Currency Update May 16th: Are We Heading Towards Global Recession?

Are we in for another round of inflation and UK downturn?

Are We Heading Towards Global Recession?

That’s a gloomy headline but we have to accept that the odds of a recession in the UK, US and EU continue to rise. The UN Trade and Development (UNCTAD) recently reported that global growth is forecast to slow to 2.3% in 2025, slipping below the 2.5% threshold often associated with a global recession. This marks a sharp deceleration compared to already sluggish pre-pandemic growth rates.

Ongoing trade tensions and disruptions, especially with the unwinding of President Trump’s Liberation Day tariffs, are a source of continued uncertainty and economists suggest we are heading towards a global recession. While disinflation momentum continues, global inflation has been revised upwards, adding to economic uncertainty. Central Banks continue to walk the tight-rope between sluggish growth and inflationary risks with the UK, US and EU central banks all expected to cut interest rates again this year.

With this outlook in mind, global financial markets are likely to remain risk averse which suggests a weaker pound and stronger Dollar and Euro. The Euro has the potential to gain as experts predict a gradual decline in the dollar's global dominance, with a shift towards a more diverse currency system where currencies like the Euro, Japanese Yen, and Chinese Renminbi play more significant roles.

This move is attributed to Trump’s aggressive use of tariffs and trade restrictions creating uncertainty in global trade. These policies are straining relationships with key trading partners, prompting them to explore alternatives. It's important to note that the dollar's dominance is deeply entrenched, and any shift is likely to be gradual. However, these actions contribute to concerns about the long-term stability of the dollar's global role.

Will the UK manage to avoid recession?

Despite all this negativity there are still reasons to be hopeful, from a UK stand point at least. The UK economy saw a 0.7% increase in GDP in the first quarter of 2025, the highest since the first quarter of 2024 and outpacing other G7 economies during this period. With inflation significantly down from it peak, the expected interest rate cuts ease pressure on consumers and businesses with strong jobs numbers and resilience in consumer spending lending further support. Although the outlook remains highly unpredictable, these areas of potential strength may provide opportunities for the pound to make gains even if they are moments in time rather than a longer term trend. 

The Pathfinder Team