Global Economic Outlook Monthly: The Fed is Back in Play

US: The Fed is likely to ease in September

Employment growth in the US is rapidly losing momentum, consistent with broader signs of below-trend growth in 2025. Recession risks remain elevated; however, our base case is a slow but continued expansion, supported by healthy consumer balance sheets and stable financial conditions for businesses. Inflation remains well above the Federal Reserve’s 2% target, and we believe risks are skewed to the upside with year-end core PCE at 3.1%.

Against this backdrop, we now expect the Fed to cut rates by 25bp in September, followed by additional quarterly cuts in December and March. More sector-specific tariffs are likely to be announced in the coming months, which will be a headwind to consumer spending. Heightened uncertainty over trade policy is likely to dampen business investment. The provisions of the One Big Beautiful Bill Act, on the other hand, are likely to be modestly stimulative in the near term.

Europe: Cutting cycle should be complete

We expect euro area GDP growth in Q3 2025 to accelerate by 10bp to 0.2% q-o-q, while the US-EU trade deal should reduce economic uncertainty related to tariffs. Increased fiscal defense and infrastructure spending led to our more sanguine view on Europe in the medium term. Harmonized Index of Consumer Prices inflation remained at its 2.0% y-o-y target in July and is expected to stay around this level for the rest of the year. We now believe the European Central Bank has finished its cutting cycle, and the depo rate will remain at 2.00% over our forecast horizon.

Among countries, surveys show Southern European economies outperforming the north. Germany has reported one of the weakest recoveries since Covid and France’s activity is consistently below historical averages, while budget deficits are in check in Spain and Italy.

China: A tricky situation

We believe China’s stock market rally since late September last year has been primarily driven by solid fundamentals. However, the boom has the potential to lead to a rise in irrational exuberance, an increase in leveraging, and a formation of bubbles. Economic fundamentals might weaken visibly in H2 on various fronts, and the stock market rally itself may not provide much of a boost to the real economy.

China’s GDP growth is expected to moderate notably to 4.0% y-o-y in H2 from 5.3% in H1, weighed on by multiple demand headwinds. The new austerity measures are now in full force, and the frontloading effects from the durable goods trade-in program over the past year are set to materialize. The campaign aimed to reduce overcapacity will in the near-term also shrink demand for raw materials and dampen investment. In the face of US tariffs, an export growth slowdown is quite likely. With the property sector still troubled, China’s fiscal situation across most cities may face rising pressures. Beijing may need to tread carefully in the next couple of months over handling the tricky divergence between the slowing economy and rising stock market euphoria.

Japan: BOJ's inflation outlook revised up

Recent data confirm our view that Japan’s economy will likely slow in Q3 2025 under the Trump tariffs. In the latest Outlook Report, the median forecast for core CPI (less fresh food) by the Bank of Japan was revised up sharpy for FY25, and marginally for FY26 and FY27, to reflect food-driven inflation. However, this is not significant enough to represent a change in the bank’s inflation scenario.

With this in mind, we maintain our base case, in which the bank hikes in January 2026 and stays put through 2026. Japan’s economy will likely remain in a recovery, albeit with uncertainty related to politics and the impact of US tariffs. Its agreement on tariffs with the US is close to our existing assumption, leading to no changes in our outlook.

Rest of Asia: Soft growth-inflation calls for deeper rate cutting cycle

Tariffs, policy uncertainty and weak global demand are likely to slow Asia’s export and capex growth sharply in H2. Disinflation should sustain, due to lower oil prices, weak demand, and a redirection of Chinese exports to the region. Such a soft growth-inflation backdrop calls for a frontloaded and deeper rate-cutting cycle in the region, with fiscal support also on tap.

Open economies such as Thailand, Singapore and Korea are most vulnerable, while India and the Philippines are more insulated. However, with the US imposing an extra 25% penalty tariff on India for its purchases from Russia, on top of the initial 25% reciprocal tariff, India could face further challenges to its already slowing economy and in need of more policy easing.

For more forecasts in respective markets, read our full monthly report, and our latest note on China.