Economic Decoupling: What It Means for 2025

In 2025, the global economy is undergoing a noticeable shift. While the U.S. economy is showing signs of slowing, other regions—particularly manufacturing hubs like China—are gaining momentum. This divergence, known as economic decoupling, is reshaping trade relationships and investment opportunities. Understanding this shift is essential for investors, businesses, and consumers alike.

• Global Economic Decoupling: What It Means for 2025

• What Is Global Economic Decoupling?

• Key Factors Behind the Decoupling

• Impact on Canada

• Why Are Non-U.S. Markets Outperforming?

• What to Watch for in the Months Ahead

Overview

The ongoing decoupling between the U.S. and global economy is reshaping investment patterns, currency markets, and trade relationships. While the U.S. faces slower growth, other regions are showing resilience, presenting both risks and opportunities. 

For investors, diversification across global markets could be a valuable strategy. Businesses that rely on international trade should prepare for continued tariff uncertainty, while consumers may need to adjust to changing prices for imported goods. Although rising trade tensions create challenges, they also open the door for strategic investments and economic adaptation. 

Staying informed and flexible will be key to navigating the shifting economic landscape in 2025 and beyond.

What is Global Economic Decoupling?

Global economic decoupling occurs when the growth trajectory between regions or countries goes in opposite directions. Historically, major economies have tended to move in sync. However, in 2025, the U.S. is grappling with higher interest rates, persistent inflation, and government spending cuts, while many other countries are experiencing an uptick in business activity. (Figure 1)

Key Factors Behind the Decoupling

A major driver of this decoupling is the U.S. administration’s decision to impose tariffs on imports from Canada, Mexico, and China. As a result, companies mostly in the United States decided to stockpile before the tariffs hit. Called front-running, this spike in U.S. imports provided a short-term economic boost to manufacturing activity around the world. China, for instance, has seen a surge in exports (Figure 2). Conversely, these tariffs also raise costs for 

U.S. businesses and consumers because tariffs are paid by importers who are likely to pass on the price increase to their customers. Add a reduction in immigration and government employment and the result is a clear slowing in U.S. growth conditions. 

Importantly, the ongoing decoupling should be moderate through the balance of the year as imports of U.S. companies decelerate and return to a more normal level. However, through the ensuing global growth slowdown, economies outside the U.S. appear better positioned to protect growth. Indeed, to offset the restraint from tariffs, world central banks will likely cut their policy rates while governments provide fiscal stimulus probably aimed at boosting defense and infrastructure spending. In U.S., however, the Federal Reserve may not be able to ease rates due to sticky inflation while the Trump administration is focused on shrinking the budget deficit, hence less fiscal spending.

Impact on Canada

Canada is particularly affected by these economic shifts and with the odds of a recession rising, the Canadian dollar (CAD/USD) has declined below 70 cents again. That said, we believe the January lows around the 68-cent level should hold because at this level, the Loonie stands 16 cents below the 84 cent CAN-U.S. purchasing power parity (PPP is the exchange rate at which one country’s currency would be converted into another to purchase the same amounts of a given product). Since 1970, the lowest deviation below PPP has been 20 cents seen during the summer of 1998 (Asian currency crisis) and the 2001-02 recession, but back then, oil prices traded below $20/bbl compared to ~$65-70/bbl today (Figure 3).  

Otherwise, with tariffs on their way, the Canadian currency is an important economic stabilizer as it cheapens import prices for U.S. and foreign importers. Interestingly, if the Trump administration brought down the levy on Canadian goods from 25% to 10%, the depreciation of the Loonie over the past would offset the bulk of the tariffs, hence opening the door to a potential resolution.    

“...the Canadian currency is an important economic stabilizer as it cheapens import prices for U.S. and foreign importers.”

Why are Non-U.S. Markets Outperforming?

One of the most significant trends emerging from a U.S.-World economic decoupling is  the outperformance of non-U.S. stock markets. Several factors contribute to this trend:

Stronger economic momentum in regions like Europe and China, thanks to easing increased government spending and lower interest rates.

Lower stock valuations outside the U.S., making investments more attractive.

A weaker US$, which is making foreign investment less attractive. 

Interestingly, when non-U.S. markets outperform in the first part of the year,  they tend to continue leading throughout the rest of the year. This trend could shape investment strategies in 2025.

What to Watch for in the Months Ahead

Stronger performance in non-U.S. stock markets, particularly outside North America.

Higher gold prices, as investors seek stability.

Persistent trade tensions.

A resilient Canadian dollar ~70 cents as the growth differential between the U.S. and the rest of the world narrows.

“When non-U.S. markets outperform in the first part of the year, they tend to continue leading throughout the rest of the year.”