Global Economy Update June 2025 by CareEdge Ratings

Strait of Hormuz: A Critical Choke Point
* Despite the current ceasefire, the conflict in the Middle-east region remains a key monitorable. Oil flow through the Strait of Hormuz accounts for about 25% of global seaborne oil trade and 20% of global oil and petroleum product consumption.
* Saudi Arabia and the UAE are key oil transporters through the Strait. However, they also have developed alternative infrastructure to bypass it and mitigate short-term disruptions, if tensions escalate.
* 84% of the crude oil and condensate and 83% of the liquefied natural gas that moved through the Strait of Hormuz went to Asian markets in 2024 with China, India, Japan and South Korea being top destinations.
* Assuming no further escalation, we estimate Brent to average around USD 65-70 per barrel in 2025-26.
Rise in Geo-Political Tensions Spur Defense Spending Across Globe
* Following the Russia-Ukraine and Israel-Iran conflicts, geopolitical tensions have escalated compared to the relatively stable period between 2003 and 2021.
* As a result sharp rise in military expenditure has been witnessed, with total world military expenditure reaching USD 2.7 trillion, accounting for 2.5% of global GDP in 2024.
* Military expenditure grew by 9% (y/y) in 2024 and 6% (y/y) in 2023 compared to an average of 2% (y/y) seen between 2014-22.
* Military expenditure increased in all five of the world’s geographical regions for the second year in a row in 2024, reflecting heightened geopolitical tensions across the globe. Largest increase in military spending was seen in Europe with 17% rise in 2024.
* The North Atlantic Treaty Organization (NATO) members have agreed to increase the defense expenditure to 5% of GDP by 2035 from current 2%.
* The five biggest spenders in 2024 were the United States, China, Russia, Germany and India, which together accounted for 60% of world military spending
Who Moved My Yields- Fiscal Deficit?
* Debt is expected to be higher than current levels in most of the major economies between 2025-29.
* US, UK, France and China’s future upward debt to GDP trajectory path remains concerning.
* The rise in debt to GDP ratio is driven by elevated fiscal deficits amidst higher military and ageing related spending pressures and rising debt servicing costs.
* India continues to be an outlier, with lower future expected debt to GDP levels driven by fiscal consolidation.
* Government bond yields have risen steadily across most advanced economies reflecting higher fiscal concerns.
Asian Currencies Strengthen Amidst Weaker Dollar Environment
* The US Dollar Index (DXY) has weakened 9.6% CYTD, reflecting fading investor confidence amidst rising US fiscal and trade policy risks.
* Investors are increasingly hedging their currency exposure on US assets as the dollar loses momentum.
* Asian exporters, traditionally large holders of US securities, appear to be reducing dollar exposure, which is resulting in an appreciation of their domestic currencies.
* There is also speculation that countries like Taiwan and South Korea may be allowing currency appreciation as part of the trade negotiations with the US.
* The yuan has appreciated modestly, in contrast to its sharp depreciation during the first trade war.
China: Trade Tensions De-escalate; Property Weakness Persists
* The US and China agreed to a 90-day tariff truce, with deeper-than-expected tariff cuts.
* China’s exports rose 6% YoY in Jan-May 2025, though exports to the US fell 9%. The truce may support near-term exports through front-loading of orders.
* Real estate investment fell 10.6% YoY in Jan-Apr 2025, highlighting continued weakness in the sector.
* In May, the PBoC cut key lending rates to record lows and reduced the reserve requirement ratio by 50 bps. Further policy easing is expected.
India: Talks Concluded on Historic Free Trade Agreement with UK
* 99% of Indian exports to the UK will enjoy zero duty, benefiting sectors like RMG, toys, gems and jewellery, engineering goods, auto parts and engines, and chemicals.
* India to reduce duties on whisky (from 150% to 40% over 10 years) and cars (from 100% to 10% under quota).
* Deal to boost services trade and talent mobility, supporting IT, financial, professional and educational services.
* As per the Government of India, India-UK bilateral trade of USD 60 billion is projected to double by 2030 with the help of FTA.
* Similarly, India’s ongoing trade negotiations with other countries/regions like the US, EU, and New Zealand are a positive for its external sector outlook
India: Growth Surprises on the Upside; RBI Front-Loads Easing
* India’s Q4FY25 GDP growth came in at 7.4%, exceeding expectations and lifting FY25 growth to 6.5%, though down from the 8.4% average over the past two years.
* The RBI delivered a larger-than-expected 50 bps repo rate cut to support growth amidst easing inflation and shifted its stance to neutral from accommodative.
* A phased 100 bps CRR cut from Sep is expected to inject ~Rs 2.5 trillion of durable liquidity by Dec-25, supporting credit growth and monetary policy transmission.
* The RBI retained its FY26 GDP growth forecast at 6.5% but lowered its CPI inflation projection to 3.7% from 4%.
* We do not expect further RBI rate cuts unless downside risks to growth materialise.
Bangladesh: Import Costs Pressures Keep Inflation Higher than Central Bank Target
* Inflation has cooled since October-2024 due to decline in food prices, though higher than 7-8% central bank target range.
* Exchange rate has depreciated significantly attributed to widening current account deficits and falling reserves leading to import costs pressures.
* Bangladesh’s central bank has maintained tight monetary policy since 2022 with the current policy rate at 10%
US: Rise in CDS Spreads
* US’ 5 Year CDS Spread is higher than Spain, France, South Korea and UK despite having a better sovereign rating.
* Greece and Italy’s CDS spreads have seen a decline whereas that of US has steadily increased in the past 1 year indicating deteriorating fiscal balances.
US: Fed Holds Rates, Projects Weaker Growth and Higher Inflation
* The Fed kept the federal funds rate unchanged in the 4.25-4.5% range in June, marking its fourth consecutive pause, in line with market expectations.
* However, its latest projections point towards a more cautious outlook, with weaker growth, slightly higher unemployment, and stickier inflation.
* The Fed now sees growth slowing to 1.4% in 2025 (vs 1.7% as per March projections). Unemployment rate is projected at 4.5% in 2025, up from 4.4% previously.
* Core PCE inflation, the Fed’s preferred measure, is now seen at 3.1% in 2025 (vs 2.8% earlier). Inflation is no longer seen returning to the Fed’s 2% target by 2027.
* The Fed noted that while uncertainty around the economic outlook has diminished, it remains elevated. • The dot plot continues to signal two rate cuts in 2025, though it is a close call as eight FOMC members project two cuts, while seven expect none
Colombia: Widening Fiscal Deficit And Rising Debt Pressures
* The fiscal deficit rose to 4.7% of GDP in 2024 from 3.2% in 2023.
* This marks reversal in fiscal consolidation trend seen between 2021-23.
* The deficit increased as revenues fell short due to weak tax collections.
* Expenditures exceeded the target driven by higher primary spending and rising interest payments.
* Gross general government debt also remained elevated at 61.3% of GDP.
Euro Area: Q1 GDP Beats Expectations
* GDP increased by 1.3% (q/q annualized) in Q1 2025 in the Euro Area amid front-loading exports to US due to tariff uncertainties.
* Inventory levels peaked in 2022 due to supply chain disruptions but have steadily declined since then. As a result, firms are now replenishing stocks, contributing to GDP growth—particularly in Germany and Italy.
* Portugal’s contraction in GDP is temporary as retroactive wage tax adjustments temporarily boosted the disposable income in late 2024 which was followed by a correction.
Greece: Tourism Strength Persists; Labor Market Developments Remain Positive
* Tourist arrivals and receipts reached record levels of 36 million (9.8% y/y) and EUR 17.7 billion (3.5% y/y) respectively in 2024.
* Labor market conditions have improved significantly, owing to labor market reforms, and rebound in private sector has led to reduction in unemployment rate falling to 10.1 % in 2024, from its peak of 27.5% in 2013.
* Full recovery in labor market is constrained due to low labor force participation rate and relatively higher unemployment among youth & females.
Portugal: House Prices Rise, Steady Improvement in External Imbalances
* Housing prices in Portugal increased by 109% between 2010 and 2024 while wages have not grown in the same proportion leading to rising unaffordability.
* Portugal recorded a current account surplus of 2.2% of GDP in 2024, highest in three decades.
* FDI inflows have also been robust improving the international investment position, now at -58% of GDP from -120% of GDP in 2014.
Turkiye: Currency Depreciation and Reserve Depletion Amid Political Unrest
* The Turkish Lira has depreciated by 20% over the past year
* Following political turmoil triggered by the arrest of the opposition leader, the depreciation in lira accelerated further.
* In response, the central bank intervened in the currency markets, leading to a significant depletion of its foreign exchange reserves
Nigeria: Oil Prices and Production to Weigh on Fiscal Revenues
* There are doubts over Nigeria meeting its optimistic revenue target of NGN 34.8 trillion in 2025, 35% larger than the revised revenue estimate in 2024.
* The government projected oil revenues to account for over half of government revenue.
* However, average monthly bonny light crude oil prices in 2025 are down by 1.8% relative to the USD 75 per barrel used as the benchmark bonny light crude oil price in the 2025 Budget.
* Meanwhile, average crude oil production for the first five months of the year lags the 2025 Budget target of 2.1 mbpd by 30%.
Mauritius: Government Unveils Bold Fiscal Consolidation and Debt Reduction Strategy
* Mauritius 2025-2026 Budget aims to reduce the budget deficit from -9.8% of GDP in FY25 to -1.3% by FY28 through streamlined spending and enhanced revenue measures.
* Revenue from the Chagos deal will be strategically used to lower public debt over the next three years , helping Mauritius reduce its debt-to-GDP ratio from 90% of GDP in FY25 to 79.7% in FY28, as per the Ministry of Finance.
* Additional measures include cutting inefficiencies, rationalizing expenditures, and increasing revenue through targeted taxation to support fiscal consolidation efforts.
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