It is dangerous to second-guess the Trump administration, but if the current pause on tariffs becomes permanent then the impact on the global economy should be manageable. As such we continue to forecast decent global growth this year. But we doubt it will be long until new risks come onto the radar of markets. Geopolitics remain unpredictable. And attempts to deliver US fiscal stimulus later this year has the potential to cause market turmoil, both at home and abroad.
The outlook for the US remains solid…
Large swings in net trade and inventories distorted Q1 GDP growth. But with underlying domestic demand largely unchanged, we expect GDP growth of 1.7% in 2025, with some pick up to 2.4% in 2026 as the Trump administration delivers some fiscal stimulus. Higher tariffs are likely to lift inflation above 3% both this year and next, keeping the Fed on hold throughout 2025. But we think fading inflation pressures and a change of leadership at the Fed will eventually clear the way for 50bp of cuts to 4% in 2026.
…but US policy uncertainty continues to heighten economic risks
Risks to our forecast remain unusually high due to ongoing uncertainty about US policymaking. There are clearly large, upside and downside risks to our tariff assumptions. We think every 10 percentage point increase in the overall US tariff rates adds about 1 percentage point to inflation and reduces GDP by 0.5 percentage points. Sovereign debt dynamics also need to be monitored, as any attempts by Trump to deliver a large fiscal stimulus could cause Treasury yields to spike, hurting domestic activity and spreading contagion to other weak sovereigns, notably in Europe.
It’s not all doom and gloom for China
We think the hit from tariffs to China’s economy will be manageable. The export cycle is still likely to roll over, adding to underlying domestic fragilities in the near term. It is not all doom and gloom, and leading indicators continue to point to some cyclical recovery as we head into 2026 supported by fiscal policy. But stimulus needs to be topped up to achieve the government’s targets and we expect GDP growth to be closer to 4%.
A more positive outlook for the Eurozone is on the horizon…
There has been a material change in the outlook for the Eurozone economy following the announcement of fiscal stimulus in Germany. Activity may still hit a soft patch in the near term if uncertainty about trade weighs on activity. This, along with better news on inflation, means we now think the ECB will cut the deposit rate to 2%. But as fiscal stimulus starts to gain traction, we expect GDP growth to accelerate from 1% this year to 2% in 2026.
…while in the UK growth is likely to remain sluggish
We also think that the Bank of England will now deliver one more rate cut than we previously assumed, by 25bp to 4% in August. However, this is in large part due to lower energy prices easing some pressure on inflation. The fundamental story of supply constraints means that growth is likely to remain sluggish, inflation sticky and policy rates relatively high. A significant deterioration in the labour market is needed for rates to fall as far as the market expects.
Promising outlook for domestically-focused EMs amid global trade challenges
Of the other major emerging markets (EM), domestically focused economies are still likely to fare relatively well. India continues to tick a lot of boxes and interest rate cuts should drive a pick-up in growth. By contrast, restrictive monetary policy is still a headwind for activity in Brazil, but with the peak in inflation coming into view, interest rates there may start to fall before year-end.
The full Viewpoint is available as a PDF here
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Originally Posted on May 15, 2025 – Economic and Strategy Viewpoint – Q2 2025
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