At the midpoint of 2025, the global economy is navigating a delicate balance of caution and optimism.
The year began with a favourable Goldilocks backdrop, with a not-too-hot and not-too-cold economy. But the actions of U.S. President Donald Trump’s administration from early 2025, and the threat of a significant shift in global markets, introduced complexities and challenges, causing investors to face uncertainty on multiple fronts.
The turning point for investors came on his so-called Liberation Day, when Trump declared a broad-based global trade war. It caused a spike in market volatility and a sell-off in bonds and equities. However, a 90-day pause on the tariffs to facilitate negotiations between the U.S. and its trading partners led to a strong market rally, pushing global equities back towards their old highs and stabilizing longer-dated bonds.
A second point of uncertainty has arisen from the introduction of the budget reconciliation bill, more commonly known as the One Big Beautiful Bill Act. It has passed through the House of Representatives and is currently under review by the Senate. Although the bill has notable tax incentives for capital expenditures and research and development, and maintains lower tax rates for corporations and individuals, Section 899 may result in higher tax rates for foreigners (including Canadians) investing in the U.S.
More recently, a new front of uncertainty has emerged. The war in the Middle East has expanded to include Iran, where tensions have escalated with the recent targeting of nuclear facilities by the U.S. military. Iran fired missiles at a U.S. airbase in Qatar today, according to a report from CNN.
Although markets have moved quickly to adjust for these additional risks in commodity asset classes like oil and gold, both rising significantly, hard data continues to show minimal surprises in the global economy for investors, causing asset classes like bonds and equities to shrug off these increased risks.
This has complicated the playbook for central banks and thus they have responded with divergent strategies. Canadian and European central banks have adopted a dovish stance, reducing policy rates to stimulate their economies. The U.S. Federal Reserve, however, has maintained its policy rate, reflecting the U.S. economy’s relative resilience. These policy differences between countries highlight the unique challenges different regions are facing.
The calm before the inflation storm?
Inflation, which has remained within the 1%–3% target band for major developed economies in the first half of 2025, is expected to rise in the second half of the year across most regions because of higher import costs from the tariffs imposed by the U.S. administration and associated reciprocal tariffs. This could complicate central banks’ efforts to lower interest rates, as the priority to counter economic slowdowns becomes eclipsed by inflationary pressures.
Rising inflation will likely impact investors’ portfolios by causing interest rates to rise and in turn bond prices to fall. Equity portfolios could also face headwinds if inflation rises significantly, as this puts downward pressure on margins as well as the multiples paid for stocks.
Not all economies impacted equally
Gross domestic product (GDP) growth across the globe has been mixed. While it surprisingly was on the upside in the first half of 2025, driven by front-end loading of purchases ahead of tariffs, the second half is expected to show a slowdown, mainly because of the Trump-induced trade war. Weakened consumer and business confidence, leading to cautious spending, would be a main factor in the slowdown. The OECD revised its 2025 GDP growth expectations from 3.1% to 2.9%, to account for the changes in spending behaviour.
Canada, with its deep bilateral ties to the U.S., is among the hardest-hit economies by the trade war. Canada’s unemployment has risen to 7%, and the job market is expected to face continued challenges before a potential recovery next year under new Prime Minister Mark Carney’s pro-growth, pro-investment agenda. The U.S. economy, while more resilient, also remains at risk due to ongoing trade negotiations and elevated oil prices which hit consumers quickly at the gas pump.
Balancing caution and optimism
Despite present challenges, investors have reason for cautious optimism. The Trump administration is likely to back away from disruptive trade-related policies as the 2026 mid-term elections approach. Meanwhile, the One Big Beautiful Bill Act aims to extend tax cuts and increase capital expenditures, research and development and defence spending, in turn stimulating the world’s biggest economy.
In response to the trade threats from the U.S., many countries have been exploring ways to stimulate their own domestic growth. The European Union plans to expand fiscal spending in defence, boosting regional growth. Canada is working on creating a more investment-friendly environment by reducing interprovincial trade barriers and speeding up project approvals with the goal of generating significant economic growth and driving domestic productivity improvements.
For advisors and their clients, diversification by asset class and geography, maintaining a long-term outlook and making strategic decisions are the best ways to overcome what continues to be an uncertain market. Advisors should prioritize a disciplined, forward-looking investment strategy while balancing short-term caution with long-term goals to best navigate this ever-evolving economic landscape.
Lesley Marks is chief investment officer of equities with Mackenzie Investments.