Tail risks clipped but we stay cautious on global economic outlook

The US-China tariff de-escalation reduces what was a rising risk of a sudden stop in trade with potential non-linear effects, such as SME financial stress and mass layoffs. While likely past its peak, the US effective tariff rate – which we estimate to be at around 15% – is still very high by historical standards. The damage is already done, including payback from a rush of economic activity in Q1 to beat the tariffs and frozen investments due to extreme business uncertainty that will likely linger.

Although worse-case tail risks have eased, we are not yet out of the woods. Unless deals are negotiated, US reciprocal tariffs on some countries could be reinstated in July, and more US sectoral tariffs could also be announced. Uncertainty remains and Nomura economists remain cautious.

Our view around the world in a nutshell

United States: The US administration showing signs of de-escalating tariffs is viewed as positive, and we have modestly raised GDP and lowered inflation forecasts for the US. We continue to expect significantly below-trend growth in 2025. With reduced recession risk and tariffs still posing an upside risk to inflation, we expect the Fed to deliver a rate cut this year in December followed by two subsequent cuts in Q1 2026.

Euro area: While fiscal policy should be growth-positive in the medium term, higher tariffs make the near-term view more challenging. We see core inflation above target in 2025, with upside risks from a tariff response, but downside risks from China. In the face of the US tariff shock, we believe the European Central Bank will cut benchmark policy rates to 1.5% by September to support the economy. The European Commission will want to avoid escalating trade tensions, so even if trade negotiations fail, the magnitude of its response is likely to be far less than US tariffs placed on goods from the EU.

Japan: The Bank of Japan has significantly revised down its GDP and CPI forecasts, in effect accepting a delay to the realization of its stable 2% inflation target. We believe Japan’s economy will visibly slow in H2 2025, driven by declines in exports and corporate earnings induced by US tariffs, potentially leading to fiscal stimulus and extended monetary accommodation. We expect the BOJ to hike in January 2026 and stay put thereafter, considering a possible slowdown in wage growth in 2026.

China: China’s economy faces a double whammy: the ongoing property fallout internally and the unprecedented US-China trade war externally. We expect strong growth headwinds after Q1, including payback from the trade-in program, payback from the frontloading of exports and exorbitant US tariffs, which may halt much of China's exports to the US. However, in light of the recent trade truce between China and the US, we have increased our GDP growth forecast for this year to 4.5% y-o-y. We continue to expect another RRR and policy rate cut in Q4, and an increase in fiscal spending to bolster domestic consumption.

Rest of Asia: Tariffs, policy uncertainty and weak global demand are likely to slow Asia’s export and capex growth sharply in H2 2025. Open economies including Thailand, Singapore and Korea are most vulnerable, while India and the Philippines are more insulated. Due to lower oil prices, weak demand, and a redirection of Chinese exports to the region, we expect disinflation to sustain. The soft growth-inflation backdrop calls for a frontloaded and deeper rate cutting cycle in the region, with fiscal support also on tap.

Read our analysts’ complete views here.