As we approach the mid-point of 2025, volatility is defining the investment landscape. The first half of the year has underscored multiple key learnings for investors that look set to play out as we move through 2025 and beyond, chief among them is to expect instability, not only in markets but also in the geopolitical and policy environments that shape them.
The persistent influence of policy
Relationships between global powers and long-standing allies have become less predictable. The Trump administration in the US has gone in hard on trade tariffs (Figure 1), disrupting previous relationships and structures. Even though the policy proposals are more initial positioning than concrete plans, the preliminary announcements alone are driving real economic impacts.
Figure 1: Proposed tariffs are large – and likely unsustainable
US average effective tariff rate (weighted average across all imports, %)
Source: Deutsche Bank, as of 30 April 2025.
For businesses, this creates uncertainty. We are seeing both a reluctance to commit to long-term investment amid regulatory ambiguity, and consumption and inventory purchases being brought forward in anticipation of potential tariffs – only for those tariffs to be delayed or altered. This mix is distorting traditional economic readings and complicating forecasting.
Attempting to time or extrapolate from uncertain policy decisions is in our view a foolish exercise. Consider the shifting timelines around trade measures – tariffs being announced, then paused, or selectively applied based on bilateral negotiations (the 90-day agreement between the US and China in mid-May to slash 145% tariffs illustrates this perfectly). This kind of policy ambiguity is especially trying for business planning and valuation, raising the risk premium and clouding investment horizons. Although the outlook for the global economy is for modest 2%-3% growth through 2025 and into 2026, with some emerging markets gaining momentum while advanced economies slow slightly, there is much that could disrupt this forecast.
Decoding economic signals
Headline GDP in the US has weakened since late 2024 and turned negative in early 2025. At first glance this suggests contraction, but the reality is more complex. Consumption remains relatively resilient, and much of the deterioration can be attributed to imbalances in trade and inventory timing rather than a wholesale collapse in demand. For instance, importers rushing to front-load shipments before tariff deadlines may appear as a temporary spike in activity followed by a lull, distorting GDP data.
Analysing real economic activity and underlying consumption provides a more accurate assessment of the economy. Even here, the uncertainty surrounding investment and policy continues to dampen capital expenditure, which could prolong the slowdown.
Although the US has seen a quarter of negative growth, so far consumption remains firm, and employment is holding. We believe the greater risk is stagflation. Stagflation would pose a significant challenge for the Federal Reserve (Fed), with its dual mandate of ensuring reasonable economic growth and keeping a lid on inflation. It would be less keen to cut in a stagflationary environment, despite the economy slowing. This is a delicate and dangerous mix for markets.
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