2025 Grey Swan: The Great Decorrelation
- By Karl Massey
This article is part of Macro Hive’s 2025 Grey Swan series, where we let our imaginations loose to try and predict low-probability, high-impact events that almost no one expects. You can read the full list here.
At the Crossroads
In 2025, the world finds itself at a startling crossroad. While the US revels in an inflationary boom, the rest of the world staggers under the weight of a deflationary bust. This phenomenon, ‘The Great Decorrelation,’ is a vivid illustration of how global economies, once bound by a complex web of interdependence, can unravel into starkly divergent paths.
In the US, the seeds of inflation were sown through years of relentless fiscal expansion. Massive public investments in infrastructure, green technology, and social programs collided with a labour market already stretched to its limits. The government’s push for reshoring critical industries, spurred by geopolitical tensions and a desire to reduce reliance on foreign trade, drove domestic production costs higher. Supply chains, once global in scope, fractured into regional silos, further stoking inflationary pressures. The Federal Reserve, cautious after the economic turbulence of the early 2020s, hesitated to tighten monetary policy aggressively, allowing the flames of price growth to spread unchecked.
Beyond America’s borders, however, the picture darkened. As the US turned inward, reducing its demand for global imports, the ripple effects were devastating. Emerging markets, long dependent on American consumption and investment, saw capital flee toward higher returns in the booming U.S. economy. In Europe, stagnation deepened as aging populations and tightening monetary policies suppressed growth. China, grappling with an overleveraged property sector and slowing industrial output, could no longer act as the engine of global demand. Commodity-dependent nations, reeling from plunging prices in oil and raw materials, found themselves on the brink of collapse.
Geopolitics played a central role in driving this decoupling. Escalating tensions between the US and its trading partners led to new trade barriers and economic sanctions, tearing apart the intricate supply chains that had underpinned global commerce for decades. Energy markets were no less volatile. America’s leap toward energy independence – through breakthroughs in clean energy and expanded domestic production – sent shockwaves through traditional oil-exporting economies, deepening the deflationary spiral abroad.
Meanwhile, the dollar’s unassailable dominance allowed the US to finance its expansive fiscal agenda with ease. While other nations struggled with rising borrowing costs and dwindling investor confidence, America’s unique position as the issuer of the world’s reserve currency insulated it from immediate financial repercussions. For the rest of the world, however, this divergence spelled disaster. Forced into austerity by spiralling debt and deflation, governments slashed spending, further stifling growth and leaving their economies mired in stagnation.
The consequences of this economic schism were profound. The US, buoyed by its self-contained prosperity, appeared increasingly detached from the global community. Yet this newfound autonomy came at a cost: diminished influence abroad and a world increasingly fractured along economic and geopolitical lines. In the deflationary shadows of the rest of the world, political instability and social unrest became the order of the day, as governments grappled with the fallout of economic dislocation and the erosion of their middle classes.
‘The Great Decorrelation’ stands as a stark reminder of the fragility of globalization. For decades, the world operated under the assumption that prosperity in one corner would inevitably ripple outward. Yet 2025 revealed a harsh truth: when global systems falter, the fractures can be as uneven as they are devastating. The US may have emerged from this divergence with its economy roaring, but the long-term consequences of a world so starkly divided remain uncertain. If nothing else, the events of 2025 serve as a warning—that in turning inward, nations risk unmooring themselves from the stability that only collective balance can provide.
So where does this leave markets and returns? The clearest divergence will be in the relative shapes of yield curves, with the US having a dramatically steeper curve and the EU having an inverted curve with long ends returning to negative real yields. The corollary of these drivers would be an outperformance of US banking shares vs non-US financial institutions, a stronger dollar and lower global energy prices as US-based energy responds to domestic demand and yet energy demand in RoW declines with lower growth and disinflation.
This is not deglobalisation; it is a US separation by unwitting design. Meanwhile, the world economy suffers from rising levels of economic uncertainty and the unwelcome arrival of greater currency and commodity volatilities.