It’s all happening, all at once

Please note: All data referenced in this article is sourced from LSEG Datastream unless otherwise stated, and is accurate at the time of publishing.

After starting the year in a buoyant mood, many investors and economists are now racked with pessimism. The reason? The actions of a new US president in his first few months in office.

So, what was so bad? Washington has adopted an aggressive, transactional approach to international relations, hitting most countries with higher tariffs and questioning the US’s commitment to its allies. 

Tariffs: Made in America

Perhaps the biggest threat to global growth prospects comes from America. The potential implications of President Trump’s policies could hit supply chains, trade and inflation expectations significantly.

The world’s largest economy is a case in point. Economists have regularly cut their forecasts for US growth. Unusually, an anticipated weaker outlook is matched by higher inflation expectations, as the effects of tariffs filter through to prices.

As predicted in our Outlook 2025, inflationary pressures are subsiding. Indeed, price increases in February and April, as measured by the consumer price index, were lower than the consensus expectations. However, given the shifting US trade policy, the outlook is cloudy, to say the least. A recession is possible, but seems unlikely.

Given the high level of uncertainty, the US Federal Reserve (Fed) is likely to remain in ‘wait-and-see’ mode. That said, while the timing of any cuts is open to question, the Fed is on track to trim interest rates towards its neutral rate target of 3%. Meanwhile, in the debt market, US longer-dated bond yields will be at the mercy of the more muscular trade policy and concerns over America’s mounting debt pile. 

Eurozone: strange times

Unusually, the eurozone economy looks set to outperform the US in 2025. Increased trade tensions may have accounted for the economic growth forecast shrinking to 0.8%, from close to 1.2% six months ago, but expansion is still expansion. 

The German government’s launch of a €500 billion infrastructure investment fund and other stimulus measures could be a game-changer for the bloc. However, plans will take time to materialise and the economic benefits from the defence spending may be limited, as the majority of Europe’s defence spending has tended to take place outside of the continent. 

Elsewhere, Spain leads the pack and is expected to grow by over 2% in 2025. Meanwhile, France and Italy reflect the bloc’s subdued growth outlook. That said, overall, the region’s short-term outlook for growth, and inflation, is on course to meet expectations, with the consumer price index closing in on the European Central Bank’s target. As such, the central bank could trim interest rates further this year. 

China: better late than never

In China, April’s retail sales were underwhelming, while the property sector continues to dampen growth. The data underlines how stimulus measures unleashed by Beijing over the last 18 months are taking time to kick-start the economy. 

More than that, international events are not helping. China is caught up in a trade war with the US. While Beijing and Washington reached a truce of sorts in May, tensions may resurface by September. While the full impact of higher tariffs may take time to be felt, there will be payback. The question is when. 

Given the headwinds, more stimulus measures seem probable. However, the shape of the initiatives is unlikely to do much to lift the job market, where hiring plans among surveyed private firms are the lowest they’ve been in six months¹. In turn, this suggests that domestic consumption will struggle to compensate for the economic hit on exports. As such, growth is forecast to shrink to 4.0% in 2025, from 5.0% in 2024.

UK: on the up?

In something of a European vibe, the outlook for the UK is challenging, but prospects seem to be getting better. Momentum has turned, with growth holding up and inflation dipping. 

In addition, the UK was first out of the blocks with a US trade ‘deal’ in May, removing much uncertainty. As such, while consensus growth forecasts for this year have been trimmed, first-quarter expansion was stronger than expected and backed by encouraging private consumption and investment data.  

The risks for the country are clearly tilted to the upside. With additional easing and further improvements in sentiment, the UK economy seems to be on track to hit a long-term growth potential of around 1.5%.

The outlook for UK inflation is mixed, making policymakers’ job more difficult. That said, two quarter-point interest rate cuts over the rest of 2025 seems likely.

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