China, once hailed as a global economic miracle, is now facing significant headwinds. The sharp decline in its property prices has dealt a heavy blow to household wealth and strained the financial position of local governments. Since the pandemic, youth unemployment has soared to record levels, and consumer confidence remains subdued, largely due to sluggish wage growth falling short of expectations.
In response, Chinese fiscal and monetary authorities have implemented a broad range of expansionary measures aimed at stimulating the economy. These initiatives include lower interest rates, reduced capital requirements for banks, and easier access to credit. A key metric to watch in assessing the effectiveness of these policies will be the level of credit extension by banks, alongside indicators such as employment growth, consumer confidence, and real wage improvements.
Complicating China’s economic outlook is the evolving trade dynamic with the US. The escalation of tariffs is dampening investor sentiment and economic momentum, introducing new volatility into global markets. Businesses and investors are navigating an atmosphere of uncertainty with the US and China imposing additional tariffs on each other’s goods. This precarious situation has created a challenging environment for global markets, as reflected in the stock market’s reaction.
The current market environment is characterised by volatility, with January showing positive performance followed by declines in February and March. In January 2025, global markets generally saw positive performance, with the MSCI All Country World Index delivering a 3.4% return, the Dow Jones Industrial Average rising 4.8%, the S&P 500 advancing 2.8%, and the Nasdaq Composite adding 1.7%.
However, in February, equities experienced their first negative month of the year, with the S&P 500 and Dow Jones Industrial Average losing between 1.4% and 1.6%, while the Nasdaq dropped nearly 4%. March continued the downward trend, with the S&P 500 dipping 1.3%.
These fluctuations have resulted in a global market sell-off. The charged mood has complicated forecasting and created an unfavourable environment for risk assets.
While the market can adjust to known tariffs on specific goods, the current volatility is likely to result in subdued economic activity. Companies may take a more cautious approach, postponing investment decisions, stalling hiring, and reducing spending until there is more clarity regarding future tariffs. However, once there is more certainty, the market is expected to stabilise, allowing businesses to plan and reassess asset values.
In the US, indicators such as consumer and business confidence surveys suggest a potential economic slowdown. The US market has underperformed Europe due to slowing momentum and high asset valuations at the beginning of the year. The tariff war has created uncertainties, but the impact on the US market has been mitigated by front-loaded imports of Chinese goods by American companies. This front-loading has temporarily boosted imports and exports, distorting first-quarter GDP numbers for both China and the US.
Despite aggressive policy interventions, a swift turnaround in China’s economic fortunes appears unlikely
While the US market has faced headwinds, the European market has shown resilience, driven by attractive valuations, improved economic indicators and potential regulatory reforms. A negotiated end to the war in Ukraine would be likely to yield several positive outcomes for Europe. Lower energy prices could boost household consumption, and European companies would benefit from opportunities to rebuild Ukraine’s infrastructure, among other advantages.
The Chinese market too has demonstrated strength. In February, the Chinese market rebounded strongly, particularly in the technology sector, following positive earnings results from Chinese tech companies and perhaps more importantly, the launch of DeepSeek’s AI app, a competitor to the likes off OpenAI’s GPT-4 and Anthropic’s Claude. The tariffs on Chinese goods have not significantly affected the market, as they were anticipated and partially priced in. The Chinese government is expected to implement further stimulus measures if tariffs negatively affect the economy, aiming for a GDP growth rate of about 5%.
Despite aggressive policy interventions, a swift turnaround in China’s economic fortunes appears unlikely. Instead, a more measured and gradual recovery is expected, contingent on sustained policy support and improved domestic and global conditions. The coming months will provide valuable insights into whether China can regain its growth trajectory or continue to struggle with structural challenges and external pressures.
The global market environment will also continue to be influenced by the resolution of tariff disputes and geopolitical events. Addressing tariff uncertainties and implementing measures to support economic growth will be crucial for stabilising markets.
• Drotschie is chief investment officer at Melville Douglas
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