The World Bank has lowered its global growth forecast for 2025 by 0.4 percentage points. This change includes a reduction in the U.S. growth outlook by 0.9 percentage points to 1.4%, with another cut of 0.4 percentage points expected for 2026. For advanced economies, growth is now projected at 1.2%, down from 1.7%. The Eurozone’s growth expectation has dropped to 0.7%, revised from 1.0%. Meanwhile, emerging and developing economies are expected to grow at 3.8%, down from a previous estimate of 4.1%. China’s growth forecast stays at 4.5%, as the World Bank notes fiscal flexibility from Beijing. They warn that this decade might see the slowest growth in over 60 years. Additionally, the World Bank indicates that 70% of economies are facing lower forecasts. A potential 10% U.S. tariff could further slow growth in the latter half of the year. The updated projections from the World Bank show a slower global expansion, particularly affecting advanced economies. The lowered expectations for the U.S. could have effects worldwide. With nearly a full percentage point taken off next year’s estimate and another reduction the following year, it’s clear that waning domestic demand will impact every market linked to U.S. consumption and investment. The cut to forecasts for the Eurozone adds stress to a region already struggling with slow industrial output and complicated monetary policies. The new growth figure of 0.7% highlights difficulties in overcoming stagnation and limited growth opportunities in the near future. However, emerging and developing economies are still expected to grow faster than wealthier nations, offering some modest opportunities despite declining capital flow conditions. China’s steady 4.5% growth, along with its ability to use fiscal tools, is a sign of consistency, although it’s not necessarily a sign of strength. It indicates relative calm while surrounding issues loom. It’s important to note that while China can sustain this pace through policy, external demand for its exports will remain a challenge. Saying this could be the weakest global growth in 60 years is significant. With almost three-quarters of economies facing lower growth prospects, we anticipate tighter funding conditions, lower revenue expectations, and changing risk costs throughout the year. This outlook does not even consider potential shocks from policy changes, such as new tariffs from the U.S. A 10% increase in tariffs could further dampen global trade and impact inflation, especially in smaller, trade-dependent economies. From our perspective, while disinflation trends in developed markets are ongoing, they are not consistent. We expect to see continued differences in monetary policy affecting asset pricing. While bond markets may have priced some of this in, rate cuts appear to be happening more slowly than anticipated. This gradual approach keeps implied volatility high in forward rate agreements and swap curves. In the background, the decline in growth prospects across futures is becoming clearer. If short-term growth does not meet expectations, carry trades that rely on clear signals from central banks may struggle. Signs of slower growth without inflation corrections make us reconsider models tied to breakeven paths and longer-term gamma exposure. While overall numbers get the spotlight, the changing global dynamics deserve our attention. Divergence is the prevailing trend, showing up in policy, activities, price trends, and cross-border investments. This creates a new risk-reward scenario compared to previous easing cycles, particularly affecting duration performance and convexity hedging. Based on the updated data: implied ranges are tightening, uncertainties around future rates are increasing, but the pace of changes leaves some policy uncertainties intact. We recommend watching for inconsistencies between realized and implied volatility since the slower growth in output and consumption might compress realized volatility in the short term without removing the risks linked to policy responses or shocks. With many developed markets struggling for growth, focusing on relative positioning within curves is more beneficial than taking outright directional bets. Export-driven economies are likely to see weaker external demand, diminishing the reasons for spread compression among regions tied to industrial production. So, what’s next? Pay less attention to aggregate numbers and more to how policymakers respond to this slower growth — that’s where volatility and mispricing may appear. We expect rate differences to be stickier than previously thought, meaning pairs trading and relative value strategies could yield better results, especially when adjusted for delayed responses.

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