0.4%, significantly below the 1.1% target, raising concerns about the bloc's economic resilience.

Investor Sentiment: Investors are closely monitoring policy announcements and macroeconomic indicators, including U.S. non-farm payroll data, which showed a job growth of only 130,000, missing the expected 170,000. The 10-year U.S. Treasury yield has climbed to 4.6%, its highest level since 2011, as investors demand higher returns amid economic uncertainty. Meanwhile, hedge funds are increasing cash positions, with gold prices surging to $2,250 per ounce, reflecting strong demand for safe-haven assets.

Fixed Income & Commodities:

Rising Bond Yields in the USA : Bond yields continue to rise as inflationary concerns persist. The U.S. 10-year Treasury yield has climbed 40 basis points (bps) over the past month to 4.6%, marking its highest level since 2011. The spread between 2-year and 10-year Treasuries remains inverted (-70 bps), historically a strong recession indicator. Corporate bond spreads have widened by 60 bps, reflecting increased credit risk premiums. The Federal Reserve’s balance sheet reduction has further tightened liquidity, driving yields higher.

Commodity Market Volatility: Oil markets are experiencing extreme volatility, with Brent crude futures trading at $93 per barrel, up 7% month-over-month as OPEC+ implements additional production cuts. The U.S. Energy Information Administration (EIA) projects global oil demand to grow by 2.1 million barrels per day in 2025, further straining supply chains. Meanwhile, wheat prices have risen 12% year-to-date, driven by supply chain disruptions in Ukraine, one of the world's largest grain exporters.

Defensive Sector Resilience: As investors shift toward defensive sectors, utilities and consumer staples are outperforming broader markets. The Consumer Staples Index is up 4.2% YTD, with companies like Procter & Gamble (+6.1%) and Coca-Cola (+5.7%) benefiting from consistent demand. Utilities, which typically perform well in times of economic uncertainty, have seen an inflow of $8.5 billion into sector ETFs, driving valuations higher.

Risks & Uncertainties:

Macroeconomic Risks:

Trade Disputes & Economic Disruptions: The escalating trade war between the U.S. and its key trading partners has led to a 7.5% decline in global trade volumes, according to the World Trade Organization (WTO). U.S. export growth has slowed to 2.3% YoY, down from 5.7% in 2023, while import costs have surged by 6.8% due to higher tariffs. Emerging markets are particularly vulnerable, with China's GDP growth slowing to 4.5% in Q4 2024, its weakest pace in two decades.
Persistent Eurozone Inflation: Inflation in the Eurozone remains stubbornly high at 3.5%, well above the ECB’s 2% target. Energy prices have increased 9.1% YoY, while food inflation remains elevated at 6.3%. Wage growth in the Eurozone is running at 4.2% YoY, putting upward pressure on core inflation. ECB officials have hinted at potential further interventions if inflation does not show signs of sustained decline.

Geopolitical Risks:

Risk of Retaliatory Tariffs: The European Union has announced retaliatory tariffs on U.S. goods worth €40 billion, targeting key American exports such as Boeing aircraft, soybeans, and whiskey. Canada and Mexico are also preparing countermeasures, with Canadian officials considering a 35% tariff on U.S. electric vehicles in response to recent restrictions on aluminum exports. If tensions escalate, global GDP growth could slow by 0.8 percentage points, according to IMF projections.

Political Uncertainty & Market Instability: The upcoming U.S. presidential election in November 2025 is adding another layer of uncertainty to financial markets. Policy shifts, particularly regarding taxation and trade agreements, could have significant economic ramifications. In Europe, political instability in France and Italy—where far-right parties are gaining traction—could lead to more volatility in the EU bond markets, with French 10-year yields rising 30 bps in the past month.

Key Takeaways

Trade War Risks: The heightened trade tensions between the U.S. and its key trading partners could have far-reaching economic implications, affecting businesses, consumers, and financial markets.
Inflation Expectations: The ECB’s monetary policy measures may not be sufficient to address inflation concerns, necessitating further policy adjustments in the near future.
UK Fiscal Strategy: The pension tax changes will contribute significantly to government revenues, but could also reshape investment and financial planning trends over the coming decades.

Sources

Financial Times (2025). UK pension tax changes and revenue projections.
ECB official statements on interest rate policy.
Market data on U.S. tariffs and economic forecasts.
Central bank and economic research reports.