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 The events of the past two months clearly point towards deteriorating global growth prospects; rising economic uncertainties; and widening geopolitical and trade conflicts. Market participants ought to take note of these dark clouds gathering on the horizon.

Deteriorating global growth prospects

The US economy flirting with stagflation

The US Federal Reserve cut its target interest rate by 25bps to 4%-4.25% last week, after a pause of nine months. The fed officials now estimate two more cuts in the next three months. The Fed decided to continue reducing its securities holdings (Treasury, agency debt, agency mortgage-backed securities) as part of its balance sheet runoff.

·         Economic growth has moderated in the first half of the year. Consumer spending is weaker; and housing remains weak.

·         Core inflation is still above the Fed target. The Fed Chairman, Jerome Powell, described the rate cut decision as a risk management measure. He admitted that there is tension between the goals of maximum employment and stable prices; because inflation remains too high while employment risks are rising.

·         In the Fed's opinion, downside risks to employment have increased. There is more concern about labor market weakness than before. Unemployment has edged up (around 4.3% in August). Job gains have slowed significantly. Reportedly, workers out of work for 27 weeks or longer – rose to 1.9mn in August 2025, up 385,000 from a year earlier. These workers now make up 25.7% of all unemployed people, the highest share since February 2022. Persistent long-term joblessness often signals deeper cracks forming in the labor market. Initial claims for unemployment insurance jumped by 27,000 to 263,000 for the week ending Sept. 6.

Most experts believe that under the current circumstances, the Fed may not venture into aggressive easing. QE may not be a viable option given the inflation concerns and aggressive rate cuts may also not help.

Chinese economy facing slow down amidst structural challenges

China has been a major growth engine for the global economy in the past couple of decades. The engine has been showing distinct signs of fatigues in the post Covid period. The Chinese economy grew 5.3% in the first half of 2025, with 5.4% in Q1 and 5.2% in Q2. Industrial output and fixed‐asset investment are weakening. Retail sales / consumer spendings are soft. Property sector continues to drag the economy. Deflationary pressures are mounting.

Growth is widely forecasted to continue slowing, especially in H2 2025, unless strong policy stimulus revives private spending. Some forecasts expect Q3 and Q4 growth to dip below 5%, possibly closer to 4%. Inflation (especially producer and export prices) being weak is threatening to turn into a wider deflation risk. Real estate sector remains a key risk area — both for financial stability and for overall growth.

Structural challenges

·         China’s historical growth model that is heavily reliant on investment, exports, and property, is hitting diminishing returns. Slower labor force growth, aging population, and less efficiency gains also poses a serious structural challenge to the Chinese economy.

·         Tightening financial regulations on developers, falling property prices, and declining real estate investment is feeding into weaker household wealth and local government revenues.

·         After COVID-19 disruptions and regulatory uncertainty, households demand remains weak and not showing much sign of an imminent recovery.

·         Trade tensions (tariffs etc.), shifting global demand, and competition. Export growth has helped in some months, but exports to certain markets have dropped sharply.

European economy showing no signs of improvement

The economic growth in Europe continues to be weak. The European Commission’s Spring 2025 forecast projects ~1.1% growth for the EU overall, and about 0.9% growth in the euro area for 2025 — roughly flat compared to 2024. The deflationary pressures are intensifying. Inflation is expected to drop from ~2.4% to ~2.1% in the euro area in 2025, and further in 2026. Business sentiment in the European economy is weakening, especially among firms exposed to export competition, global trade tensions, and supply chain disruption.

The factors impacting European growth are both cyclical and structural. Therefore, some rebound is expected in 2026, especially if investment picks up and disinflation completes, possibly helping consumer real incomes. However, there is less visibility about improvement in structural factors, in the near term.

Cyclical factors

·         After the Russian invasion of Ukraine, energy supply disruptions (especially natural gas) plus high energy prices raised costs for both producers and consumers. Though prices have retraced somewhat, energy components of costs are still significantly higher than pre-pandemic in many places.

·         To fight inflation, central banks have raised rates. That increases borrowing costs, weighs on investment (especially in manufacturing, construction), and slows demand.

·         Tariffs and trade policy uncertainty (both with the U.S. and more broadly) are hurting export demand.

·         Consumer confidence remains fragile: households are still dealing with high inflation (food, energy), rising living costs, and economic uncertainty. That reduces spending.

·         Investment cycle is not picking up due to higher cost of capital, uncertain regulatory / policy environments, and energy & supply risks.

Structural factors

·         Competition from Asia and China (especially low-cost manufacturers) is squeezing European exporters.

·         Shifts in supply chains and demand patterns post-COVID are disrupting traditional trade flows.

·         Productivity growth has been sluggish in many European countries, as demographics are worsening and investment in tech innovation has been lagging.

·         Regulatory burdens, fragmented capital markets, and slower innovation are holding back private investment and scaling up.

·         High energy costs and environmental transition costs also pose competitive disadvantages relative to regions with cheaper energy or more efficient infrastructures.

·         Civil unrest in many major European economies is becoming more deep rooted with rising resentment against immigration policies and rising youth employment.

Japanese economy also facing specter of stagflation

Japan’s economy recently contracted (-0.2% in a recent quarter), largely driven by falling exports. Demand from major trade partners is weakening. U.S. tariffs on Japanese goods (especially autos and parts) are hurting its export-heavy industries. Inflation has remained above the Bank of Japan’s target (2%) for some time. Food, energy, and import costs (exacerbated by a weak yen) are contributing to higher consumer prices. Moreover, while inflation is persistent, wage growth has been slower, so real income gains are modest.

Growth is expected to remain modest. Most forecasts point to ~1.0-1.2% real GDP growth in FY2025, assuming global demand holds and domestic consumption strengthens. Fiscal pressures continue to mount as interest costs are rising; resulting in less fiscal space for stimulus or cushioning shocks. External risks (trade, global slowdown, currency fluctuations) also remain elevated. For example, stronger yen is hurting exports; and U.S./China trade policies are adversely impacting demand for Japanese goods.

Two major constraints for the Japanese economy are:

Demographics & labor constraints: Japan’s population has been aging fast, and the working-age population is shrinking. This means fewer workers, more spending on healthcare/pensions, and fewer taxpayers. Labor shortages in certain sectors are putting upward pressure on wages, but this comes with trade-offs (cost pressures for businesses, especially smaller firms).

Monetary Normalization: The Bank of Japan has begun to shift away from ultra-loose monetary policy (e.g. raising short-term rates to ~0.5%, reducing purchases of government bonds / ETFs). This helps combat inflation, but carries risks: higher borrowing costs for companies and government, and stress for debtors.

These two are mostly structural and may keep the growth rate of the Japanese economy under check.

…to continue tomorrow.

The first half of the financial year FY25 has been good for financial and commodity markets. Despite elevated geopolitical concerns, inflation, and political changes in many countries, stocks, precious metals, industrial commodities and crypto made a steady move up, though not without higher volatility.

In 1HFY25, the global central bankers embarked on a path of monetary easing, with several of them cutting rates. Most notably, the People’s Bank of China (PBoC) and the Federal Reserve of the US, did rather aggressive easing. The Chinese (and Hong Kong) equities rose sharply in the last week of the 1HFY25 to erase months of underperformance. Indian equities were amongst the top performing global assets for 1HFY25. Japan, South Korea and European equities were notable underperformers.

Another notable feature of global markets was the sharp rally in precious metal. The central bankers across emerging markets accelerated their gold accumulation, in view of the geopolitical developments and trade tensions.

At present equity markets appear little jittery in view of the recent escalation in the middle east and resurfacing of the Sino-US trade tensions. Otherwise also, the post Covid growth momentum is evidently slowing down with stimulated demand waning across the globe. Fears of earnings failing to match the stock prices’ trajectory are rising. Uncertainties about the policy direction post the US presidential elections, and erratic weather conditions are some other points of concern.

India performance – 1HFY25

Indian markets performed very well in the first half of the financial year FY25. Indian equities have been amongst the top performing global assets. Indian bonds and currency have also been mostly stable. The key highlights of the India market performance could be listed as follows:

·         The benchmark Nifty50 gained 15.6% during 1HFY25; while the Midcap (+25.1%) and Small Cap (+25.6%) did much better. Consequently, overall market breadth has been strong.

·         Two third of the market gains came in the months of June and July 2024, post the elections. This was contrary to the pre-election consensus that the BJP failing to secure a majority on its own may result in sharp decline in market.

·         The total market capitalization of the NSE is higher by ~22.7%; more than gains in the benchmark indices – implying that stronger gains have occurred in the section of the market beyond indices.

·         The number of sectors outperforming the benchmark indices far outnumbers the sector underperforming. The rally was led by Consumers, metals, Pharma, and Realty sectors. PSU Banks was the only segment of the market that yielded negative returns.

·         Ship builders and chemicals were the notable outperformers amongst the individual stocks. Smaller PSU banks were notable losers.

·         Institutional flows to the secondary equity markets were positive for all six months. 1HFY25 witnessed a total flow of ~INR2697bn, out of which FPIs invested ~Rs375bn. The correlation of institutional flows with Nifty returns remained poor (~43%). 

·         The rates, currency and yields were stable in 1HFY25. Policy rates were unchanged; while money market rates were marginally lower by 20bps. Deposit rates did not see much change while lending rates were higher by 15bps.

·         The overall Indian yield curve shifted lower and flattened completely, as the RBI maintained the status quo on policy stance.

·         The economic growth for FY25 is expected to be ~7%, lower than the 8.2% achieved in FY24. Fiscal balance is expected to be better with FY25BE fiscal deficit projected at 5.1% (vs FY24RE at 5.8%).

·         CPI inflation has inched closer to the lower bound of the RBI’s tolerance band of 4%-6% with August 24 CPI inflation number coming at 4.2%.  

• Corporate performance has shown signs of slowing down in 1QFY25 with sales growth, margins improvement and RoE showing signs of fatigue. The steep post Covid upward earnings growth trajectory is now plateauing and showing signs of normalizing.